Master Japanese Kagi Technical Analysis Charts For Your Trading & Investing!

KAGI CHARTS! In recent weeks we've taken a look at various styles of Japanese Technical Analysis chart types - Renko, Line Break. The last of what I call 'independent' Japanese chart types I will introduce you to in this article is the Kagi chart - a fantastic chart type you don't want to miss out on!!

Firstly, why 'independent' - these chart types stand alone as an individual chart type tool unlike Heikin Ashi that is a derivative of the Candlestick chart and tools like Ichimoku that is simply a complex indicator configuration - both of which by the way I will cover off in weeks to come. In this article though, its all about understanding and interpreting the Yin and Yang of the markets!!

Nb. If you'd like to discover more about Kagi charts after reading this article, then I offer a totally FULL & FREE Kagi Trading course on my YouTube channel - links at end of this article.

So, Kagi technical analysis charts, are another fantastic and ancient Japanese approach to aid your trading and investing and maybe give you a new edge on the markets! It is relevant to many different styles of trading e.g. day, scalping, trend following, swing trading, calling the turn etc.These charts are the Japanese equivalent of the Western Point & Figure charts.

They were developed and used to give a much more transparent picture of where the price of an individual asset was headed independent of time. It's an unusual looking chart and is made up of lines called Yin and Yang lines. The other fundamental concept of these charts, is that of the reversal in price. The lines change direction once the price moves a set amount.

Kagi charts are great for:

• Filtering out some of the psychological issues you may be having with your analysis. 
• Takes away a lot of the ‘noise’ of the charts and information overload in your trading.
• Great for trend following and reversal trading systems, spotting key support and resistance levels.

Due to the global world we live in and the advancement in charting software, techniques such as Kagi charting are now available to all of us.

What is KAGI?

• Created in Japan, 
• Been around since 1870’s.
• Used to give a much more transparent picture of where the price of an individual asset was headed independent of time.
• Ignores time and focus solely on price changes that meet a minimum requirement. 
• Great for taking the ‘noise’ out of the charts; another great ‘psychological’ helping chart!
• Instead of using 'X's and O's like point and figure charts, the Kagi chart simply uses lines. These lines are known as the Yin and Yang lines. 
• The other fundamental concept of these charts, is that of the reversal in price. The lines change direction once the price moves a set amount.

Below you can see a typical example based on the S&P500 stock index (Charts: TradingView). In this example the thicker black line signifies up bullish periods (Yang line) and the thinner red line signifies bearish periods (Yin Line):

Also take a look at the same period on the Kagi S&P 500 chart versus the traditional candlestick chart S&P 500 chart. See how much less noise there is on the Kagi chart (Charts: TradingView):

Basics:

• It is the study of pure price movement i.e. it doesn’t take into consideration ‘time’ when constructing its charts.(although we can now add time to our advantage!!)
• Uses simple lines known as ‘Yin’ and ‘Yang’ to measure price.
• The lines change direction once the price moves a set amount.
• Kagi charting is all about the price reversal.
• Normally: Black (thicker) lines indicate bullish periods (Yang Line), Red (thin) lines signify bearish periods (Yin Line)
• In my examples: Going Black to Red = Sell, Going Red to Black = Buy

WARNING: just using the change from one line to the next as an entry / exit for your trade eg going green to red will get you in a lot of trouble - you need to understand what the chart is telling you, the patterns it is producing and strengthen even further by adding on other indicators and tools.

Construction:

Step 1 is to calculate the reversal amount. You can do this one of three ways:

1. Fixed number of points
2. A set percentage move
3. Average True Range (ATR)

• Calculation not restricted to just the 'close', but could also be based on a range such as the high-low.
• The reversal amount is the minimum price change required for the Kagi line to reverse its direction. 
• The  approach in Kagi, is virtually the same as you'd use in Renko charts.
• The Fixed approach is more subjective and harder to use with any consistency and dangerous for the beginner.
• The percentage is ok but doesn't factor in volatility.
• I prefer a combination of all 3 - ATR, percentage and Fixed number of points approach. (the full course covers in detail the crucial element of calculating the reversal amount)
• Whatever chart package you have, these are the 3 main input variables to setting up the Kagi chart. I cant stress enough how important it is to get this bit right to be able to successfully use this type of chart.

Example of Kagi Chart inputs using TradingView charts - notice only ATR and Traditional (Fixed) options available (not essential that it doesn't offer percentage option as you will see in my course):

So, what is the benefit to using ATR in the equation? ATR adds in the current volatility of the asset and reflects market action in its calculation currently, rather than just taking a set amount or percentage and applying that uniformly.

Example: Nikkei 225 Kagi Chart with a 350 point reversal based off ATR input and turned into a fixed /traditional static number - this allows you to backtest your strategy more easily and add consistency to signals for entry and exit (Charts: TradingView)

Use of indicators on Kagi charts:

Due to the advancement of technology and charting software you can now seriously enhance your Kagi analysis even further and create some brilliant trading strategies. 

• Can use indicators in conjunction with Kagi charts to improve results.
• You don't have to stop at just pattern analysis though. 
• Advancements in charting software mean you can also add indicators to your analysis which, with a bit of planning, could create some fabulous trading strategies. 
• Why not consider: RSI, MACD, Stochastics, Moving Averages etc to determine support, resistance, entry and exit points.

Stops:

Can you use stops on Kagi charts? Yes:

Basic rules: 

• Use levels of support and resistance
• Use indicators e.g. moving averages, bands etc.
• You can trail your stops using the turns / reversals in the Yin /Yang lines.

Lets look at an example of adding indicators.

Our Nikkei 225 price chart now has the further addition of a 50 'line' moving average and a MACD indicator - I also highlight some of the unique features of the Kagi chart in its terminology eg Falling waists, rising shoulders etc:

Nikkei 225 Kagi chart with MACD applied (Charts: TradingView):

Another strategy example: (Hang Seng Index) - using DMI, adjusted Bollinger Bands and a Moving Average - band breakout and trend confirmation:

A possible rule set for this setup (test thoroughly before implementing - this is only a hypothetical example):

• 1. Use ATR 10 as Kagi Line input feed (you can change to suit)
• 2. When lines change colour (Red to Black in my example) and price is > 10 MAV = LONG.
• 3. When lines change colour (Black to Red in my example) and price is < 10 MAV = SHORT.
• 4. Use the DMI indicator to help determine the trade direction (you don’t need to use the cross of the lines as an entry tool)
• 5. Initial Stop loss: use obvious levels from say IHA charts or turning points on the Kagi chart,
• 6. Exit: reverse back into Bollinger Bands, Change of indicators, or predefined rules e.g. trailing stops.
• TIP: Price <> Bollinger Bands = more bullish / bearish

This has been only a very brief introduction to another powerful and often forgotten chart type. It has many applications as a stand alone trading system or in conjucnction with other chart types as say a trend filtering tool.You can certainly strengthen the Kagi charts by adding on other types of technical analysis tools to create even stronger trading strategies. (which I explain actually how to do this in my Kagi course) I've used Kagi charts successfully for over 2 decades and built the concept into many successful trading strategies. Im going to be using Kagi charts a lot in my posts on Tiger Brokers quite a bit in the future, so I wanted to explain how they work to make translating my thoughts easier!

The Kagi course link (copy and paste into your browser): https://youtu.be/seDquxtolTY

What will you learn? Content summary:

CONTENT:

• Section 1 - Introduction
• Section 2 - What Are Kagi Charts? Construction, uses, useful patterns, trading Kagi
• Section 3 - Strengthening The Predictive Nature Of Your Kagi Charts - adding other indicators, risk & trade management, building a Kagi strategy
• Section 4 - Trading Kagi  - creating / implementing startegies, getting in and out, rules, automation
• Section 5 - Course RoundUp

If you’d like to find out more about what I do, you can get in touch with me via:

• Email: info@thestophunter.co.uk
• Website: www.thestophunter.co.uk
• YouTube: thestophunter

Visit my YouTube channel for loads of free educational content / courses / tips / analysis /ideas via my TIGER Intro post: THE STOP HUNTER (Links to YouTube at bottom of post)

Risk Warning: This course is purely for educational purposes and should not be construed as investment advice. Always be aware that trading and investment comes with a high degree of risk - always speak to your financial adviser first before investing and trading.