What Is a Kagi Chart?

What Is a Kagi Chart?

Let me explain what a Kagi chart is. It's a specialized form of technical analysis that originated in Japan back in the 1870s. You see, it uses a series of vertical lines to represent general levels of supply and demand for assets, such as the price movements of rice, which was a key agricultural product in Japan. When the price of the asset breaks above the previous high, I draw a thick line, which indicates an increase in demand. On the other hand, thin lines show increased supply when the price drops below the previous low.

Key Takeaways

Here's what you need to know about Kagi charts. They change direction when there's a price reversal of a specified amount or more. The chart keeps moving in that direction until another reversal of the same amount happens in the opposite way. When the price goes above the prior Kagi high, the line turns thick or green, and when it drops below the prior low, it turns thin or red. That line stays thick or thin until the opposite signal appears. These changes in direction, line thickness, and other patterns can produce buy and sell signals.

What Does a Kagi Chart Tell You?

On a Kagi chart, you get an entry signal when the vertical line shifts from thin to thick, and it doesn't reverse until it changes back to thin. Remember, you should filter these signals with other fundamental or technical criteria, because just buying or selling every time the chart switches could lead to losses. The line turns thick when a new high is made if it was thin before, and it stays thick as long as no new low occurs. It turns thin on a new low and remains that way until a new high. The chart moves up and down as the price shifts by the reversal amount or more.

These charts ignore time entirely and only change direction once the predefined reversal amount is reached. This gives them an edge in reducing noise, which is a common issue with traditional candlestick charts. If you're a trader, you might find Kagi charts helpful for isolating trends and seeing directions more clearly. Depending on your platform, the lines might be colored red and green instead of thick and thin, with color changes signaling breaks below recent highs or lows.

Kagi Chart Reversal Amount

A Kagi chart reverses when the price moves in the opposite direction by a specified amount or more. For example, if you're trading Apple Inc. (AAPL) and set a $10 reversal, the chart shows that. If the price is rising to $300, it won't reverse until it drops below $290. If it goes to $350, reversal happens only below $340. And if it falls to $340, it won't reverse higher until above $350. This $10 is a moving target, based on closing prices or highs and lows.

The reversal doesn't have to be fixed; it can use Average True Range (ATR), adjusting with volatility. When reversing, the chart draws a horizontal line at the low or high price—depending on what's selected—and then moves vertically until the next reversal. These are directional changes, and the line color or thickness shifts highlight breaches of prior highs or lows.

Kagi Chart Trade Signals

You should use Kagi signals alongside other analysis. That said, they have unique formations. Swing highs are shoulders, swing lows are waists. Rising shoulders indicate a rising market and potential buys. Falling waists signal downtrends. A Three Buddha bottom is like an inverse head and shoulders, offering buying chances. You can find more patterns in Steve Nison's book Beyond Candlesticks.

For best results, combine Kagi charts with tools like sentiment indicators and moving averages.

Example of How to Use a Kagi Chart

Take this example: a Kagi chart of Apple based on 1-hour closing prices with a $5 reversal. It shows rising shoulders highlighting uptrends, falling waists indicating downtrends, and three Three Buddha Bottoms signaling buys. Generally, the chart switches to green above prior highs and red below prior lows.

The Difference Between Kagi Charts and Renko Charts

Both Kagi and Renko charts rely on reversal amounts. Renko uses bricks at 45-degree angles, never side by side, each a specified amount. A Renko reversal needs the price to move two brick distances.

The Limitations of Using Kagi Charts

Kagi charts are sensitive to settings; bad ones can be as noisy as other methods. A good setting for one asset might not work for another, so you may need to adjust per asset. For some, trends are harder to spot with changing thickness and vertical movements. Signals often aren't profitable alone without filtering. Kagi features require study to use effectively.

How Do You Read a Kagi Chart?

Unlike a line graph, a Kagi doesn't show linear time changes. It moves up or down when price changes exceed the reversal amount. The line thickens breaking past a previous high and thins below a previous low. Use these for entry and exit points.

What Is the Difference Between Kagi and Candlestick Charts?

Candlesticks show high, low, open, close per day, cutting noise. Kagi changes direction on significant moves, with thickness reflecting breaks of highs or lows. Kagi ignores time, focusing on size, so it has less info than candlesticks, which some find easier to read.

What Does the Line Thickness of a Kagi Chart Mean?

Thickness shows price trend. It thickens or turns green on new highs, staying until a new low. It thins on new lows, until a new high.

The Bottom Line

A Kagi chart identifies major asset price movements, showing only significant changes and new highs or lows. It's less intuitive than line or candlestick charts and may need more expertise to interpret.