A candlestick chart is a data visualization tool used to analyze the price movements of stock prices, currencies, and other financial instruments. It is often used in stock price analysis by stock traders and financial analysts. Many financial analysts and even data science beginners find it difficult to analyze a candlestick chart. So if you want to learn how to analyze a candlestick chart, this article is for you. In this article, I will take you through how to analyze a candlestick chart as a data science professional or a financial analyst.
How to Analyze a Candlestick Chart
To learn how to analyze a candlestick chart, we must first understand the structure of a candlestick and the technical terms used to describe the components of the candlesticks in a candlestick chart. So here is the structure of candlesticks that you see in a candlestick chart:
As you can see from the figure above, the area between the open and close is known as the real body of a candlestick which indicates the opening and closing prices. The components above and below the real body are known as shadows. The upper and lower shadows show the highest and lowest prices of the stocks during a given period.
Formation of Candlesticks
Two types of candlesticks are formed by the movements of stock prices for a given period. When the price increases, a bullish candlestick is formed and when the price falls, a bearish candlestick is formed. For example, look at the figure below:
In the figure above, the green candlestick represents a bullish candlestick, and the red candlestick represents a bearish candlestick. When the opening price is higher than the closing price for a given period, a red or bearish candlestick is formed, and when the closing price is higher than the opening price for a given period, a green or bullish candlestick is formed.
You must have seen that the size of the real body of a candlestick also differs in a candlestick chart. Its size can be long, normal or short depending on the proportion of high and low prices of the stocks for a given period.
Now Here’s How to Analyze a Candlestick Chart
The real body of a candlestick chart shows the opening and closing prices of a stock. If the open price is higher, you will see a red or bearish candlestick which represents a drop in price for a particular period, and if the close price is higher, you will see a green or bullish candlestick which represents an increase in price for a particular period.
The upper and lower shadows show the high and low prices for a particular period. If the upper shadow of a green or bullish candlestick is short, it means that the stock prices closed near the highest price of the day, and if the upper shadow of a red or bearish candlestick is short, it means that the stock prices opened near the highest price of the day.
Summary
So this is how you can analyze a candlestick chart as a data science professional or a financial analyst. Here are some of the points you should takeaway:
- The area between the open and close price is known as the real body of a candlestick which indicates the opening and closing prices;
- Upper and lower shadows show the highest and the lowest prices of stocks during a particular period;
- When the price is increasing, a bullish candlestick is formed, and when the price is decreasing, a bearish candlestick is formed;
- If the open price is higher, you will see a red or bearish candlestick which represents a decrease in price for a particular period;
- If the closing price is higher, you will see a green or bullish candlestick which represents an increase in price for a particular period.
I hope you liked this article on how to analyze a candlestick chart as a data science professional or a financial analyst. Feel free to ask your valuable questions in the comments section below.
