What is Kagi Chart and How to use it?

Have you ever thought that candlestick charts are way too volatile and busy to keep track of the price in any meaningful way? Kagi charts perform the same role without the noise, making it easier to identify the trend. These charts eliminate the insignificant price movement and allow you to see the true path of prices. 

Discover the intricacies of Kagi charts and learn how to apply them to improve your trading and investment through this article.

What is a Kagi Chart?

The Kagi chart is a Japanese technique of charting that goes back more than 100 years. Its unique feature is that it plots the movement of a security’s price only when it moves beyond a certain predetermined reversal amount. A Kagi chart does not factor in the small price or the “noises” often found on standard charting methods such as candlesticks or bar charts. 

The most critical concept to remember about Kagi charts is that they are all made up entirely of straight lines connected to create a series of vertical lines. There are no spaces, peaks, or valleys as there are in candlestick charts. An upward vertical line is formed when the price rises by the reversal amount from the prior low. In contrast, a downward vertical line segment is developed when the price falls by the reversal amount from the preceding high.

What a Kagi Chart Indicates

• Long vertical lines: Long vertical lines indicate that this motion has continued because the price has exceeded the reversal amount.
• Thin horizontal lines: As long as the price moves at the range of the reversal amount, there will be a thin horizontal line between the vertical and the downward stroke. 
• Thicker lines: If a price continues to rise or fall at an increasing pace, the vertical line above the level of the reversal amount becomes thicker.
• Thinner lines: If the price did so grindingly, the vertical line below the reversal level will be thinner. 
• Reversal signaling: When a stock has lost or gained enough buying or selling power to change directions, Kagi charts clearly show when sentiment has shifted. 
• No noise: Prices between close, horizontal reversals are ignored for Kagi charts; they do not exist. 
• Trend slope change: You can see whether a trend is accelerating, decelerating, or straying by examining the slope of the vertical strokes. 
• Support and resistance levels: Previous support and resistance may be identified as horizontal support on a Kagi chart.

How to Use Kagi Charts

Select the Reversal Amount Carefully

The reversal amount you set is essential when working on a Kagi chart. You should select a smaller reversal amount for shorter trading timeframes and more volatile instruments. This ensures that the chart is more responsive to price movements. On the contrary, you may go for a more significant reversal amount for longer timeframes and less volatility to filter off the unnecessary noise. 

Identify Strength from Thick Vertical Lines

Long, thick vertical line segments indicate a tough price that pushes beyond the reversal amount. The denser the line, the faster the price moves in this particular direction. Thin vertical lines, however, indicate a weak trend. 

Use Horizontals for Support/Resistance

The horizontal lines that join the vertical upstrokes and downstrokes outline previous areas where the price was consolidated between the reversal amount levels. These are potential areas of support and resistance in the future. 

Combine With Other Techniques

Combining Kagi charts with other technical indicators that you can apply to the charts is possible and probably more effective. You can also combine Kagi charts with different chart types, such as candlesticks, to get a clear picture of the price action.

If you want to implement your theoretical knowledge of Kagi Charts, you should start with the best, highest dividend-paying penny stocks, as these stocks are less costly and easy options to start your trading career.

Advantages of Kagi Charts

• It is Easier to Spot Trends Clearly: Kagi charts remove meaningless price fluctuations, making it easier to discern genuine price trends. 
• Simple and Clean Visual: Kagi charts provide a simple and clean representation of the price journey due to their uncluttered appearance. 
• They Reveal Momentum Shifts Early: New vertical stroke lines in the opposite direction signal a momentum change in the price pattern. 
• Kagi Charts are Simple to Combine with Other Analysis: It is possible to superimpose kagi charts with technical indicators and combine them with other charts.

Limitations of Kagi Charts

• Information is Lost: Since Kagi charts eliminate price movement below the reversal amount, some required information for trading must be recovered. 
• Reversal Amount is Subjective: An optimal reversal amount doesn’t have definitive rules. It often depends on the timeframe you are trading and the volatility of the asset. 
• Not Ideal for Scalping: If you’re scalping, the Kagi charts might not be detailed enough. Additionally, if the Kagi chart eliminates small price swings, they cannot be followed intensively. 

Conclusion

Cut through the market noise and see the price trend with Kagi charts. These are a clean, simple way to view and trade the price action by cutting through the noise. Master this ancient Japanese technique; you’ll be slicing through the clutter like a Samurai.