Red Candlestick Definition, What It Tells You, How to Use It

What Is a Red Candlestick?

A red candlestick is a price chart indicating that the closing price of a security is below both the price at which it opened and previously closed. A candlestick may also be colored red if the close is below the prior close, but above the open—in which case it will usually appear hollow.

The candlestick is composed of the period's high and low, represented by the shadows, and the open and close, represented by the real body or thick part of the candle.

What Does a Red Candlestick Tell You?

A red candlestick quickly conveys that the price moved lower during the period, as well as the open, high, low, and close. The longer the candle, the greater the price movement over the period.

Most charting software allows you to change the colors of candlesticks, but the most commonly used colors are black filled, red filled, red hollow, and black hollow.

Each color conveys a different meaning:

• Black Filled Candlesticks occur when the close is greater than the prior close but lower than the open.
• Black Hollow Candlesticks occur when the close is greater than the prior close and the open.
• Red Filled Candlesticks occur when the close is below the open and prior close.
• Red Hollow Candlesticks occur when the close is greater than the open but lower than the prior close.

The two most common types of candlesticks are black hollow candlesticks, which are indicative of a strong uptrend, and red filled candlesticks, which are indicative of a strong downtrend. Red hollow and black filled candlesticks are less common since they require a price gap to occur.

Technical analysts can quickly glean a lot of information from the color of a candlestick before looking at any aspects of the chart. For example, a black filled candlestick might suggest that the price is becoming top-heavy, while a red filled candlestick represents a clear and strong downtrend. Traders may use these insights to gauge market sentiment.

Most traders use candlestick charts in conjunction with other forms of technical analysis. For example, they may gauge market sentiment using candlestick charts and then use chart patterns to identify potential areas of breakdowns or breakouts. Technical indicators can also be useful as a confirmation of market sentiment. For example, the relative strength index (RSI) may be used in conjunction with candlestick charts to show how strong a trend is in a given direction.

Example of How to Use a Red Candlestick

A red candle simply shows that the price moved lower over the period. Such candles will occur frequently. Therefore, red candlesticks must be analyzed in the aggregate, and in combination with other forms of analysis. There are many ways this could be accomplished. The following is an example:

During an uptrend red candlesticks are typically quite small. If a large red candle appears it indicates a strong selling day and possibly a change in short-term sentiment.

During a downtrend, red candles are typically quite large. Small red candles, especially following large red candles, may indicate indecision or a slowdown in selling. If large white (black hollow) candlesticks follow, the short-term trend has turned higher.

Note these tendencies on the chart below.

In the case of Apple Inc., the RSI was already in a steady decline when large red candlesticks began to occur on the price chart. This was followed by a substantial decline. The large down candles coupled with negative divergence could have been used as an exit signal prior to the decline.

Candlesticks vs. Bar Charts

Candlestick and bar charts show the same information—open, high, low, and close—but in a different way. A bar is a vertical line, with no real body like a candlestick, consisting of a small horizontal line to the left marking the open price and a small horizontal line on the right marking the close.

Limitations of Using Red Candlesticks for Trades or Analysis

It's important to know how the trading platform is drawing candlesticks. Some platforms don't take the prior close into account, while others do. Traders also have the option of making all the candlesticks filled or hollow, based on the close versus open, for example. To test what your platform is doing, hover the cursor over the candles and note the open and close prices, as well as how the platform has colored the candle based on these figures.

New price bars are constantly forming. While price action traders focus on the movements from candle to candle, helping them to find trading opportunities, this won't suit everyone.

Many traders don't scrutinize each candlestick, but instead look at the overall picture. This is because a candlestick only represents one period of price action. The overall picture is more important because it provides clues to longer-term direction, which is what many investors care about.

Candlesticks are historical data points. They only represent what has happened. Although, with practice, certain patterns may tip a trader off to a likely price move in one direction or the other.