What Are Kagi Charts & How To Trade Them

The Kagi charts are a form of technical analysis that describes different price movements. It was developed in the 1870s by the Japanese to measure the supply and demand of rice prices. It differs from traditional stock charts such as the Candlestick chart by being mostly independent of time. This feature aids in producing a chart that reduces random noise.

What are the Kagi charts?

The structure of Kagi charts consists of a series of vertical lines. These lines depend on the asset’s price rather than time, like in bar or candlestick charts. In addition, these lines vary in size. Some are thick, and others are thin. These lines’ thickness and thinness are the most important factor of the Kagi charts, as they give trading signals.

Thick lines appear when an asset’s price is higher than the previous price, and it’s a signal that there is a strong demand for a certain asset. On the other hand, thin lines emerge when the price of an asset is lower than the previous price, and it signifies an increased supply of a particular asset.

Two of the most important points of the Kagi charts is that it is time-independent, and the lines move in a specific way. The time-independence means that the Kagi lines plot according to the price of an asset. When the lines form, they make a certain movement. For example, if the market is in a downtrend, instead of showing various lines, the Kagi will only show a single downward line. After that, if a price show reversal, another line in an upward direction will emerge.

This is what a Kagi chart looks like:

Kagi chart
Kagi chart

How to use Kagi charts?

On the Kagi charts, an entry point occurs when a traded asset’s price changes its direction from a thick line to a thin line. As already mentioned, thick lines represent a sharp demand in the asset’s price, so traders may look to take buy positions after their appearance with a stop-loss close to an entry point. Conversely, thin lines illustrate a strong supply in the asset’s price, and traders could look to take sell positions after their formations, with a stop-loss close to an entry point.

Buy and sell entry points on the Kagi chart
Buy and sell entry points on the Kagi chart

Like candlesticks or bar charts, the Kagi charts are a graphical illustration of price movements, so traditional patterns can sometimes be established on the Kagi. With the appearance of these patterns, traders can fully utilize the Kagi for their trading strategies.

One of the benefits of the Kagi is that it filters market noise by ignoring the time. The price fluctuations make price trends much more difficult. By applying the Kagi lines, a trader can screen some of the unimportant signals.

Kagi charts trading strategy

The Kagi chart is used to illustrate the various levels of supply and demand. To read them, traders look at the specific thickness of the lines. If the price continues to move in the direction of the previous kagi line, it extends the line.

If it reverses, like it always does, a new kagi is drawn in the next level and in the opposite direction. This is unlike a candlestick, which changes depending on the period used.

There are several trading strategies for using the kagi line. The most common approach is to buy when the kagi line moves from thin to thick (yang).

When trading with the Kagi lines, a trader may wish to first find the long-term price of an asset to ensure that they are trading in the direction of the trend.

Kagi charts buy strategy

  • Identify a thick line in an uptrend or downtrend.
  • Wait for a thick line to form.
  • Enter right after the appearance of a thick line.
  • Place a stop-loss near the recent low from the entry point.
  • Exit the trade when a thin line starts to emerge.

Kagi chart sell strategy

  • Locate a thin line in an uptrend or downtrend.
  • Wait for a thin line to form.
  • Enter right after the appearance of a thin line.
  • Place a stop-loss near the recent high from the entry point.
  • Exit the trade when a thick line starts to emerge.

Kagi charts conclusion

Since their inception in the Japanese rice markets, Kagi charts have come a long way. Unlike the candlestick charts, they filter any market noise by relying on the asset’s price rather than time. Surprisingly, not many traders know about Kagi charts. This is probably because they are not included by default in most forex trading platforms.

Due to its effectiveness in showing a clear path of price movements, the Kagi chart is one of the various charts that investors use to make better decisions about stocks. The most important benefit of this chart is that it is independent of time and change of direction occurs only when a specific amount is reached.

Kagi and candlesticks are parallel with one another, meaning that they have no close resemblance. The candlestick chart shows a trader everything that they need to know about the asset. In other words, it has a OHLC (Open, High, Low, and Close). Therefore, by looking at these numbers, you will be at a good position to understand the current price action. The chart below shows how a candlestick looks like.

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