Free lesson · Charts & patterns

First principles: what a candle actually records

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Start with the idea

A candle is a compact record of prices over an interval. Learn its measurable parts before attaching a narrative. A long lower wick means the interval traded much lower than its open and close; the candle alone cannot establish who traded or why.

Symbols, units & horizon

O,H,L,C: open, high, low and close in matching price units
A: full range, nonnegative
B: absolute body length
U,D: upper and lower wick lengths
b,u,d: dimensionless range fractions
CLV: close-location value between −1 and 1
| |: absolute value
max,min: larger and smaller of their arguments
Volume: quantity traded during the defined interval

When and why to use this

Use OHLC checks in data cleaning and dimensionless candle features in a research model. For execution simulation, identify which facts become known only at the interval close.

A candlestick compresses an interval into four traded prices: open, high, low and close (OHLC). Volume adds the amount traded, producing OHLCV. The body spans open to close; a wick extends to each extreme. A rising candle closes above its open and a falling candle below it. Colour is only a display convention. A green candle can still close below yesterday’s close after a downward gap.

A = H - L, B = | C - O |, U = H - \max (O, C), D = \min (O, C) - L, A = B + U + D

Algebra and arithmetic

Partition the trading range

Suppose C≥O. Then B=C−O, U=H−C and D=O−L. Adding gives C−O+H−C+O−L=H−L.
If C<O, the body is O−C and lower wick is C−L. The same cancellation gives A=H−L. Absolute value and min/max handle both cases.

Work it by hand

O=100,H=106,L=98,C=104: range=8, body=4, upper wick=2, lower wick=2.

Start by comparing body and wick lengths in price units, then divide by the range to compare different prices and timeframes. A tiny range makes ratios unstable; a zero-range bar has no meaningful body/range ratio. A high close within the range is an observation about where trading ended, not direct evidence about hidden buying pressure or the next return.

b = \frac{B}{A}, u = \frac{U}{A}, d = \frac{D}{A}, CLV = \frac{2 C - H - L}{H - L}

Algebra and arithmetic

Remove scale and centre the close

Divide A=B+U+D by positive A to get b+u+d=1.
The close fraction is (C−L)/A, between 0 and 1. Multiply by 2 and subtract 1: 2(C−L)/A−1=(2C−H−L)/A.

Work it by hand

For the same candle, b=.50, u=.25, d=.25 and CLV=(208−106−98)/8=.50.

A daily bar depends on the session calendar and exchange timezone. Intraday bars depend on boundary rules, auction prints and whether off-session trades are included. Splits and distributions can distort a chart if prices are inconsistently adjusted. OHLC does not reveal the order in which the high and low occurred. If both a stop and a target fall inside one bar, their execution order is unknown without finer data.

Research sources, review dates and limitations

Python implementation

Self-contained teaching example. Python 3.10+; dependencies and input conventions are shown in the code and notation. Run in your own Python environment.

def candle_geometry(o, h, l, c):
    if not l <= min(o,c) <= max(o,c) <= h:
        raise ValueError("Invalid OHLC ordering")
    span, body = h-l, abs(c-o)
    upper, lower = h-max(o,c), min(o,c)-l
    fractions = None if span == 0 else (body/span, upper/span, lower/span)
    clv = None if span == 0 else (2*c-h-l)/span
    return {"range":span,"body":body,"upper":upper,"lower":lower,
            "fractions":fractions,"clv":clv}

print(candle_geometry(100,106,98,104))

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