What are Kagi Charts?
Kagi charts display the price action for a security. This method was developed by the Japanese in the late 1800s. Kagi charts are similar to point and figure charts in that it is not time based, but is dependent upon the price movement of the security to print a new line on the chart.
How to Construct a Kagi Chart
Kagi charts are a combination of vertical and horizontal lines. Each vertical line represents the total price movement from low to peak before a counter move occurs. As each previous high or low is exceeded a thick black line is drawn to indicate that dominant trend is still in play. While all counter moves are indicated by a thin colored line.
Kagi Charts vs. Candlesticks
Traders that use kagi charts are looking to take a lot of "noise" out of the market. Unlike candlesticks which display the open, high, low and close for each period, the kagi chart will only print if a previous swing high or low is exceeded. So, if a stock is trending in a parabolic state, there will not be enough of a counter move to print any new lines on the kagi chart. All the trader will see in this example is one solid line.
Trading with Kagi Charts
Trading with kagi charts may sounds simple because a trader is only paying attention to the major price swings, but not each minor swing point. However, whenever a trader removes information from the chart, it can leave one in the dark. There is a delicate balance between too much information (gann lines, 10 indicators, etc.) on a chart, but It is important to see how many times a security may test a given level over a period of time. Since the kagi chart only displays the price and not time, there is no way for a trader to know the amount of "strength" at a given resistance level within a given period of time.
The most common method for trading with kagi charts is to wait for a thin line, which indicates a pullback in the security. Then place a buy order above the most recent think kagi line, representing the last swing high. This basic method allows a trend trader to stay in the direction of the primary trend.