Cryptocurrency Basics Notes: Essential for K-Line Beginners

1. Introduction to K-Line History and Basics

K-Line, also known as candlestick or candle chart, is a type of chart that reflects price trends. Its characteristic is to condense and organize the price movements of an asset over a period of time, using different colors and shapes to convey price information and market sentiment, making it easy to read and practical. It is widely used in technical analysis of stocks, futures, precious metals, digital currencies, etc., referred to as K-Line analysis.

It is said that K-Line was invented by a rice merchant named Homma Munenaga during the Edo period in Japan to record daily rice market trends and analyze the futures market. In Japanese, it is pronounced as "keisen," hence the Chinese translation as K-Line.

K-Lines can be categorized by time into daily K-Line, weekly K-Line, monthly K-Line, yearly K-Line, and can also be divided into smaller time frames within a day, such as 5-minute K-Line, 15-minute K-Line, 30-minute K-Line, 60-minute K-Line, etc. K-Line charts are particularly popular in daily trading for two reasons: they provide extensive trading information and are easy to interpret.

2. Interpretation of Basic K-Line Patterns

1. Big White Candle

Characteristics: The body of a big white candle (the part between the closing price and the opening price) is usually long, indicating strong buying power. The upper and lower shadows of the big white candle are usually short or nonexistent, suggesting that there was little price fluctuation during trading, with buyers in control.

Interpretation: The strength of the big white candle is proportional to the length of its body; the longer the body, the stronger the force, and vice versa. Big white candles often appear in the early or middle stages of an uptrend, serving as a strong signal for rising prices.

2. Big Black Candle

Characteristics: Also known as a long black candle, it refers to a K-Line with a long black body and little or no upper and lower shadows, characterized by opening near the highest price of the day and closing at the lowest price.

Interpretation: Sellers dominate. Holders sell off frantically at any price, creating a sense of panic. The market is one-sided, with prices continuously falling until the close, indicating a strong downtrend. The strength of the black candle is proportional to the length of its body; the longer the body, the stronger the force, and vice versa. However, in certain market conditions, the appearance of a big black candle may be followed by a price increase.

3. Doji

Characteristics: The opening price and closing price are equal, resulting in no body or a very short body.

Interpretation: Indicates that the market is in an uncertain state, and a price reversal may occur.

4. Dragonfly Doji / T-Line

Characteristics: The opening price, closing price, and highest price are the same or very close, with the body resembling a "1" and leaving only shadows on the K-Line, occasionally accompanied by a small upper shadow. This pattern, whether a black or white candle, carries the same meaning.

Interpretation: In actual trends, T-Lines often appear near high points during an uptrend or rebound, often becoming short-term peaks and signaling an impending adjustment. T-Lines at high points reflect a probing behavior of short-selling forces, testing the strength of the buying forces below. Generally, the longer the lower shadow, the greater the adjustment space. Due to its significant bottoming and rebound movement, it often attracts retail investors to buy, becoming a form of inducement for the main capital.

5. Gravestone Doji / Inverted T-Line

Characteristics: Has a long upper shadow, with the opening price and closing price at the same level, resembling a "1."

Interpretation: A reliable trend reversal signal.

6. Spinning Top

Characteristics: The body of the spinning top K-Line is short and located between equally long upper and lower shadows, with long shadows.

Interpretation: This pattern indicates market indecision, where bulls push prices up while bears pull prices back down. Spinning tops are usually interpreted as a period of consolidation or rest following a clear uptrend or downtrend.

The spinning top itself is a relatively benign signal but can also indicate that current market pressure is becoming uncontrollable.

7. Hanging Man

Characteristics: Appears during an uptrend, signaling a potential top. A small body (black or white) is at the top of the K-Line, with the lower shadow significantly longer than the body, generally considered to be more than twice the length of the body.

Interpretation: The hanging man is a bearish pattern. Its shape is similar to that of a hammer, but it forms at the end of an uptrend.

This pattern indicates significant selling pressure during the day, but buyers manage to push prices back up to some extent. Large-scale selling is often seen as a sign that bulls are losing control of the market.

8. Hammer

Characteristics: Appears during a downtrend, also known as a hammer line, and is a reliable bottoming pattern. Its characteristic is that the body (either black or white) is very small, located at the top of the K-Line, generally with no upper shadow (or a very short one). The lower shadow should be significantly longer than the body, generally considered to be more than twice the length of the body.

Interpretation: Usually indicates a large amount of buying interest, suggesting that prices may rise soon.

The hammer appears during a downtrend and is a bottoming signal, indicating a bullish outlook. The longer the lower shadow of the hammer, the stronger the resistance from buyers, suggesting that the buying power is nearly equal to or even exceeds the selling power.

Comparison: Similarities between Hammer and Hanging Man

The body is at the upper end of the price range; the length of the lower shadow is at least 2-3 times the height of the body; there is no upper shadow, or if there is, it is very short.

Comparison: Differences between Hammer and Hanging Man

The hammer and hanging man are simply patterns that differ in their occurrence; the hammer generally appears after a period of decline, requiring a certain degree of drop, indicating a stage cycle bottom; the hanging man appears after a period of increase, requiring a certain degree of rise at a relative high point.

9. Inverted Hammer

Characteristics: The inverted hammer is a bullish signal that starts from the opening price and gradually rises, showing a significant increase during the day. The buying power is very strong, but after reaching a peak, it quickly falls back, closing above the opening price while leaving a long upper shadow.

Interpretation: After a long downtrend, the inverted hammer has market significance for a potential reversal, appearing at low points after a prolonged decline, serving a similar bullish function as the hammer. When analyzing the inverted hammer, it is crucial to wait for subsequent bullish signals to confirm.

3. Common K-Line Combination Patterns

1. Morning Star: Appears during a downtrend, consisting of three K-Lines: the first is a black candle, the second is a doji or small black (or white) candle, and the third is a white candle. Ideally, the middle should be a small doji, with gaps from the previous and next K-Lines, and the heights of the white and black candles should be roughly equal.

Technical Meaning: A bottoming signal, indicating a bullish outlook.

2. Piercing Line: Appears during a downtrend, starting with a large black candle or medium black candle, followed by a large white candle or medium white candle. The body of the white candle penetrates more than half of the black candle's body.

Technical Meaning: The more the body of the white candle penetrates into the black candle's body, the stronger the reversal signal.

3. Rising Sun: Appears during a downtrend, starting with a large black candle or medium black candle, followed by a large white candle or medium white candle that opens high, with the closing price of the white candle above the opening price of the previous black candle.

Technical Meaning: A stronger bottoming signal than the piercing line; the higher the body of the white candle, the stronger the reversal signal.

4. Evening Star (opposite of Morning Star): Composed of three K-Lines, during an uptrend, a long white candle appears. It gaps up, and the body of the K-Line gradually shrinks, forming the main part of the star. This is followed by a large black candle.

Technical Meaning: A topping signal, indicating a bearish outlook.

5. Dark Cloud Cover: During an uptrend, a long white candle appears. It gaps up, then falls to close at the lowest point, forming a large black candle. The closing price of the second K-Line is below half of the body of the first K-Line.

Technical Meaning: The more the body of the white candle penetrates into the black candle's body, the stronger the reversal signal.

6. Engulfing Pattern: The engulfing pattern consists of two K-Lines of different sizes and opposite colors, where the latter completely engulfs the body of the former (excluding shadows).

Technical Meaning: The engulfing pattern is a frequently occurring and effective reversal pattern.

7. Double Top: The double top consists of two or more K-Lines, appearing during an uptrend, with the highest price at the same level.

Technical Meaning: A topping signal, indicating a bearish outlook. Double tops or double bottoms are not commonly seen in daily operations, but when they do appear, they are often highly accurate. The double bottom is the opposite.

8. Rising Three Methods: During an uptrend, a large white candle appears, followed by three small black candles (which can also be two, four, or more), slightly declining but trading within the range of the first white candle. This is followed by another large white candle that closes above the highest point of the first white candle. The overall movement resembles the letter "N."

Technical Meaning: Continue to be bullish.

9. Three Black Crows: Composed of three consecutive black candles. The closing price is at the lowest point of each K-Line. Each K-Line opens within the body of the previous K-Line. Each K-Line closes lower.

Technical Meaning: A topping signal, indicating a bearish outlook.

The above only lists a few common patterns; no pattern should be viewed in isolation. Accumulating various patterns step by step, combining them with volume and indicators, will yield relatively meaningful conclusions.

4. Technical Pattern Analysis

1. Support and Resistance Levels

As shown in the figure above, the lowest price becomes the support level, while the highest price indicates the resistance level. The support level shows the price level at which traders are willing to buy, while the resistance level is the price level at which traders wish to sell. In the figure, you can also see a breakthrough above the resistance level, which then becomes a new support level. Once these levels are broken, the supply and demand dynamics and the psychology behind price movements are considered to have changed. New support and resistance levels will then be established, and vice versa.

2. Double Top (M Top) and Double Bottom

Double tops and double bottoms are reversal patterns that indicate a potential reversal of the ongoing trend.

After two consecutive waves of rising and falling, the pattern forms two peaks, consisting of two relatively close high points, resembling the letter "M." The low point between these two highs is drawn as a horizontal line called the "neckline."

The double top pattern appears during an uptrend. There are two heads, and the high points formed by the two heads do not necessarily remain consistent. After forming the second head, it will fall back and break through the previously formed low point. Generally, after breaking the previous low, prices often experience a pullback, and when it is confirmed that the pullback cannot return above the previous low, the double top structure is confirmed. The logic for double bottoms is the opposite.

3. Triple Top and Triple Bottom

Triple tops and triple bottoms are similar to double tops and double bottoms, except that the market reverses after touching the support or resistance level three times instead of two. The triple top pattern indicates that the market reverses after touching the resistance level three times, while the triple bottom pattern has the opposite logic.

4. Head and Shoulders

This is another pattern indicating a trend reversal. It is very similar to the triple top, but the head and shoulders pattern has a peak shoulder, followed by a higher peak (the head), and then a lower peak (the other shoulder). The two shoulders should take roughly the same amount of time to form, and the neckline is formed between the two troughs on either side of the head. You can calculate the target level based on the distance between the head and the neckline: starting from the breakout point, this distance will be the target decline.

It is important to note that the head and shoulders pattern is only fully formed after the neckline is broken. At this point, the target is established.

The inverse head and shoulders pattern operates on the same principle, just in the opposite direction.

5. Triangle

When market prices begin to converge towards a certain point, a triangle pattern emerges. The formation of the triangle can indicate the next price movement. There are three main types of triangle patterns: ascending triangle, descending triangle, and symmetrical triangle.

Ascending Triangle: Simply put, the highs are nearly the same while the lows are progressively higher. This pattern often appears at the beginning of an uptrend or during a rising trend, usually indicating that prices will rise, but be cautious as strong resistance may lead to a price pullback. Generally, when trading using triangle patterns, it is wise to wait for the pattern to form and then trade at the breakout point.

Descending Triangle: The principle is the opposite of the ascending triangle. The highs are progressively lower, and the market touches the support level, but the peaks are consistently falling, indicating that prices are likely to decline.

Symmetrical Triangle: When prices converge with peaks consistently falling and troughs continuously rising, a symmetrical triangle is formed. This is referred to as "consolidation," meaning that after the pattern forms, the overall market trend will typically continue in the same direction.

If a triangle forms without a clear trend beforehand, the market may break out either upward or downward.

6. Wedge

Do not confuse it with a triangle; this pattern refers to the market price beginning to narrow within a small range between two sloping trend lines. An ascending wedge is formed between two upward-sloping support and resistance lines. In this case, the support line is steeper than the resistance line. This pattern generally indicates that prices will decline.

A descending wedge is formed between two downward-sloping trend lines. In this case, the resistance line is steeper than the support line, usually indicating that prices will rise.

5. Reference Indicators

1. Moving Average (MA)

As the name suggests, a simple moving average simply plots the average price of the market over a specific period. The above figure shows the 10-day moving average (10MA), 20-day moving average (20MA), and 50-day moving average (50MA). The 20-day moving average is smoother than the 10-day moving average and lags behind the price more. Among the three moving averages, the 50-day moving average is the flattest, while the 10-day moving average is the steepest.

2. Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) is a type of moving average that places more emphasis on recent data points. It is also known as the exponentially weighted moving average. The principle of the exponential moving average is similar to that of the simple moving average, but it focuses on more recent periods. This means that the exponential moving average reacts more quickly to price movements and is usually closer to the asset's price.

For example, the 5-day EMA is used for ultra-short-term judgment, the 10-day EMA for short-term judgment, the 20-day EMA for medium-term judgment, and the 200 EMA is recognized as the dividing line between bull and bear markets.

3. Moving Average Crossovers

For example, the 10-day moving average is usually above the 20-day moving average in an uptrend but below it in a downtrend. Therefore, the crossover points of moving averages can be excellent positions to enter and/or exit trades. Generally, when a shorter-term moving average crosses above a longer-term moving average, it is suitable for going long; when a longer-term moving average crosses above a shorter-term moving average, it is suitable for reversing positions.

4. Moving Averages as Support and Resistance Levels

For example, the 10-day exponential moving average had a point in mid-September where the price significantly broke above this moving average. It turned out to be a false breakout, and the downtrend continued until the end of September and into October.

Because of this, many traders add multiple moving averages to their charts. If we also include the 50-day exponential moving average, we can see that although the 10-day moving average was broken during the brief rebound in September, the 50-day moving average was not breached.

Adding the 50-day exponential moving average also released strong crossover signals just before the market turned upward at the end of November and early December.

5. MACD (Upgraded Version of MA)

The MACD indicator consists of three parts: DIF, DEA, and the MACD histogram, with the calculation formulas as follows:

MACD Line (DIF, Fast Line) = 12-day EMA - 26-day EMA

Signal Line (DEA, Slow Line) = 9-day EMA of the MACD Line

Histogram (MACD Histogram) = (MACD Line - Signal Line) × 2
(Note: Some software may double the values for a more intuitive display of the histogram)

MACD Crossover Strategy --- Golden Cross

A golden cross occurs when the MACD line crosses above the signal line (the fast line crosses above the slow line), at which point the histogram turns from negative to positive, changing color from red to green (different tools may have different color settings), indicating a shift from weakness to strength in the market, suggesting a potential upward movement and serving as a buy signal.

MACD Crossover Strategy --- Death Cross

A death cross occurs when the signal line crosses above the MACD line (the slow line crosses above the fast line), at which point the histogram turns from positive to negative, changing color from green to red, indicating a shift from strength to weakness in the market, suggesting a potential downward movement and serving as a sell signal.

The above figure shows the price trend of Bitcoin combined with the MACD indicator (2024 data).

When identifying golden crosses and death crosses, the simplest and quickest method is not to look at the movements of the fast and slow lines but to observe the size and color changes of the histogram. When the histogram gradually shrinks and changes from red to green, it indicates a golden cross; conversely, when the histogram gradually shrinks and changes from green to red, it indicates a death cross.

MACD Divergence Strategy --- Bottom Divergence

Bottom divergence occurs when the price breaks below a previous low, while the MACD line (fast line) is above the previous low, indicating an upward momentum, suggesting that the price may reverse from a decline to an increase, serving as a potential buy signal.

MACD Divergence Strategy --- Top Divergence

Top divergence occurs when the price breaks above a previous high, while the MACD line (fast line) is below the previous high, indicating a downward momentum, suggesting that the price may reverse from an increase to a decline, serving as a potential sell signal.

6. BOLL (Bollinger Bands)

Middle Band = 20-day Simple Moving Average (SMA)

Upper Band = 20-day SMA + (20-day Standard Deviation x 2)

Lower Band = 20-day SMA - (20-day Standard Deviation x 2)

Typically, standard Bollinger Bands are set with a 20-day period, with the upper and lower bands set at two standard deviations (x2) away from the middle band. This is done to ensure that at least 85% of the price data will fluctuate between these two bands, but the settings can also be adjusted based on different needs and trading strategies.

The BOLL indicator is a price channel indicator, so it is displayed overlaid on the K-Line main chart. The BOLL indicator consists of three bands; generally, the upper band serves as the resistance level of the price channel, while the lower band serves as the support level. Price fluctuations occur within the upper and lower limits. The middle band may sometimes act as a support line and sometimes as a resistance line. The upper and lower bands represent standard deviations, meaning they reflect price volatility. When the bands contract and come close together, it indicates that the market is entering a period of low volatility, and the market is about to enter a consolidation phase.

If the price is above the moving average and exceeds the upper band of the Bollinger Bands, it can generally be safely assumed that the market is in a state of overextension (overbought). On the other hand, if the price repeatedly touches the upper band, it may indicate a significant resistance level. Conversely, if the price of certain assets significantly declines and repeatedly exceeds or touches the lower band, the market may be in a state of overselling or has reached a strong support level.

When the Bollinger Bands gradually open up, the upper band moves upward, and the lower band moves downward, forming an open trumpet shape. This indicates that the price's volatility is increasing, which may trigger a significant market movement. At this point, traders should pay attention to the direction of the middle band. If the middle band is trending upward, it indicates that prices will enter an upward trend, serving as a buy signal; if the middle band is trending downward, it indicates that prices will enter a downward trend, serving as a sell signal.

In summary, the Bollinger Bands indicator can show overbought and oversold conditions. When the price breaks above the upper band, it enters the overbought zone. When the price breaks below the lower band, it enters the oversold zone. When using Bollinger Bands, it is essential to pay attention to whether the price is in a normal range or an abnormal range. In an abnormal range, one should not simply operate under the rule of "selling when touching the upper band and buying when touching the lower band."

6. Comprehensive Indicators

1. Fibonacci Retracement

The Fibonacci sequence is a series of numbers such as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc., where each subsequent number equals the sum of the two preceding numbers. This sequence has many interesting mathematical properties, such as its relationship with the golden ratio (Phi). The golden ratio is approximately 1.618, and as each term in the sequence is divided by the previous term, it approaches this ratio, leading to the establishment of important Fibonacci ratios of 23.6%, 38.2%, 50%, and 61.8%.

In technical analysis, Fibonacci retracement is drawn by taking two extreme points (usually a peak and the most recent low) on the K-Line chart, systematically plotting several horizontal lines as shown in the figure above. This can help traders identify potential support levels for retracements. The Fibonacci retracement tool should be used in conjunction with other technical indicators (such as moving averages or Bollinger Bands).

2. Ahr999

This indicator was created by a Weibo user Ahr999 to assist Bitcoin dollar-cost averaging users in making investment decisions based on timing strategies. The indicator implies the short-term yield of Bitcoin dollar-cost averaging and the deviation of Bitcoin prices from expected valuations.

When Ahr999 index < 0.45, it is a signal to buy the dip;

When Ahr999 is between 0.45 and 1.2, it is suitable for dollar-cost averaging;

When Ahr999 > 1.2, the coin price is relatively high, making it unsuitable for trading.

In the long term, Bitcoin prices show a certain positive correlation with block heights, and by leveraging the advantages of dollar-cost averaging, users can control short-term averaging costs, keeping them mostly below Bitcoin prices.

3. Rainbow Chart

The Rainbow Chart is a long-term valuation tool for Bitcoin. It uses a logarithmic growth curve to predict the potential future price direction of Bitcoin.

It overlays rainbow-colored bands on the top of the logarithmic growth curve channel, attempting to highlight the market sentiment at each rainbow color stage as prices pass through it. Thus, it emphasizes potential buying and selling opportunities.

4. Two-Year MA Multiplier (2 Year Moving Average)

The two-year MA multiplier indicator is designed to serve as a long-term investment tool, highlighting periods when buying and selling Bitcoin can yield significant returns. It uses the 2-year moving average line (equivalent to the 730-day line, shown in green) and the fivefold multiple of that moving average line (shown in red).

Historically:

When the price falls below the 2-year moving average (green line), it is a buy signal, and purchasing Bitcoin will yield excess returns.

When the price exceeds the 2-year moving average x5 (red line), it is a sell signal, and selling Bitcoin will yield substantial profits.

These indicators should be used in conjunction with one another in practical applications, and a comprehensive analysis considering current events and market dynamics is necessary to maximize the guiding effect of the indicators.