THE 5-YEAR-OLD VERSION
Imagine a tug of war that lasts all day. A candle records where the rope started (open), the furthest each team pulled it (high and low), and where it stopped when the bell rang (close).
Anatomy of a candle
Real candles from a historic week
Here are eight trading days around the Covid low in March 2020:
| Date | Open | High | Low | Close |
|---|---|---|---|---|
| 18 Mar | 9,088.45 | 9,127.55 | 8,407.05 | 8,468.80 |
| 19 Mar | 8,063.30 | 8,575.45 | 7,832.55 | 8,263.45 |
| 20 Mar | 8,284.45 | 8,883.00 | 8,178.20 | 8,745.45 |
| 23 Mar | 7,945.70 | 8,159.25 | 7,583.60 | 7,610.25 |
| 24 Mar | 7,848.30 | 8,036.95 | 7,511.10 | 7,801.05 |
| 25 Mar | 7,735.15 | 8,376.75 | 7,714.75 | 8,317.85 |
| 26 Mar | 8,451.00 | 8,749.05 | 8,304.90 | 8,641.45 |
| 27 Mar | 8,949.10 | 9,038.90 | 8,522.90 | 8,660.25 |
Read two of them:
- 23 March: opened 7,945.70, fell to a low of 7,583.60 and closed at 7,610.25, down 13.0% on the day. A tall red body: sellers controlled the whole day.
- 24 March: opened 7,848.30, dipped to 7,511.10, then recovered to close at 7,801.05. A small body with a long lower wick: price was pushed far down but buyers pushed it back up before the close.
Volume: how many traded
Volume is how many shares changed hands. A big move on high volume means many people agreed on the new price; a big move on thin volume can be less convincing. (Index levels have no volume of their own, but individual shares and ETFs do.)
Patterns are names, not predictions
Traders give shapes names ("hammer", "doji", "engulfing"). The names help you describe what happened that day. Treat them as descriptions of past behaviour. Before relying on any pattern to make decisions, test it on lots of data and count the times it failed, which is what the replay lab and the next lesson start to teach.