How to read candlestick charts? Complete analysis of K-line patterns and practical guide to technical analysis

Mastering candlestick charts (K-line charts) is the core task of technical analysis. For any investment trader, being proficient in interpreting K-line patterns is absolutely fundamental. This article will delve into the structure of candlestick charts, the meaning of various patterns, and how to use K-lines for trend analysis, helping you analyze market movements as precisely as professional traders do.

Basic Introduction to Candlestick Charts (K-line Charts)

What is a candlestick chart?

A candlestick chart, also known as a K-line chart or K-stick, is an analytical tool that visually presents four key prices within a specific time period—opening price, closing price, highest price, and lowest price. This visual representation allows traders to quickly grasp price dynamics and intuitively reflect market sentiment and the comparison of buying and selling forces through colors and shapes.

The candlestick chart gets its name from its unique shape, consisting of a “real body” and “shadows” (or “wicks”). The real body is the rectangular part of the candlestick, while the shadows extend above and below like the wick of a candle.

Colors and meanings of candlestick charts

The color of the real body in a candlestick chart depends on the relationship between the closing price and the opening price:

Bullish (uptrend) candle: When the closing price is higher than the opening price, the real body is red (or green on some platforms), indicating stronger buying pressure during that period and a price increase.

Bearish (downtrend) candle: When the closing price is lower than the opening price, the real body is green (or red on some platforms), indicating stronger selling pressure and a price decrease.

Note that different trading platforms may have different color schemes. US stock trading platforms typically use green for bullish candles and red for bearish candles, which is opposite to the setting in Taiwan stocks. Traders should interpret colors based on their specific platform.

Structure analysis of candlestick charts

The thin line above the real body is called the “upper shadow,” with its highest point representing the highest price in that period; the thin line below is called the “lower shadow,” with its lowest point representing the lowest price. These two shadows help traders understand the range of price fluctuations during the period and identify support and resistance levels.

Different Time Frames of K-line Types

Application scenarios for daily, weekly, and monthly K-lines

Candlestick charts can be applied across various time frames, commonly including daily, weekly, monthly, and even yearly K-lines. The patterns of K-lines often differ across these time frames, and choosing the appropriate one is crucial for trading decisions.

Daily K-line: Used to observe short-term price movements, suitable for intraday or multi-day trading. Through daily K-lines, investors can capture short-term trends and make quick trading decisions.

Weekly and Monthly K-lines: Suitable for long-term value investors. Weekly K-lines allow observation of overall fluctuations over several weeks; monthly K-lines provide a panoramic view of battles between bulls and bears over several months, aiding in long-term trend judgment. When analyzing monthly K-lines, investors can also incorporate fundamental news into their analysis for a more comprehensive assessment.

Interpretation of Candlestick Patterns

Common K-line patterns and their meanings

Different K-line patterns reflect various market sentiments and the comparison of trading forces. Here are common candlestick patterns and their market signals:

Bullish pattern with no upper or lower shadows: Close equals the high, indicating strong buying force, with prices rising throughout the period without encountering significant resistance. The stock price may continue upward.

Bullish pattern with shadows: If upper and lower shadows are of equal length, it indicates market tug-of-war, with balanced forces; if the lower shadow is longer, it shows weakened rebound strength and insufficient buying power; if the upper shadow is longer, it indicates stronger buying force and a market in an advantageous position.

Bullish candle with only an upper shadow: Close above open, showing buying pressure pushing prices higher, but encountering selling pressure at the high point, which pulls the price back, suggesting potential for further rise.

Bullish candle with only a lower shadow: Close above open, indicating that although prices dipped, buyers supported the low levels and caused a rebound, hinting at a possible reversal upward.

Bearish pattern with no shadows: Close equals the low, indicating strong selling force, with prices declining throughout the period without encountering support, possibly continuing downward.

Bearish pattern with shadows: If upper and lower shadows are equal, it indicates indecision; if the lower shadow is longer, selling pressure is weakening; if the upper shadow is longer, prices fluctuate within a certain range.

Bearish candle with only an upper shadow: Prices rose but faced selling pressure at high levels, closing lower, indicating strong selling force and potential further decline.

Bearish candle with only a lower shadow: Prices rose but encountered selling pressure, and the decline persisted, suggesting a possible reversal downward.

Core Rules for K-line Chart Analysis

Rule 1: Understand rather than memorize K-line patterns

Many beginners tend to memorize K-line patterns mechanically. In reality, candlestick patterns are formed by combinations of open, close, high, and low prices. Using simple logical reasoning, you can understand the market implications behind each pattern without rote memorization. For example, if the close is higher than the open, it naturally forms a bullish candle; if the lower shadow is long, it indicates support at lower levels. By understanding these logical relationships, investors can apply K-line analysis more flexibly.

Rule 2: Pay attention to the closing position and the length of the real body

Significance of closing position: The closing position reflects who currently controls the market. If the close is near the high, it indicates buyers are in control; if near the low, sellers dominate.

Comparison of real body length: Compare the current candlestick’s real body length with previous candles. If the current real body is significantly longer (twice or more), it indicates strong buying or selling force, and a clear market direction; if similar in size to previous candles, it suggests balanced forces and a lack of clear trend.

Rule 3: Use swing points to identify market trends

The most direct way to interpret candlestick charts is to identify the high and low points of major swings and observe their movement:

• Uptrend: Swing highs and lows are continuously rising, indicating buyers are pushing prices higher.
• Downtrend: Swing highs and lows are continuously falling, indicating sellers are pushing prices lower.
• Consolidation: Swing highs and lows are close to each other, indicating a balance between bulls and bears, with prices fluctuating within a range.

Drawing trendlines connecting successive highs or lows can help traders better determine the overall market direction.

Rule 4: Accurately identify market reversal points

“Predicting” market turning points is key to finding low-risk, high-reward trading opportunities. The steps to accurately identify reversal signals are:

Step 1: Wait for prices to approach support or resistance levels and observe for signs of breakout or breakdown.

Step 2: Watch whether the candlestick bodies become smaller and whether the trend momentum weakens. Combine with volume and technical indicators (like KD lines) for comprehensive judgment.

Step 3: When retracement momentum strengthens, execute corresponding trading strategies.

Practical example: When prices hover near resistance and the trendline points downward, and a candlestick pattern shifts from bullish to bearish, it indicates buying strength is waning and sellers are taking over. Traders should look for short opportunities on shorter timeframes. Also, note that as retracement candles grow larger, selling pressure increases; smaller trend candles suggest weakening buying pressure, so avoid entering trades at this point.

Advanced K-line Analysis Techniques

Technique 1: Rising swing lows + approaching resistance line = Strong buying force

Traditional traders might worry about reaching a top when prices approach resistance lines and choose to short. However, when swing lows are rising and near resistance, the opposite is true—this indicates increasing buying strength, continuously pushing prices higher, with weak selling force unable to lower prices. In such cases, prices are likely to break through resistance and continue upward.

This pattern often appears as an “ascending triangle” on the chart, which is a strong bullish signal.

Technique 2: Recognize overbought/oversold and momentum reversals

When momentum decreases significantly, it indicates buyers are losing strength, and market attractiveness diminishes, with fewer buyers. Gaps formed during this phase are called “liquidity gaps.” This suggests a lack of demand to support the current price level, making a market reversal likely.

Technique 3: Avoid false breakouts

Many investors are troubled by false breakouts. A false breakout occurs when the market breaks above a high or below a low with a large candlestick, attracting traders to enter, but the market quickly reverses, causing losses for those who entered.

To handle false breakouts: first, identify the support and resistance levels of the breakout; if the price falls back and the breakout fails, trade in the opposite direction of the false breakout. For example, if a false breakout upward fails, consider shorting; if downward, consider going long. This approach allows you to profit from the reversal signals caused by false breakouts.

Practical Application Summary

Key points for mastering candlestick analysis:

◆ The basic structure of K-line charts (real body, shadows) and the meaning of various patterns are the foundation of all analysis.

◆ No need to memorize patterns mechanically; understanding the significance of closing position and real body length, combined with practice, will make analysis natural and intuitive.

◆ Grasp the trend changes of swing points to quickly identify the overall market direction.

◆ When trend candles become smaller or retracement candles grow larger, it indicates weakening major forces; stay alert.

◆ Combining support/resistance lines, volume, and other factors can greatly improve analysis accuracy.

Through systematic learning and practice of candlestick analysis, you will be able to interpret market signals as accurately as professional traders and make smarter trading decisions in the ever-changing market.