Learn to use Kagi charts
CONTENTS:
What are Kagi charts
Kagi charts are a specific type of chart composed of vertical lines (green for up and red for down) and small horizontal lines that connect them. Similar to Renko charts, Kagi charts don’t factor in time. Time intervals are completely cast aside, as Kagi charts only take price action into consideration.
The word "Kagi" is derived from the Japanese art of woodblock printing. A "Kagi" or "Key" is an L-shaped guide used to properly align paper for printing. Due to this, Kagi charts are even sometimes referred to as "Key charts."
From the starting point (usually the first closing price), lines are drawn solely based on price action. Up lines (also called Yang lines) are formed during uptrends, while down lines (Yin lines) are formed during downtrends.
As long as prices continue to move in the current direction, the current up line or down line will continue. Once price reverses enough (the necessary reversal amount is set by the trader), a horizontal line is drawn, and then a line is drawn in the opposite direction, stopping at the new closing price.
Line types
There are five different types of lines that can be drawn within a Kagi chart:
- Up lines (Yang lines): Form during an uptrend
- Down lines (Yin lines): Form during a downtrend
- Projected up lines: During an intraday timeframe, a potential up line that would form based on the current price (before the actual closing price is set)
- Projected down lines: During an intraday chart interval, a potential down line that would form based on the current price (before the actual closing price is set)
- Horizontal lines: Lines drawn when a line changes direction. When an up line changes to a down line, the horizontal line is considered a shoulder. When a down line changes to an up line, the horizontal line is called a waist
Line calculation methods
There are three different methods for calculating lines:
- Average true range (ATR): Uses the values generated by the Average True Range (ATR) indicator. The ATR is used to filter out the normal noise or volatility of a financial instrument. The ATR method automatically determines a good line size. It calculates what the ATR value would be in a regular candlestick chart and then uses this value as the line size
- Traditional: Uses a user-defined absolute value for line size. New lines are only created when price movement is at least as large as the predetermined line size. The upside to this method is that it is very straightforward and easy to anticipate when and where new lines will form. The downside is that selecting the correct line size for a specific instrument requires some experimentation
- Percentage (LTP): The line size is based on a percentage defined by the user. This percentage is applied to the most recent closing price to calculate the line size, then rounded to the nearest minimum tick size and applied consistently across all bars. This method is subject to chart repainting
How to use Kagi charts
Kagi charts are a popular charting choice because of their ease of interpretation. Because they do not take time intervals into consideration, they help filter out noise. When price movement is the only variable that matters, the creation of new lines gains importance.
Price movements typically need to be substantial to register a line change and therefore should always be noted.
Small price variations that occur naturally over time can be disregarded. Some common applications for Kagi charts include basic line reversal trading signals, support and resistance identification, and sequence-based reversal patterns.
- Up line/down line reversals: Steve Nison, who popularized Kagi charts, offered the most basic interpretation: buy in Yang, sell in Yin. In other words, buy on a reversal to an up line and sell on a reversal to a down line
- Support and resistance: Kagi charts often reveal areas of support and resistance
Nison also proposed a trading signal involving a sequence of nine (mostly) consecutive shoulders or waists. After the ninth is drawn, traders can look for a potential reversal opportunity.
Kagi chart settings
- Up bars: Change the color and outline of up bars
- Down bars: Change the color and outline of down bars
- Projected up bars: Change the color and outline of projected up bars
- Projected down bars: Change the color and outline of projected down bars
- Box size assignment method: Choose between the ATR, Traditional, and Percentage (LTP) line calculation methods
- ATR length: If ATR is selected, this value sets the ATR look-back period. The default is 14
- Reversal amount: If Traditional is selected, this sets the size of the move needed to draw a new line in the opposite direction
- Percentage: If Percentage (LTP) is selected, this sets the percentage of the last trading price to be used as the line size. Default is 1%
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