Red Candlestick: Definition, What It Tells You, and 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 that at which it previously closed. A candlestick may also be colored red if the close is below the prior close but above the open. It will usually appear hollow in this case.

The candlestick is composed of the period's high and low, represented by the shadows. The open and close is 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 of a security 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.

Technical analysts can quickly glean a great deal of information from the color of a candlestick before they look at any aspects of the chart. A black-filled candlestick might suggest that the price is becoming top-heavy. 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. 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. The relative strength index (RSI) can be used in conjunction with candlestick charts to show how strong a trend is in a given direction.

How to Use a Red Candlestick

A red candle simply shows that the price moved lower over the period. Such candles will occur frequently so red candlesticks must be analyzed in the aggregate and in combination with other forms of analysis.

This can be accomplished in several ways. Red candlesticks are typically quite small during an uptrend. A large red candle indicates a strong selling day and possibly a change in short-term sentiment.

Red candles are typically quite large during a downtrend. Small red candles may indicate indecision or a slowdown in selling, particularly when they follow large red candles. The short-term trend has turned higher if large white (black hollow) candlesticks follow.

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

Limitations of Red Candlesticks

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

Many traders don't scrutinize each candlestick. They look at the overall picture instead because a candlestick represents only 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 but certain patterns may tip a trader off to a likely price move in one direction or the other with practice.

The Bottom Line

The red candlestick is but one indicator of the movement in price of a security. Black candlesticks are also quite common. Both can be filled or hollow, pointing in different directions. They're historical data points and not crystal balls but they can predict likely movements for an investor who's well-versed in the nuances of each.