What is a Kagi chart?

Developed in Japan in the late 1870s, Kagi charts were originally used to track the price of rice, so traders could buy at the best price. Steve Nison, the man who brought candlestick charts from Japan to the western world, also introduced the Kagi Chart. He saw that traders needed another way of reading and understanding the trading matrix, and Kagi charts offered benefits in comprehension and stock price movement evaluations.

Kagi means “key” in Japanese—these charts can be an effective key to detecting changes in sentiment.

How do Kagi charts work?

Kagi charts have a number of features that need to be understood before they can be deciphered correctly.

• There are two axes, the Z and Y. The X axis is horizontal and has dates, which are markers for key price actions. The Y axis is vertical and is the value scale.
• There are generally two types of lines, a thicker green line and a thin red line. The thicker green line is called the yang line. This is basically the increase in demand over supply for the share and a “bullish” trend upward. The thin red line is a yin line, where the price goes below a previous waist and shows an increase in supply over demand. This is a “bearish” downward price trend.
• A horizontal line that joins a plunging line with a rising line is known as a waist.
• A horizontal line that joins a plunging line to a rising line is called a shoulder.
• The line will not change direction until the share price moves more than a pre-set reversal amount, which is generally 4 percent. This reversal amount has to be small enough to show reliable shifts in price but not too large that it misses signals. This percentage can be very subjective, depending on what the trader wants to see. A trader could also set this pre-set value for a dollar value or average true rating (ATR), rather than a percentage.
• The shoulders and waists will change color when surpassed. The color changes at the point when the shoulder or waist is passed. However, the color does not always change when there is a reversal, only when the price exceeds beyond the waist or shoulder.

A trader can quickly look at a Kagi chart and see if they should be buying, selling, or watching the stock.

How are Kagi charts used?

Interpreting Kagi charts is relatively simple. The most important thing for traders to note is the thickness of the lines and the direction the line is going in. Because this line does not change until there is a significant price reversal, it removes all the noise and unimportant information.

If a trader is looking at a chart that has a line going straight down, this will not change and go into a shoulder until a reversal amount of 4 percent (or whatever the trader has specified) is reached. Then, the shoulder shows the point the change was reached, and where it will then go on to rise. This will then become a green line, indicating a bullish upward trend in price. When the reversal amount of 4 percent is reached, it will form a waist, and then track downwards, a bearish price trend.

The traditional way to use Kagi charts is to buy when the lines change from thin, to thick. Because there is no noise, it simply shows trends, patterns, and outcomes. However, this simpleness means you won’t know all the major details.

Alternatives to Kagi charts

Candlestick chart

A candlestick chart is another Japanese-derived financial chart. It uses candlesticks to show open and close prices, as well as top and low prices for the day. Used over a time period, they track trends and patterns, and for those who are skilled in evaluating them, can even allow discernment of trader emotion.

While they are an excellent tool for traders to understand, they are more complex than Kagi charts and take a skilled trader to understand them.

Point and figure chart

A point and figure chart (P&F) is another chart that tracks asset prices over a time period. There are a stack of X’s and O’s, which show the rise (X) and fall (0) of a price. These charts provide trade and trend signals, similar to candlestick or bar charts. They can be slow to react, which may reduce false breakout signals, but this also means that by the time the signal is reflected in the chart, the time to act has passed.

Open high low close chart (OHLC chart)

These bar charts show open and close prices, as well as high and low prices for shares. They are excellent at identifying momentum changes and assessment of share price volatility. A vertical line shows the high and low price for that time period, and the open price and closing price are marked by lines. They are great for assessing patterns and identifying reversals.

Renko charts

Another Japanese-invented investing chart, Renko charts use colored blocks made up to resemble a line graph. The red bricks signify a down, and the green bricks signify an up. Like Kagi charts, there is no set time scale, but rather the bricks are formed as a result of movements. No movements, no bricks. However, they typically only use a closing price.

Benefits of Kagi chart

Reduces noise

A Kagi chart’s time scale is not a regular day-by-day count but records events, so it removes a lot of noise, making it independent of time. Because day to day price fluctuations can make it tricky to determine what is the true trend, Kagi charts do not pay attention to unimportant price moves that are unlikely to affect the future price.

For example, a Kagi chart is like looking at the sea and trying to ascertain if the tide is going in or out; removing all ripples and waves makes it easier to see the overall tidal movement.

Simple and easy to understand

Because there is no noise, Kagi charts are easy to understand. There is nothing that interferes with seeing the overall trend. When you can look at the Kagi chart in comparison to the line graph from the same period, it is easy to see the trends, not the individual price movements.

There is no extraneous information that can confuse or muddy the waters.

The challenges of Kagi charts

Do not work effectively in choppy markets

If the market is unstable and reacting to external events, this affects stock prices. However, Kagi charts are not ideal when assessing these periods as the volatile market will be reflected in the chart. Using a tool such as the Bollinger Band Squeeze can help identify these periods, where it would be wiser to not trade.

No trend strength provided

Kagi charts give more importance to trends, not strength of trends.

Kagi charts are an excellent tool

These charts have been around for 150 years, and that is for good reason. They quickly cut through the noise and clearly show trends in price. By eliminating the time data, they simplify the data considerably.

Kagi charts are best used in conjunction with other tools, such as a candlestick chart, to identify trends in share and stock prices. The biggest strength and weakness of Kagi charts is that the trader can set the reversal amount; whether it is a percentage, dollar amount, or average true rating. To make the chart more sensitive, this threshold can be dropped, or to make it less susceptible to volatile markets, it can be increased. However, that is up to the trader, their experience, and their level of comfort with the reversal amount.