1. What you will learn
By the end of this lesson you will be able to read an open, high, low and close bar correctly and say exactly what it does not tell you, define a trend with a rule another person could apply, treat support and resistance as observations rather than forces, and explain why a rule based on a closing price cannot be executed at that same close. This is education about chart mechanics and is not advice about any security or strategy.
2. The idea explained
A candle or bar summarises an interval with four numbers: the first traded price, the highest, the lowest and the last. The body spans the open and the close, and the lines above and below span the rest of the range.
This missing sequence is not a technicality. If a bar's high and low both lie beyond your intended exit levels, the four numbers cannot tell you which was reached first, and therefore cannot tell you whether the position was stopped out or took its target. The honest responses are to use finer data for that interval or to adopt an explicit conservative assumption, such as always assuming the adverse level was reached first, and to state which you chose.
Trend definitions must be reproducible. Saying a market is trending up because it looks like it is cannot be tested by anyone else. A rule such as a sequence of higher swing highs and higher swing lows, with the swing definition stated precisely in terms of how many bars on each side must be lower or higher, can be applied by a stranger to the same data and produce the same answer.
Support and resistance are areas where price previously stalled or reversed. That is an observation about the past. It is not a force, and describing it as though price bounces off a level attributes agency to a number. The defensible statement is that the region has been associated with reversals before, which may be because participants remember it and act accordingly, and may not persist.
Pattern names carry no predictive power by virtue of being named.
Two practical requirements finish the lesson. Prices must be adjusted for splits and other corporate actions, or a chart will show a crash that never happened. And liquidity must be checked, because a chart of a thinly traded instrument shows prices at which almost nothing could have been done.
Finally, execution. A rule that says enter when the price closes above a level cannot enter at that close, because the close is only known once the interval has ended. The entry must be at the next available opportunity, and any test that enters at the signal close has awarded itself a price that was not available. Past performance does not indicate future results.
3. The market, the regulator and the rulebook
Indian equity and derivative markets are regulated by the Securities and Exchange Board of India, the statutory securities regulator constituted by an Act of Parliament, which supervises exchanges, brokers and clearing members and sets the framework for order handling and client protection.
The exchanges publish the data that charts are built from, including the settlement or closing price methodology, which is often a defined average rather than the last trade and therefore differs from what a chart's close may show. They publish corporate action circulars with record and ex-dates, from which adjustment factors are derived, and they publish trading hours, price bands and halt rules, which explain gaps and flat intervals that otherwise look like data errors.
Traded volume is published alongside price, and it is the first check on whether a chart describes a liquid instrument. Never state a price band, a tick size, a charge or a tax rate from memory; name the source and the date.
Worked example
4. Worked example
All figures are invented. An interval opens at one hundred rupees, reaches a high of one hundred and eight, falls to a low of ninety-six, and closes at one hundred and four.
The body spans one hundred to one hundred and four, so it is four rupees tall and the close is above the open. The full range is one hundred and eight less ninety-six, which is twelve rupees, so the body is only a third of the range and two-thirds of the interval's movement happened outside it.
Now the missing sequence. Those four numbers are consistent with the price rising to one hundred and eight first and then falling to ninety-six before recovering to one hundred and four. They are equally consistent with the price falling to ninety-six first and then rallying to one hundred and eight before easing to one hundred and four. Nothing in the four figures distinguishes the two.
Now why that matters. Suppose a position was entered at one hundred with a stop at ninety-eight and a target at one hundred and six. Both levels lie inside the bar's range. Under the first sequence the target was reached first and the trade was a gain of six rupees. Under the second the stop was reached first and the trade was a loss of two. The same bar produces a gain or a loss depending on information the bar does not contain, and a backtest must either use finer data or assume the loss and say so.
Now the trend rule. Suppose swing highs are defined as a bar whose high exceeds the highs of the two bars on each side. Applying that definition to a series gives a specific list of swing highs that anyone can reproduce. A trend up is then defined as the most recent swing high exceeding the previous one and the most recent swing low exceeding the previous one. That statement can be checked; an impression cannot.
Finally, execution. If a rule requires a close above one hundred and four, that fact is known only after the interval ends. The earliest realistic entry is the next interval's open, which might be one hundred and six or ninety-nine. A test that enters at one hundred and four has used a price that was not available to anyone.
5. Common mistakes and how to fix them
The first mistake is treating a bar as a description of what happened. It is four summary numbers, and the order of the high and low is not among them.
The second is resolving an ambiguous bar in the strategy's favour. Use finer data or assume the adverse level was reached first, and state which.
The third is an unreproducible trend definition. Write the swing rule in terms of bars and comparisons, so a stranger gets the same answer.
The fourth is describing support as a force. Say that the region was associated with reversals before, and that it may not persist.
The fifth is entering at the signal's own close. The close is known only after the interval ends, so entry is at the next available opportunity. Past performance does not indicate future results, no method is safe or guaranteed, and a SEBI-registered investment adviser is the person to consult about an individual's own money.
Key takeaways
6. Board summary
A bar compresses an interval into four numbers and discards the order in which the high and low occurred. When a stop and a target both fall inside one bar, the four numbers cannot say which was hit first. A trend definition must be written in bars and comparisons so that a stranger reproduces it exactly. Support and resistance are observations about past behaviour, not forces acting on price. A rule based on a closing price is executed at the next opportunity, never at that close.
Check your understanding
7. Practice and self-check
One. An interval opens at fifty, highs at fifty-six, lows at forty-eight and closes at fifty-two. Body and range? Two rupees and eight rupees.
Two. What proportion of the range is the body? One quarter.
Three. A stop at forty-nine and a target at fifty-five both lie inside that bar. What can the four numbers tell you? Nothing about which was reached first.
Four. What are the two honest responses? Use finer data, or assume the adverse level came first and say so.
Five. A swing high is defined as a bar whose high exceeds the two bars on each side. Is that reproducible? Yes.
Six. Is the phrase the trend looks strong reproducible? No.
Seven. A rule fires on a close above two hundred. Where is the earliest realistic entry? At the next interval's open, whatever it is.
Eight. A chart shows a fifty per cent one-day fall. What must be checked first? Whether the series is adjusted for a corporate action.
Nine. What does traded volume tell you about a chart? Whether the prices shown were available in any size.