FX · Reading the FX market · lesson 4 of 9 · 5 min read · David Alexander
Reading a single candle
Reading a candle
A candle records how one period's auction went: the body shows where the period opened and closed, the wicks show prices that traded but did not hold, and the range shows the full territory contested. Reading a candle means describing what happened in the period. It is a record of the auction just finished, not a forecast of the one starting.
An hour ends and leaves behind a candle: small body, long upper wick. Something happened in that hour, and the candle wrote it down. This lesson is about reading the note accurately - which is a different activity, with a different payoff, from the one candle folklore promises.
What does the shape record?
Each part is one fact about the period's auction. The body: where the period settled relative to where it started - the net of every order that hour. The wicks: territory that traded but did not hold, prices where one side pushed and the other pushed back, in the book-consumption mechanics of module 1. The range: how much ground was contested in total. So a small body under a long upper wick reads, in plain English: buyers carried price 20 pips up during the hour, sellers took nearly all of it back, and the hour settled 6 pips above where it began. That sentence is the candle, read.
What the shape does not record is what happens next. Candle folklore assigns names and prophecies to shapes - and whatever analysis is worth building on such shapes belongs to module 5, built properly, with its limits stated. Here the discipline is simpler and prior: describe before you interpret. A trader who can say exactly what a candle records has something real; a trader who skips to what it foretells has a name for a shape.
Worked example
figures in USDYou hold 0.5 lots of EUR/USD through an hour that prints a 30-pip range, 6-pip body and 20-pip upper wick. A pip on a full lot is worth $10.
- The hour's candle on EUR/USD: a 30-pip range, a 6-pip body, a 20-pip upper wick. Read it: buyers reached 20 pips above the open, lost nearly all of it, and the hour settled 6 pips up.
- Now price the difference between the note and the journey at your size ($10 per pip per lot, $5 on your 0.5 lots). Close-to-open, the hour looks like $30. But a position held through it rode the full excursion: $100 up and most of it back.
- Same candle, two readings: the settlement and the experience. Both are in the shape once you know where to look - and neither is a statement about the next hour.
What this means for you
Practise the reading, not the naming: for any candle, say in one sentence what the period did - where it settled, what it reached and abandoned, how much ground was fought over. Wicks are the part worth respecting: they are the record of prices the market visited and rejected, which is exactly the territory stops and worked orders lived or died in. When you meet a named pattern with a promise attached, translate it back into the description first - the description is the part that is true. What descriptions can and cannot support comes in module 5.
Check your understanding
Question 1 of 4
An hourly candle shows a 20-pip upper wick. What does the wick record?