What is a Kagi Chart?

As a trader, are you looking for a technical tool to analyse price trends without much noise? A Kagi chart might be an efficient tool for this, as it filters market noise by excluding the element of time and using the price movement of assets as its sole foundation.

With over 19.43 crore retail investors and traders in the Indian stock market, you can gain an upper hand in trades by identifying price trends with this chart and making quick and informative trade decisions.

Understanding the Kagi Chart in trading

Originating in Japan, the Kagi chart is a technical analysis tool for traders that uses thick and thin vertical lines to show price direction, reversals in price trend and thus the overall price movement of an asset.

If you see this chart while trading, you will notice thick green lines and thin red lines. With these lines it represents the overall supply and demand of assets such as a stock, commodity, etc.

Focusing on the thick or green lines, this chart plots them when an asset price crosses its previous high. Conversely, it shows red lines or thin ones when the asset price drops below its earlier low during trading sessions.

Furthermore, as it does not consider time measurement, it eliminates small price fluctuations that increase noise. It shows you the strength of trends with less effort compared to those that include market noise.

Key Components of Kagi Charts

Now that you have an idea of what is kagi chart, you must also make note of its key components. As these components mainly indicate price trends, understanding them is crucial while using a Kagi chart trading strategy:

1. The Thick Line

   The chart represents price movements using thick lines, typically in green. Also known as ‘Yang’, it indicates a potential uptrend in an asset’s price. This thick line usually forms when the asset price moves beyond its previous Kagi high, signalling a continuation of a bullish trend.

   Suppose a stock trading at INR 1000 rallies and breaks beyond its previous high of INR 1200. Here, a thick and green Kagi line appears.

2. The Thin Line

   Typically, a Kagi Chart represents a falling asset price in red, and this line is also known as ‘Yin’. It appears on the chart when an asset price moves below its previous Kagi low. It signifies a bearish move, meaning that sellers are gaining control. Instead of rallying from INR 1000, suppose the above stock drops below its previous low of INR 970. It creates the Yin.

3. Shoulders and Waist

   A Waist (typically a U-shaped bend) on kagi chart patterns appears when the Kagi line moves past a previous high or low, making this line switch thickness. However, you can spot a shoulder on a Kagi chart at the turning point of a thick line to a thin vertical line.

4. The Reversal Amount

   A reversal amount is a small price change of an asset which might cause a Kagi line to change its direction. Furthermore, a more considerable reversal eliminates small reversals, making it easier to locate price trends on a Kagi chart.

   To clarify this, suppose a chart uses INR 5 as a reversal amount, and if the price drops from INR 100 to INR 95, it triggers a reversal. However, if reversal is set to a higher amount, say at INR 15, a small movement would not affect the direction.

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Interpreting Kagi Charts for Trades

Aside from understanding what is kagi chart in trading and its components, you must take a look at how to interpret. It might help you to impose the kagi chart trading strategy and capitalise on profit-making situations:

1. Read Changes From Thin to Thick

   When you closely observe a Kagi chart, you can locate a point where a thin or red line changes to a thick or green line. As you already know, that means the asset price has crossed beyond its previous high and now indicates a possible bullish scenario. As a trader, you might choose to open a long position or opt for making a buying decision here.

2. Interpret the Change From Thick to Thin

   While observing the chart, when you see a thick green Kagi line change to a thin line, it means the current price has broken down past its previous low. As it highlights a potential bullish trend, you should hold your buying decision or open a short or selling position.

3. Locate the Support and Resistance Level

   As the shoulders and waists locate zones where prices have reversed, it helps reveal shifts in buying or selling pressure. Suppose, on a Kagi chart, the thick line turns to thin at INR 1200. It indicates selling pressure and acts as a resistance line. If the price later breaks above INR 1200, it signals that selling pressure has been overcome and creates a buying opportunity.

   Conversely, if you locate a thin Kagi line turning thick around INR 1000, it indicates a buying pressure or a support zone. If the price later falls below INR 1000, it indicates that sellers overcame the buying pressure, bringing you a potential selling opportunity.

How to Use Kagi Charts for Trading Strategies?

To use a Kagi chart in your trading as a strategy to capitalise on profit-making opportunities, you must follow its indications from its line formation, locating the support and resistance zones, and breakout trading:

1. Follow Price Trend Using the Line Formation

   On this chart, when a line moves upwards, it typically appears as a thick green line or the ‘Yang’, representing a price uptrend. As you already know, a ‘Yang’ is a potential bullish momentum, and as a trader, you can opt for a buying decision. Conversely, as a downward red and thin line or Yin represents a bearish momentum, opt for selling.

2. Support and Resistance Level

   The market for an asset typically reacts to certain points, where the price trend reverses. These are the support and resistance zones that you must identify. Upon locating, place stop loss orders strategically at key support and resistance levels. To be specific, place a stop loss below the waist in case of a long trade or above the shoulder for short trades.

3. Breakout Trading

   As a trader, you can also make buying or selling decisions based on price breakouts. For example, a breakout beyond its resistance level or a prior shoulder indicates buying pressure, and you might choose to buy at this breakout. A breakdown below its support level, which is its prior waist, indicates selling pressure, and you can opt for selling.

Key Advantages of the Kagi Chart in Trading

Aside from knowing its key components, interpretation, and trading strategies, you must also note some of its key advantages:

1. Smoother Price and Trend Representation

   As Kagi charts do not consider time as a factor, they eliminate market noise such as unnecessary price movements. It helps you have a broader picture of the potential future price direction or momentum. With a clear representation of price momentum, it helps with easy trend identification, which might further assist in making medium to long-term trades.

2. An Easier Reversal Indication

   With lines turning from thick to thin and vice versa, you can easily locate the trend reversal of the price of an asset. By choosing a reversal amount smartly, you can employ this trend reversal to your advantage and book potential profits.

3. Use it with Other Technical Indicators

Due to its versatility to be used with other indicators, it helps you confirm price trends more accurately. You can use its indications in combination with indications from moving averages, and oscillators, such as the MACD or stochastic, etc.

Disadvantages of Kagi Charts

Aside from noting its advantages, learning some of its drawbacks might help you avoid inaccurate trade decisions:

1. Delayed Insigghts

   A Kagi chart typically uses a set reversal amount. Hence, there is a chance of it producing a delayed signal in a highly volatile market.

2. Lacks in Volume Analysis

   Being a trend analysis tool, it focuses on price and does not concentrate on volumes. Therefore, you must confirm volume with any other confirmation tool. Trading with just price information might lead to inaccurate trades.

Conclusion

A Kagi chart is a technical analysis tool that focuses on meaningful price changes and filters irrelevant price moves. It represents an upward trend using thick lines and a downtrend using thin ones. However, you must confirm with other tools for an accurate trend confirmation.

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FAQ’s on Kagi Charts

1. How do Kagi charts help identify market trends?

It plots thick lines or a Yang on the chart when the price of an asset goes up. It represents a downtrend using thin lines or Yin.

2. How to make a Kagi chart?

First, you must choose an asset and a reversal amount. Use a trading portal or platform that supports a Kagi chart and adjust these settings to align with your trading strategy.

3. How to read Kagi charts?

A thin line on a Kagi chart represents that the price has broken through its previous low, indicating a bearish move. Overall, a transition from thin to thick lines and vice versa represents a reversal and helps decide for market entry or exit.

4. How do traders determine reversals using Kagi charts?

It depends on how much volatility there is in the market. A small reversal amount captures more changes in a volatile market. A large amount filters out smaller price changes and produces a broader picture of price movements.