Kagi Charts

KagiChartsbyWillFeibel Introduction SeveralyearsagowestartedusingrangeandRenkochartswithoursystemshereatNetPicks.Thishas piquedpeople’sinterestinsomeoftheothermoreesotericcharttypes.Inthisarticlewe’llintroduce youtoKagicharts. Kagi(rhymeswithtouchy)chartsweredevelopedinthe1870’sinJapan,andmanyofusintheUSfirst learnedaboutthemfromSteveNisoninhisbookBeyondCandlesticks.LikeRenkocharts,Kagicharts areindependentoftimeandhavethevirtueoffilteringoutmuchofthemarketnoise,therebygivinga clearindicationofpricetrend.

Basics LookingataKagichartsyoumightthinkyou’reseeingaverylongsnakegraduallyweavingitswaytothe right.Thereappeartobenodistinctpricebarsasyou’dseeintimebased,Renkoorothercharts,but that’ssimplyduetothepresentationmethod.Wedoinfacthaveaseriesofpricebars,thevertical bars,connectedbytheshorthorizontalbars.Everyhorizontalbarrepresentsahighoralow.Abarthat movesfromalowtoahig movesfromalowtoahighisanupb hisanupbar,oneth ar,onethatmovesfr atmovesfromahight omahightoalow,adown oalow,adownbar.Note bar.Notealso also thatanupbarcanbeeitherthick(greenonsomeplatforms)orthin(redonsomeplatforms),socoloror linethicknessdoesnotreflectthedirectionofpricemovementinsidethebar.

Figure1–KagiChart

ThestyleorcoloroftheKagilinetellsuswhatthedominantmarkettrendis.Athick(green)linetellsus themarketisinarallyandthedominanttrendisup;athin(red)linesaysthatthemarketisindecline andthedominanttrendisdown. EachoftheelementsofaKagichartalsohasauniquename.Thethicklineiscalledtheyanglinewhile thethinlineiscalled thethinlineiscalledayinline, ayinline,andahigh andahighisreferr isreferredtoasas edtoasashoulderanda houlderandalowasawaist. lowasawaist.Wewon’t Wewon’t usethesenamesinthisarticlehowever,we’llkeepreferringtothemasthickorthinorhighorlow.

Reversals Consideranupbar,onethatstarteddrawingfromapricelow.Aslongaspricecontinuesmovingup, thebargrowslongerandthehighofthebarextendsfurther.Minorpricefluctuationswillnotaffectthe directionofthebar.However,oncepriceretracesapredeterminedamountwehaveareversal,and yourchartingplatfor yourchartingplatformwilldrawas mwilldrawashorthorizo horthorizontallineat ntallineatthebarhi thebarhighandcommen ghandcommencedrawinga cedrawingadown down bar.Aslongaspricecontinuestomovedown,thenewbarwillextendlower.Ifpricehowevermoves backupbythesamepred backupbythesamepredeterminedam eterminedamount,weest ount,weestablishanewl ablishanewlow,drawahor ow,drawahorizontalline izontallineatthatlo atthatlow w andbegindrawinganupbar.

Figure2-Reversals

Onmostchartingplatforms,includingTradestationandNinjaTrader,thereversalcanbespecifiedas eitherafixedamountorapercentageofthepriceoftheinstrument.Thetraditionalapproachuses4% ofpriceasthereversalamount.Notethatyoucanhaveaseriesofreversalbutthelinestyle–thickor thin–willnotnecessarilychange.Ineffectwhatyou’llseeisessentiallyaseriesofswinghighsand swinglongs.

DominantTrendReversals Asstatedearlier,athicklineindicatesadominanttrendtotheupside.Aslongaspricedoesnotmove belowthepreviouslowontheKagichart,thatdominanttrendwillremainineffectandthelinewill remainthick.Oncethepreviouslowisbroken,thestyleimmediatelychangestoathinline,indicating

thatthedominanttrendischangingtoadowntrend.Conversely,whenathinlinehaspricebreakinga previoushigh,itbecomesthickagainindicatingashiftoutofthedominantdowntrend.

Figure3–DominantTrendChanges

Inpracticeyou’dneedtoseeacoupleofreversalswherethelineremainsthinbeforeacceptingthatthe dominanttrendhaschange dominanttrendhaschanged,sinceas d,sinceasyouknowpric youknowpricesusuallygo esusuallygothrougha throughaconsolidationp consolidationperiodbefor eriodbefore e definitivelychanging definitivelychangingdirection. direction.Thesecons Theseconsolidationsshow olidationsshowupclearly upclearlyonaKagibar onaKagibarasasucces asasuccessionof sionof shortthickandthinlines.

 Application ThetraditionalapproachtotradingKagichartssaysthatyoubuywheneverthelinechangesfromthinto thick,andyousellwhenitchangesfromthicktothin.BecausetheKagichartsfilteroutalotofthe marketnoise,thiscankeepyouinsomeverynicetrends.Ofcourseit’snotperfecteither,asyou’llstill besusceptibletochopwheneverpriceconsolidates. YoucanalsouseKagichartsasadirectionalfilterforyourcurrenttradingsystem.Openachartwith yourtradingsystemandaseparateKagichartforthesameinstrument.Onlytakelongsetupsfromyour systemwhiletheKagilineisthick,andonlytakeshortsetupsfromyourtradingsystemwhiletheKagi chartisthin. Finally,youcanusealloftheusualtechnicalanalysistechniqueswithKagicharts,including support/resistancelevels,priceformations,andallofthetechnicalindicatorsavailableinyourcharting package.Giveitatry:pullupachartofyourfavoritetradingsystemandsimplychangethecharttype

toKagi.Yoursystemwillcontinuetoworkasbefore,exceptthatnowallthesignalswillbebasedonthe Kagichart.Awordofcautionisinorderhere:ifyoudaytradeusingaKagichartbesuretosetthe precisiononthechartto1ticintervals.

Figure4–NetPicksSSTwithKagiChart

Conclusion Kagichartsareanothertoolwecanuseintradingthemarkets.Theydoagreatjoboffilteringoutnoise andindicatingmajortrendsandcanbeusedeitherontheirownorinconjunctionwithotherchartsand systems.OpenupKagichartsofyourfavoriteinstruments,experimentwiththereversalsizeandsee howyoucanincorporatet howyoucanincorporatethemintoyour hemintoyourowntrading owntrading. .