Reading a chart
A candle summarizes four values for a period: open, close, high, and low. Together with volume, that's the entire information a chart contains.
Every candle represents a time period, say a day. The thick body shows open and close; the thin lines above and below show the high and low.
A long body means the price moved substantially in one direction during that period. Long wicks mean it moved far and came back. There's nothing more inside a single candle than that.
The time frame changes everything. The same movement looks like a dramatic crash on an hourly chart and like a small dip on a monthly one. Before judging a chart, check the time frame.
Volume below shows how much was traded. A big move on low volume means few participants caused it. That makes it less reliable than the same move on high volume.
Candlestick charts encode four values per period. The information loss relative to the full intra-period price series is substantial, and in particular, the order of moves is lost. Two identically shaped candles can represent completely different paths, which limits the informational value of individual candle formations from the outset.
Choice of scale heavily affects visual interpretation. On a linear scale, equal absolute moves look equally large; on a logarithmic scale, equal percentage moves do. For long periods and heavily appreciated assets, logarithmic display is the appropriate one, since return is a relative measure. Trendlines drawn on a linear scale over long periods systematically create misleading pictures.
Volume is only partly reliable as a confirming metric, since it's captured differently across venues, and a growing share of trading happens off-exchange. With crypto assets, reported volumes at individual platforms have historically sometimes been substantially overstated on top of that.
Summary
- A candle shows four values; the sequence between them is lost.
- Use a logarithmic scale for long periods, or the picture misleads.
- Volume figures vary in reliability by venue.
Did you get it?
What information is lost within a candle?
The sequence of price moves within the period.
When should you use a logarithmic scale?
For long periods and heavily appreciated assets, since return is a relative measure.
What does a big move on low volume mean?
That few participants caused it. It's less reliable.
Related
- Moving averagesStage 3
- DiversificationStage 2
- RSI, MACD, and Bollinger BandsStage 3