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Kagi
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. |
