Previously we looked at the Line Break chart which was great for spotting possible reversals. In this article, we look at an approach that can filter out some of the psychological issues you may be having with your analysis. If you’re struggling with the ‘noise’ of the charts and information overload in your trading, then Kagi charting could be just the thing for you to add to your trading arsenal. Kagi charts were developed in Japan in the 1870’s when their stock market started trading and were used to track the price movement of rice. They were used to give a much more transparent picture of where the price of an individual asset was headed independent of time. Due to the global world we live in and the advancement in charting software, techniques such as Kagi charting are now available to all of us.
It’s all about the Yin and Yang: What are Kagi charts?
Kagi charts, like their western equivalent the ‘point and figure chart’, do away with time, leaving the user to focus only on the price action. Instead of using ‘X’s and O’s like point and figure charts, the Kagi chart simply uses lines. These lines are known as the Yin and Yang lines. The other fundamental concept of these charts, is that of the reversal in price. The lines change direction once the price moves a set amount.
Below you can see a typical example based on the S&P500 stock index (Charts: TradingView). In this example the thicker black line signifies up bullish periods (Yang line) and the thinner red line signifies bearish periods (Yin Line):
Also take a look at the same period on the Kagi S&P 500 chart versus the traditional candlestick chart S&P 500 chart. See how much less noise there is on the Kagi chart (Charts: TradingView):
Constructing your Kagi chart:
Step one is to calculate your reversal amount. This can be done one of three ways:
- Fixed number of points
- A set percentage move
- Average True Range (ATR)
This calculation is not restricted to just the ‘close’, but could also be based on a range such as the high-low. The reversal amount is the minimum price change required for the Kagi line to reverse its direction. If a reversal were to occur, a horizontal line would be drawn and a new vertical line up would be added.
The benefit to using ATR? ATR adds in the current volatility of the asset and reflects market action in its calculation currently, rather than just taking a set amount or percentage and applying that uniformly:
Example: Nikkei 225 Kagi Chart with a 350 point reversal (Charts: TradingView)
Trading Kagi Charts:
The most simple strategy is to buy on a new Yang line and sell on a new Yin line. This basic concept can be further enhanced by analysing the patterns of the lines. A lot of traditional pattern analysis can be applied to these charts e.g. breakouts, trend line breaks and also add their own unique set of named patterns such as the Buddha (essentially a head and shoulders pattern), falling waists, rising shoulders etc.
Again, using the Nikkei 225 (Charts: TradingView), pattern analysis just on its own can seriously aid your trading decision making:
You don’t have to stop at just pattern analysis though. Advancements in charting software mean you can also add indicators to your analysis which, with a bit of planning, could create some fabulous trading strategies. Why not consider: RSI, MACD, Stochastics, Moving Averages etc to determine support, resistance, entry and exit points.
Our Nikkei 225 price chart now has the further addition of a 50 ‘line’ moving average and a MACD indicator:
Further reading and learning:
If you are interested in learning more about Kagi charts then the following reading may help:
Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison, (Wiley Finance) Hardcover – 8 Dec 1994
Kagi charting is an ancient method brought to life today, through the enhancement and development of technical analysis charting software. These charts offer a very different perspective on trading. A perspective that is devoid of noise and made simple, so that the user can clearly see key support and resistance levels, breakouts in the price, chart pattern formation and trends, as well as being able to add indicators on top of the analysis to create trading strategies. What’s not to like about Kagi charting?!
Next time: Technical Analysis (Part 23): Putting it all together: strategy, design & implementation