What is a K-line chart?
Key Points
Candlestick chart, also known as K-line chart, each K-line is composed of three parts - body, shadow, and color, with four data points - high price, low price, open price, and close price.
We can analyze each K-line from three perspectives: the size of the body, the length of the shadow, and the volume.
Due to its simplicity, aesthetics, and ease of interpretation, the candlestick chart is widely used in various financial asset markets.
Concept Explanation
The candlestick chart is a type of price chart that displays the highest price, lowest price, open price, and close price of a certain financial asset within a specific time frame.
The candlestick chart was invented by a Japanese rice merchant named Homma Munehisa in the 18th century. He first used the candlestick chart in the rice futures market. In the 1990s, an American named Steve Nison published the book 'Japanese Candlestick Charting Techniques,' introducing the candlestick chart to the Western financial world. Subsequently, Homma Munehisa's candlestick chart theory has been continuously modified and adjusted to be more suitable for modern financial markets.
The figure above shows the components of a candlestick chart.
A candlestick chart usually consists of three parts: the body, the shadow, and the color.
Each candlestick has four data points: the opening price, highest price, lowest price, and closing price for a specific time period.
The opening price refers to the fill price of the first trade in that specific period, while the closing price is the fill price of the last trade in that period. The rectangle drawn by connecting the opening and closing prices is considered the body of the candlestick.
The vertical line connecting the highest price and the body is called the upper shadow of the candlestick. The vertical line connecting the lowest price and the body is called the lower shadow.
If the closing price is higher than the opening price, the candlestick is usually drawn as a hollow green candle, representing a bullish candlestick. Conversely, if the closing price is lower than the opening price, the candlestick is typically filled with solid red to indicate a bearish candlestick.
A special case occurs when the opening and closing prices are nearly equal, in which case the candlestick is commonly referred to as a 'doji'.
In conclusion, the body displays the opening and closing prices of the day, the shadows show the high and low points of the day, and the color indicates the direction of movement during the formation of the candlestick.
How to interpret candlestick charts
Each candlestick tells the story of the game between bulls and bears. To become a professional trader, the first thing you need to learn is to understand candlesticks.
In general, traders can interpret candlesticks by examining the following three aspects:
1. Size of the body
A candlestick with a large body indicates that buyers are in a strong position. Conversely, a candlestick with a large body indicates that sellers are in a strong position.
2. Length of the shadows
Long shadows indicate significant price fluctuations, but ultimately return to the original price level, showing market sentiment is uncertain. Short shadows indicate a relatively mild market. Generally, the longer the shadow, the greater the possibility of the price moving in the opposite direction of the shadow.
3. Trading volume
One key indicator worth noting when analyzing candlesticks is the trading volume associated with them. If a price increase is accompanied by an increase in trading volume, the likelihood of the uptrend strengthening is higher. However, if prices rise sharply while trading volume decreases, it implies that the uptrend may not last long.
Candlestick charts intuitively convey market trading information, and are therefore widely used in various financial asset markets such as forex, commodities, government bonds, and stocks.
