Kagi Charts

What are Kagi Charts?

They are stock charts used in charting and study of chart patterns in technical analysis. It differs from traditional stock charts, such as the Bar and Candlestick chart by being independent of time and volume.

It does not even use open, high, low and close prices. It only uses tick data. The chart line changes direction only if there is a specified amount of move in the opposite direction.

This eliminates noise by not reacting to smaller movement in the opposite direction than a fixed reversal amount of movement. It lessens the ambiguity in making trading decision.

History

The Kagi chart was originally developed in Japan during the 1870s when the Japanese stock market started trading. This charting was designed to find entry exit points to trade rice. Later on it was found useful in trading financial instruments also. These charts display a series of connecting vertical lines where the thickness and direction of the lines are dependent on the price action. These charts use only the continuous price data called Tick data. Change of direction of lines occurs only when a change reaches a specific amount. This reduces random noise.

These charts were introduced to the western world by Steve Nison a well-known authority on the Candlestick charting. You can get more detailed information on this subject in his book Beyond Candlesticks.


How are Kagi Charts constructed?

They are constructed by drawing vertical and horizontal lines. The vertical line denote the change in price in one direction. The horizontal lines denote the change in the trend.

The vertical line is moved in the direction of the price movement. The line keeps extending as long as the price moves in the same direction however small it may be. When the price move in the opposite direction by a pre determined 'reversal' amount, an horizontal line is drawn and the vertical line is drawn in the opposite direction. Keep extending this line as long as the price moves in this direction.

If the closing price moves in the opposite direction of the current line by less than the reversal amount then no lines are drawn. The change in direction is made only if the price moves in the opposite direction more than the reversal amount although this could take a number of sessions.

If the line drawn in the opposite direction penetrates the prior column's high or low, the thickness of the Kagi line changes. When the line crosses the previous swing high the line is made thick denoting strong up movement. When the line crosses the previous swing low the line is made thin denoting strong down movement.

Thick lines denotes increased demand and thin lines represents increased supply. It may also be color coded. Thick line can be made green or blue and thin line can be made red or orange.

The 'reversal' amount may be measured in terms of pips or percentage. It is usually fixed at 4%. We can change it as per our requirement.


Study the Kagi chart given below and compare it with the bar chart. Click on the charts to see bigger charts.


Kagi chart with 1% reversal amount

In this chart the 'reversal amount' is set to 1 percent.



Kagi chart with 1 point reversal amount

In this chart the 'reversal amount' is set to 1 point.



Bar Chart

This bar chart is for the comparison. 

All the charts given above belong to the same stock and time frame.


Do you want some more examples? See the three charts given below. Click on the charts to see bigger charts.


Candlestick Chart

This is the normal candlestick chart. Observe the amount of noise present. Compare this with the chart given below. 


4 Point Kagi Chart

This is 4 Point Kagi Chart. See how the noise is reduced compared to standard candlestick chart. Compare this chart with the chart given below.


4 Percent Kagi Chart

This is 4 Percent Kagi Chart. 4 percent reversal amount is the standard default. See how the noise is reduced drastically. Compare this chart with the charts given above.

All the three charts shown above belong to the same stock and time frame.


How to use Kagi charts?

These charts are an excellent way to view the underlying supply and demand of a security. A series of thick lines indicate that demand is exceeding supply and thus the stock in in an up trend. A series of thin lines shows that supply is exceeding demand and thus the stock in a down trend. And a series of alternating thick and thin lines shows that the market may be in a relative state of equilibrium that is supply equals demand.

The most basic trading technique for these charts is to buy when the Kagi line changes from thin to thick and to sell when the Kagi line changes from thick to thin.

Take buy signals when swings are making higher highs and higher lows as they show the underlying force of the bulls. Similarly take sell signals when swings are making lower highs and lower lows as they show the underlying force of the bears.

As a general rule of thumb, eight to ten higher highs on a Kagi chart often coincides with an overbought market. This means a downside reversal may be imminent. Whereas lower highs and lower lows may reflect an underlying weakness.

Indicators calculated on these charts use all the data in each line and then display the average value of the indicator for that line.



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Related Readings

There are many other types of charts used in stock analysis. You may click on the name of each chart listed below to learn and understand more about them.

  1. Bar chart
  2. Bar charts also called as OHLC charts or open-high-low-close charts. They are used in charting and study of chart patterns in technical analysis. Each bar is a symbol created by connecting a series of price points, typically used to illustrate movements in the price of a financial instrument.

  3. Candle chart
  4. Candle chart or simply candlesticks charting is an ancient Japanese method of technical analysis. Candlesticks dramatically illustrate supply and demand concepts defined by classical technical analysis theories. Candlestick patterns not only display the absolute values of the open, high, low, and closing price for a given period in a format similar to the modern day, bar chart. But they also indicate trend continuation and trend reversal more clearly and more precisely.

  5. Candlevolume chart
  6. Candlevolume Chart combine the features of Equivolume charts and Candlestick charts. These charts have the wicks or tails and filled/unfilled body features of Candlestick charts, as well as the volume-based body width of Equivolume charts. This combination gives us the unique ability to study Candlestick patterns in combination with their volume.

  7. Equivolume chart
  8. Equivolume Charts display the relationship between price and volume in a bar. They presents a highly informative picture of market activity for stocks, futures, and indices. They differ from candlesticks by not considering open and close prices, and they differ from bar charts by not considering time factor.

  9. Line chart
  10. Line charts are created by connecting a series of data points together to form a line. This is the basic type of chart common in many fields.

  11. Point and figure chart
  12. Point and Figure charts just like in Kagi charts, disregard the passage of time and the chart changes only when the price changes. Rather than having price on the y-axis and time on the x-axis, these charts display price changes on both axis.

  13. Renko chart
  14. Just like in Kagi chart & Point and Figure chart, Renko charts also disregard the time factor in X axis. These charts are similar to Three Line Break charts except that a brick (or a line) is drawn in the direction of the prior move only if a fixed amount of the box size has been exceeded. The bricks are always of equal in size.

  15. Swing chart
  16. Swing charts are also called as Gann charts because their construction is based on W.D.Gann's method of trading. These charts disregard time factor and does not consider opening and closing prices.

  17. Three line break chart
  18. Three Line Break Charts originates from Japan and gets its name from the default number of line blocks typically used. They use an up block (line), a down block (line) and a reversal block (line). These charts disregards the time factor, which is usually plotted on the X axis, in commonly used stock charts.





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