Understanding the Basics of K-Line Pattern

If you want to play stocks, you can't do it without technical analysis. And to understand these technical analyses, the most basic must first learn to read those colorful lines. To know what they really mean and what the relationship is between the lines. As a matter of fact, the line chart is the first and last impression many people have of a stock, because it always makes people go straight to bye-bye with the stock. Let's tell you a little bit more about what a K-line pattern is.

K-line pattern

A K-line pattern is a graph that visualizes the daily, monthly or yearly opening, closing, high and low prices of a stock. K-line is a name that comes from the English word "kind of stick" because it is drawn one by one and looks like a candle.

The world's earliest K-line, which appeared in the 18th century in Japan, was invented by rice merchant Honma Sokyu to record the fluctuation of the market price of rice. It was named a candlestick chart. He put a day in the rice market, the opening and closing prices connected to a long strip of candles, and then the highest price, the lowest price, and the name of the upper and lower shadows. The day the price of rice long painted white, called the Yang candle, fell black, called the Yin candle.

In 1990, the American Steve candlestick charts were introduced into the Western financial sector. Candlestick charts have become the stock market K-line. Yang candles and negative candles incarnated as a positive line and a negative line; the opening price and the closing price also shifted into the opening price. The closing price color also becomes green up and red down. However, this only applies to some countries; China, Japan, and South Korea are red-up and green-down.

A trading day inside the four most important prices, respectively, is the opening price, closing price, intraday high, and intraday low. The open and close represent the beginning and end of the trading day and determine the final rise and fall. High and low values represent the degree of volatility of the trading day's market. With the daily trend of different open and close highs and lows, the distribution of these four points will be different.

The K-line is based on these four points drawn as price symbols; under normal circumstances, it consists of a thick line and a thin line. The thick line represents the start and end price, while the thin line represents the high and low price.

The color of the entire K-line is determined by the position of the open and closed If the close is higher than the open, representing that the final result is up, the K-line will be red, also known as red K or red bar. If the close is lower than the open, representing that the day is down, it will be drawn in green. However, it will generally be black, also known as black K or black bar. Then, if the opening and closing prices are the same, which means that the last did not go up or down, then it will be drawn as yellow or white.

The K-line pattern is a big family; according to the period of different periods, it can be divided into minute K-lines, daily K-lines, monthly K-lines, annual K-lines, and so on. If you want to use K-lines to show the changes in stock prices over the course of a year, each trading day corresponds to a daily K-line, and you need more than 200 of them in total. If you use the monthly K-line to represent it, you need 12 candles, while the annual K-line only needs one candle to be enough.

In addition, different K-line patterns express different information about the market, of which there are more than 400 classic patterns alone. Clever stockholders in order to facilitate the distinction between the respective given names.

At present, there are a total of three more commonly used international stock market analysis lines. In addition to the K-line, there are a bar line and a folding line; the latter two are mostly used in the Western stock market. K-line, compared with them, carries more information, graphic changes are also more abundant, and is the most commonly used to analyze the market.

How to read a K-line pattern

First, it is important to understand the components of a k-line. When breaking down a k line, it can be divided into four key points, which are the color, the opening and closing highs and lows, the k line solid, and the shadow line. Each k line represents the price fluctuation in a certain period of time; if you use a one-minute chart, then each k line records the price fluctuation in this minute. If a daily chart is used, each k-line represents the price movement in the last 24 hours.

The color is a way to analyze whether the k-line is positive or negative. Generally, green means up, and red means down. A positive k line means that the closing price was higher than the opening price within a specific period of time. A negative k line is the opposite, as the k line ends with a closing price lower than the opening price. So one thing you can tell by the color of the k line is whether the market is temporarily controlled by the buyers or the sellers.

Then there is the open and close high and low, which I believe we are all familiar with. Positive k from top to bottom is high, close, open, and low; its closing price is in the opening price above. Negative k line from top to bottom, high open, close low. Contrary to the positive k line, its closing price is lower than the opening price.

The k-line entity means the true range of price movement over a certain period of time, as exemplified by a daily batch of positive lines. For example, Apple's opening price on March 14, 2022, was $10.151.45, and after a day of back-and-forth trading, he had been up to a high of $154.12. and down to a low of $150.1, ending the moment at $150.62, the closing price.

All of this is recorded on the k-line, and each k-line represents a story. This story can be long or short; short can be less than 1 minute, while long can be more than a month. It depends on what time chart is used.

Finally, there are the shadow lines, which represent the highs and lows that price has been to. These shadow lines can give clues about market pressure and support levels. These levels may influence the price to rally or retreat. By observing price fluctuations and levels of support and resistance in k-lines, traders can better grasp price dynamics and possible trading opportunities.

After understanding the composition of k-lines, it is also important to understand k-line patterns. Specific K-line patterns can provide clues about market trends and reversals. For example, the Hammer Head (Hammer) and Hanging Man (Hanging Man) are reversal patterns, as are the Morning Star (Morning Star) and Twilight Star (Evening Star). These patterns can provide signals about market sentiment and possible trend reversals.

Finally, multiple K-lines need to be used for analysis. Individual K-lines may provide limited information, so it is often recommended to put multiple K-lines together to analyze a trend. For example, by looking at the movement of a series of K-lines, it is possible to get a better understanding of the overall movement of the market. Also, combining other analytical tools can provide more comprehensive market insights.

How to Draw a K-Line Chart

As a type of chart used to show price fluctuations in financial markets, its drawing requires specialized software or trading platforms that can automatically draw K-lines. The general stEPS are as follows:

First, select the asset of interest and the desired period. This determines the time period represented by each K-line. For example, if the choice is a stock, then you need to select the stock's ticker symbol and the viewing period, e.g., 1 minute, 15 minutes, 1 hour, etc.

Next, open a trading platform or charting software that supports line charts. These platforms usually provide real-time market data and charting tools. Search for and select the asset of interest on the platform, and add it to a watchlist or chart.

Then, in the charting software, select K-line as the chart type. Usually, you can select "K-Line Chart" or "Candlestick Chart" from the chart type menu. Select the desired period, which determines the granularity of the K-line. For example, if you want to see daily K-lines, then you need to select "Daily" as the time interval.

Many charting software programs allow the addition of technical indicators, trend lines, support and resistance levels, etc. to enhance the analysis. For example, moving averages can be used to identify long-term price trends, or relative strength indicators can be used to gauge the strength of the market. These additional tools can provide additional information and clues.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment, or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person.