Anatomy of a Candle

Four prices, three measurements

A candle compresses four numbers — open, high, low, close — and three measurements fall out of them. The body is the open-to-close distance, and it is the part of the session that stuck: whatever else happened, this is where the market chose to mark the books. The wicks are the extremes the session reached and refused, and they come in two lengths that mean different things: an upper wick is upside that sellers absorbed, a lower wick is downside that buyers absorbed. The third measurement is the one most chart readers never compute: where the close sat inside the range, from 0% at the low to 100% at the high. A green candle that closes at 83% of its range is a one-sided session; the same body with a close at 45% is an unfinished argument. The body-to-range ratio is the fastest read of conviction. Divide the body by the range: above two thirds means one side controlled the period and the move is more likely continuation than reversal, around a third means a fight and the next candle has to decide it, and near zero with wicks on both sides means indecision — a doji, which is a statement about balance rather than about direction. None of this is prediction. It is description, and description is what the rest of this subject is built on: levels, breakouts and plans are all claims about price, and a learner who cannot measure a candle cannot check any of them. Wicks have a second property that makes them useful: they are rejection at a price, so they mark prices where orders appeared. A long wick ends where the market found a size that could not be moved further, which is the same information a level carries — with the difference that a wick is one session and a level is a repeated fact. That is why the reading order in this curriculum is candles, then ranges and noise, then levels: the wick is the raw observation that levels are later built from. One session, decomposed — Open 142.10, high 145.80, low 141.60, close 145.10: Range $4.20; body $3.00 (71.4% of it) ← · Upper wick 145.80 − 145.10: $0.70 of upside refused · Lower wick 142.10 − 141.60: $0.50 of downside refused · Close in the range (145.10 − 141.60) ÷ 4.20: 83.3% — marked near the high ← A candle is a summary, not a record. Four prices say nothing about the order in which they occurred, so a session that rallied all day and faded into the close looks different from one that gapped up and drifted — and identical on the candle. When the sequence matters, read the intraday chart; when the outcome matters, read the candle.

The close is the number that is marked

Every participant in the market has to produce a value for what they hold, and almost all of them use the close: fund performance is struck on it, margin and collateral are valued on it, and the benchmark an investor is measured against is computed from it. That is why the close carries more information than the high, even though the high is a higher price: the high is a transaction that happened to someone, while the close is the number by which positions are judged, and the order flow around it is deliberate rather than incidental. A session that closes on its high was not merely strong at some point; it was strong when strength gets recorded. The practical consequence is a hierarchy of evidence for one session. The close is first: it is where the market’s books are, it is what a gap is measured from, and it is what a level closes above or below. The body is second, because it tells you whether the close was a reversal of the open or a confirmation of it. The wicks are third — informative about where orders were, silent about whether those orders are still there. Anyone who has watched a stock close strong and open weak knows the difference between a wick and a level. There is also a mechanical asymmetry worth knowing at the start: because the close is where valuations are struck, it is where the most deliberate flow of the day arrives, whether from index funds rebalancing, options positions being hedged, or funds needing a specific price for their report. This is one reason candle patterns that involve the close — engulfing shapes, closes above a level — carry more weight than shapes that only involve a wick. The anatomy is not neutral between its four prices; it ranks them, and the rank is the lesson. • Close: the marked price, the reference for gaps, levels and performance. • Body: whether the close confirmed or reversed the open — the conviction of the period. • Wicks: prices explored and refused, so evidence of orders rather than of control. • Body-to-range ratio: above two thirds is control, near zero is indecision. Timeframe changes nothing about the anatomy: a weekly candle is the same four prices over five sessions, and a 5-minute candle is the same over five minutes. What changes is how much randomness each one aggregates, which is the lesson after next.

What a bar throws away

A candle is a compression of everything that happened in a session, and compression always loses something. Tick data records every price and every trade; a one-minute bar records four numbers; a daily bar records four numbers for six and a half hours of trading. Two sessions with an identical body, wick and close can have taken completely different paths — one grinding steadily, the other collapsing and recovering twice — and the daily chart will render them the same. Three things are lost, and each one costs a beginner money. **Path**: whether the low came at 10 am or at 3:55 pm, which decides whether a resting stop was hit early or late and how far a trailing stop had moved by the time it was. **Volume distribution**: 20 million shares traded steadily is a different market from 5 million at the open and 15 million in the closing auction. **Trade size**: a move built on a handful of block prints is a different event from the same move built on thousands of retail tickets, and only the tape shows which one it was. The practical response is not to abandon bars but to know what question each timeframe answers. A daily bar answers “where did the market close the argument?”. An intraday chart answers “how did it get there?”. When a decision depends on the path — where a stop would have filled, whether a squeeze was real — the bar cannot answer it and you need the deeper data. Gap, inside bar and outside bar are all artefacts of the same compression: a session that opened away from the last close, or whose range sat entirely inside, or entirely around, the previous one. They describe two bars together, not anything happening *inside* either one.

VWAP: the price the day actually traded at

A bar’s close is one number from one moment; the four prices this lesson has dissected describe a session’s extremes and its endpoints. Neither says where the day’s business was actually transacted. That is what the **volume-weighted average price** answers: the average price of every share that traded, weighted by the size of each trade, computed from the open and accumulating through the session. The difference between VWAP and the close is information rather than noise. A day that closes well above its VWAP means the buying happened late and at higher prices, with volume failing to resist the move — a session that finished strong. A close well below VWAP means most of the business was done higher and the close is the weak end of the range. The same green candle can produce either, and the VWAP is the part that distinguishes them. That is why VWAP belongs beside the four prices rather than replacing them. The reason it matters beyond description is that VWAP is a **benchmark**, and a very widely used one. Institutional execution desks are frequently measured against it, because an order large enough to move the price cannot be filled at a single price and the honest comparison is against the average the market itself achieved during the period. That measurement creates behaviour: a desk measured against VWAP has a reason to buy when the price is below the line and to slow when it is above, which is why a session in which price spends the afternoon oscillating around VWAP tends to stay there. The line is not just a result of the trading; it becomes a target for some of it. There are several versions and they are not interchangeable. A session VWAP resets each day, so it describes one session’s business and nothing else. An **anchored VWAP** starts at an event the trader chooses — an earnings date, a gap, the low of a decline — and then accumulates, which turns it into a measure of the average cost of everyone who has transacted since that event. That anchoring is a judgement and therefore a parameter, and like every parameter in this subject it should be stated in advance and tested rather than moved until the line lands where it looks useful. The reading skill is modest and worth having. When price is above a rising VWAP, the marginal buyer is paying more than the day’s average and is doing so while the average rises — a description of a market where demand is in control. When price falls below a flattening VWAP, the average is no longer moving and the last trades are weaker than the day’s business. Neither is a signal on its own. Both are a better description of what a session was than the candle alone, which is the standard this lesson sets. • VWAP weights every trade by its size, so it describes where the day’s business happened. • The gap between the close and VWAP distinguishes a strong finish from a weak one. • Institutions are measured against VWAP, which makes the line a target as well as a result. • An anchored VWAP measures average cost since an event, and the anchor is a parameter. One habit that uses it immediately: on any day where a position moved oddly, compare the close with the session VWAP. The comparison usually answers whether the move was broad participation or a thin end-of-day push, and those two look identical on the candle.

Sources

• Japanese candlestick constructionNison, “Japanese Candlestick Charting Techniques”
• Why the closing print mattersMarket microstructure literature; standard settlement and marking practice
• Range and rejection as a measuring exerciseBulkowski, “Encyclopedia of Candlestick Charts” (methodology sections)