Kagi

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Description

Kagi charts are thought to have been created around the time the Japanese stock market started trading in the 1870s. Kagi charts were introduced to the western world by Steve Nison (a well-known authority on the Candlestick charting method). Kagi charts display a series of connecting vertical lines where the thickness and direction of the lines are dependent on the price action. If closing prices continue to move in the direction of the prior vertical Kagi line, that line is extended. However, if the closing price reverses by a pre-determined "reversal" amount, a new Kagi line is drawn in the next column in the opposite direction. An interesting aspect of the Kagi chart is that when closing prices penetrate the prior column's high or low, the thickness of the Kagi line changes.

To draw Kagi lines, compare the close to the ending point of the last Kagi line. If the price continues in the same direction as the prior line, the line is extended in the same direction, no matter how small the move. However, if the closing price moves in the opposite direction by the reversal amount or more (this could take a number of sessions), then a short horizontal line is drawn to the next column and a vertical line is continued to the new closing price. If the closing price moves in the opposite direction of the current column by less than the reversal amount then no lines are drawn.

In addition, if a thin Kagi line exceeds the prior high point (on the Kagi chart), the line becomes thick. Likewise, if a thick Kagi line breaks a prior low point, the line becomes thin.

Interpretation

Kagi charts are an excellent way to view the underlying supply and demand of a security. A series of thick lines shows that demand is exceeding supply (a rally); a series of thin lines shows that supply is exceeding demand (a decline); and a series of alternating thick and thin lines shows that the market may be in a relative state of equilibrium (i.e., supply equals demand).

The most basic trading technique for Kagi charts is to buy when the Kagi line changes from thin to thick and to sell when the Kagi line changes from thick to thin.

A sequence of higher highs and higher lows on Kagi charts shows the underlying force of the bulls. As a general rule of thumb, eight to 10 higher highs on a Kagi chart often coincides with an overextended market (i.e., a downside reversal may be imminent). Whereas, lower highs and lower lows may reflect an underlying weakness.
Indicators calculated on kagi charts use all the data in each column and then display the average value of the indicator for that column.

For more in-depth coverage of the Kagi charting method, we recommend the book Beyond Candlesticks by Steve Nison.