Reading a Price Chart

The short answer

A candlestick chart takes every transaction in a fixed interval and compresses it into four numbers: where the interval opened, the highest price traded, the lowest price traded, and where it closed. That compression is the whole point — and it is also the source of most misreadings, because people forget what was discarded.

What a candle encodes

Take a one-hour candle. During that hour, thousands of transactions occurred. The candle keeps:

• Open — the first traded price of the interval
• High — the highest traded price
• Low — the lowest traded price
• Close — the last traded price

The body spans open to close. The wicks reach out to high and low. Colour conventionally indicates whether the close was above or below the open.

What it does not keep is the path. Consider two hours that produce visually identical candles:

• Hour A: price fell to the low immediately, ground sideways, then rallied to close near the high.
• Hour B: price rallied to the high first, collapsed to the low, then recovered to the same close.

Same four numbers. Same drawn candle. Completely different hours, and completely different experiences for anyone holding a position through them. Any interpretation that depends on the sequence of events within the candle is interpretation you have supplied, not information the candle contains.

Timeframe is a decision you make

Switching from a daily to a five-minute chart does not reveal a truer market. It changes how much detail you are discarding. The daily chart throws away the intraday path; the five-minute chart keeps more of it and throws away less.

Two consequences follow.

First, structures that look decisive on one timeframe often look like noise on another. That is not a contradiction to resolve. Both descriptions are accurate compressions of the same transaction record.

Second — and this is where it becomes expensive — the timeframe you analyse should be fixed before you enter, and should match the timeframe your stop and target are placed on. The most common way this rule breaks is quiet: a position goes against you on the timeframe you entered on, so you look at a higher one where it still looks fine. Nothing about the position changed. You changed the lens until it gave you the answer you wanted.

Volume

Volume records how much traded in the interval. That is all it records.

It is genuinely useful context: a move on unusually heavy volume involved more participants than a move on thin volume, and thin-volume moves are easier to reverse. But volume does not tell you why people traded, and it does not confirm a direction. Every unit of volume has a buyer and a seller. "Buying volume" and "selling volume" are, at the level of the tape, the same transactions described from two sides.

Treating volume as confirmation is a way of borrowing certainty from a number that does not carry any.

The pattern problem

Humans detect patterns in random data reliably and involuntarily. This is not a failure of concentration; it is how visual cognition works. Given a few hundred candles, you will find shapes. Given a name for the shape, you will find it more often.

Two guards are worth adopting early:

1. Name what you see before you interpret it. "Price made a lower high and then a lower low" is a description. "Price is exhausted" is a story. Keep them separate.
2. Check whether you would have seen it in advance. Patterns are trivially visible after the move that completes them. The honest test is whether the pattern was identifiable at the left edge of the move, not the right.

None of this means chart reading is useless. It means a chart is a record, and the job of reading it well is to describe accurately what happened — no more. Interpretation is a separate step, and it needs to be labelled as such so it can be tested later. That labelling is what the journaling lesson turns into a working routine.