.jpg)
The Kagi chart resembles a linear price chart. However, it serves an entirely different function. Consisting of a series of vertical lines connected by short horizontal lines, the Kagi chart references an asset’s price action rather than the movement of quotes anchored to time.
In this article, we will analyze how to trade using the Kagi chart, and what signals can be obtained with it when trading.
The article covers the following subjects:
Kagi Chart Construction
The Kagi chart has vertical lines connected by horizontal ones, forming a continuous line resembling an L-shaped guide.
The Kagi chart includes four lines:
-
Yin is a falling line (marked in red on the chart).
-
Yang is a rising line (marked in green on the chart).
-
Shoulder is a horizontal line linking an upward movement to a downward one.
-
Waist is a horizontal line linking a downward movement to an upward one.
Building Kagi Chart
The Kagi chart looks similar to the Renko chart. It also casts time intervals aside, taking price action into consideration. The price change is usually preset, but it can also be identified, based on the ATR (Average True Range) data. Some platforms suggest using percentage amounts.
To draw a direct link to the Renko chart, I have selected the preset amount of the price change for the Kagi chart; it is 125.1 USD, applied to BTCUSD.
The Kagi chart will not take shape if the price movement is less than the specified value, which, in our case, is 125.1 USD. Let’s check the price history on the Japanese candlestick chart to make it easier to understand.
The chart on the left shows that on August 11, BTC declined after a sharp rise to $6,388.8 (marked by arrow No.1). The price change exceeded the preset value of $125.1, forming a vertical downward line on the Kagi chart. The last Japanese candlestick’s closing level corresponded to the Kagi chart’s base level.
After that, four bullish candlesticks appeared. When the total price growth was more than $125.1, the Kagi chart demonstrated another line, a waist, plotted from the base level.
As you can see in the screenshot above, line No.2 has accumulated nine candlesticks, confirming that the Kagi chart is not linked to time.
At some point, line No.2 changed its color from red to green due to the fact that the price crossed the base level of $6,388.8. That is, the Kagi line changed from Yin to Yang, from bearish to bullish, giving a clear buy signal.
The last bullish candlestick closed at $6,441.3, forming a new base level. The Bitcoin price went sharply down and the first bearish candlestick formed a new line connected by a shoulder with the previous one at the last base level.
The chart shows that the last tallest bearish candlestick declined below the waist, the base level before the previous one. As a result, the rest of the line has turned red below this level.
The trend change occurred at the closing level of $5,975.30, followed by a growth wave. However, the fourth line gave the bullish signal at the high of $6,444.1 when it reached the shoulder of the base level before the previous one.
In general, the Kagi chart combines the features of Renko and Line Break charts.
-
The Kagi chart excludes sideways movements and market noise.
-
It marks key trend reversal levels (potential support and resistance).
-
It signals a trend reversal.
Kagi signals:
-
A double-colored Kagi line indicates that the market has reached an equilibrium, pointing to a trend reversal.
-
A red line (Yin) indicates a bearish trend and gives a sell signal.
-
A green line (Yang) suggests a bullish trend and a buy signal.
-
Statistically, the trend’s duration does not exceed ten Kagi lines.
Combining Kagi chart and technical indicators
Considering the specifics of the Kagi chart formation, its middle lines, taking the form of a letter L, become uninformative due to their increased angularity.
However, on August 21, the MACD indicator crossed the zero threshold from below, signaling a trend reversal on the Kagi chart. This was a strong bullish signal, along with other moving average crossovers. As a result, this signal marked the beginning of a new bullish trend when other indicators were not signaling a reversal.
Applying Kagi Chart in Trading
I have been testing the Kagi chart during the week. This section contains the results of the test. I use the ETHUSD and XMRUSD quotes on the Japanese candlestick and Kagi charts to make it easier to understand.
Forecast for ETHUSD as of September 7, 2018
The price has fallen sharply on the Japanese candlestick chart. On the Kagi chart, a downward movement is forming. The line’s color has changed to red, which signals a trend reversal. The ETHUSD rate is predicted to continue declining, so we can open a short trade.
ETHUSD quotes on September 9, 2018
The price continued to decline as three bearish candlesticks emerged on the chart. However, the quotes then turned upwards, and the Kagi chart displayed a reversal. Therefore, you can close the short trade and take profits.
Forecast for XMRUSD as of September 5, 2018
On the Japanese candlestick chart, the price has declined sharply. At the same time, a reversal is forming on the Kagi chart, and the line’s color has not changed yet. The price is expected to decline within the downtrend.
XMRUSD quotes on September 9, 2018
The charts show that the forecast was correct. The price is declining within a downtrend with minor corrections.
Conclusion
The Kagi chart is an efficient tool that can supplement the Japanese candlestick chart and any trend strategy. Nevertheless, it has its advantages and disadvantages.
Advantages:
-
It filters out minor sideways movements and market noise.
-
It signals trend reversals.
-
It easily identifies support and resistance levels.
-
The MACD and moving averages enhance Kagi signals, making them more accurate.
Disadvantages:
-
It may give lagging signals;
-
Volume indicators cannot be applied to the Kagi chart;
-
False signals may appear.
The Kagi chart is essential for identifying the trend’s direction. When combined with technical indicators, the chart allows you to identify entry and exit points, increasing the efficiency of your trading strategies.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
