The Kagi chart is a specialized technical analysis tool developed in Japan in the 1870s. It uses vertical lines to illustrate general levels of supply and demand for certain assets, including price movements. Thick lines are drawn when the price of the underlying asset breaks above the previous high price, indicating an increase in demand. Thin lines signal increased supply when the price falls below the previous low.
Key Takeaways
- Kagi charts change direction with a specified price reversal.
- The chart continues in one direction until the specified reversal amount is met in the other direction.
- When the price moves above the prior high, the line turns thick and when the price drops below the prior low, it turns thin. The line maintains its thickness or thinness until the opposite signal occurs.
- Changes in direction, line thickness, and other patterns generate buy and sell signals.
Image by Julie Bang
Insights from a Kagi Chart
An entry signal is triggered when the vertical line changes from thin to thick and is not reversed until it changes back to thin. This signal can be overlaid with other fundamental or technical criteria to validate trading decisions.
- The line turns thick with a new high and remains so until a new low is reached.
- The Kagi chart moves up and down depending on price movement by the reversal amount or more.
- Kagi charts are independent of time and trigger direction changes only after reaching a predefined reversal amount, reducing noise common in traditional charting methods.
Setting the Reversal Amount
A Kagi chart will reverse direction when the price has moved a specified amount in the opposite direction. For instance, if trading Apple Inc. (AAPL) with a $10 reversal amount, the chart signals a reversal only when this condition is met.
- If the price is $300, a reversal won’t occur until it drops to $290.
- If it rises to $350, a reversal won’t happen until it drops to $340. The reversal amount need not be fixed; it can depend on Average True Range (ATR) to adapt to volatility changes.
Optimizing Trade Signals
Kagi chart signals gain effectiveness when combined with other analysis tools.
- Patterns like rising shoulders (buying opportunities) and falling waists (downtrend indicators) help in decision-making.
- Identifying formations like Three Buddha Bottoms predicts buying opportunities mirroring the inverse head and shoulders.
For enhanced outcomes, use Kagi charts with additional technical analysis tools such as sentiment indicators and moving averages.
Example of Kagi Chart Use
The following chart shows the Kagi chart of Apple based on 1-hour closing prices with a $5 reversal amount. The green line indicates an uptrend, while the red line indicates a downtrend. This visual aid illustrates the rising shoulders (price in uptrend) and the falling waists (price in downtrend), along with Three Buddha Bottom patterns that indicate buying opportunities.
Comparing Kagi and Renko Charts
Both Kagi and Renko charts rely on reversal amounts. However, Renko charts use bricks that only move at 45-degree angles and never occur beside each other. Each brick represents a defined amount, and a reversal requires movement equivalent to two bricks since there are no side-by-side bricks.
Limitations of Kagi Charts
- Sensitivity to settings: Poor settings can make Kagi charts as noisy as other methods.
- Customization: Each asset may need unique Kagi settings for optimal utility.
- Complexity: Identifying trends might be challenging given the varied line thickness and the vertical movements.
- Combined analysis: Kagi charts need to be coupled with other forms of analysis to ensure profitable trades.
How to Read a Kagi Chart
Unlike traditional line graphs, a Kagi chart changes only when the price exceeds the reversal amount. It thickens when surpassing a previous high and thins when dropping below a previous low, helping traders identify clear entry and exit points.
Kagi vs. Candlestick Charts
A candlestick chart displays the highest, lowest, opening, and closing prices for each trading day while omitting much of the daily fluctuation noise. Conversely, Kagi charts only change for price movements over a certain threshold, with line thickness (or color) indicating surpassing established highs or lows.
Meaning of Line Thickness
The thickness of a Kagi line signifies price trend changes — it becomes thick when a new high is formed and remains so until a new low occurs. Conversely, it thins when a new low is reached and stays that way until it hits a new high.
Conclusion
Kagi charts serve as a powerful technical tool to highlight major price actions and new highs or lows. While less intuitive than some other charts, with practice, they provide significant insights for experienced traders.
Related Terms: Renko chart, Candlestick chart, Reversal amount, Trend analysis.
