Kagi charts are a type of technical analysis chart that focus on the price action and filter out minor price fluctuations. They are different from traditional time-based charts, such as line charts or candlestick charts, as Kagi charts are solely based on price movements.
In a Kagi chart, only the price changes that meet certain criteria are plotted, while insignificant price movements are ignored. The chart consists of vertical lines, either solid or dashed, which change direction based on predetermined price movements. Kagi charts aim to capture the overall trend and help traders identify key support and resistance levels.
Let's look at an example to better understand how Kagi charts work:
- Upward Trend: Suppose the price of a stock starts at Tk. 100 and the predetermined price movement criterion is set at Tk. 2. If the price increases to Tk. 102, a solid green (upward) line is drawn from the previous price level to the new price level. The line continues to extend upward until the price reverses by Tk. 2 or more. If the price drops from Tk. 102 to Tk. 99, a dashed red (downward) line is drawn instead. This process continues, with solid green lines representing upward movements and dashed red lines representing downward movements.
- Reversal and Change in Direction: When the price reverses by the predetermined criterion, a new line is drawn in the opposite direction. For example, if the price rises from Tk. 99 to Tk. 101, a solid green line is drawn. However, if the price subsequently falls to Tk. 98, which is a Tk. 3 reversal from the previous high, a dashed red line is drawn in the opposite direction. This reversal indicates a change in trend and helps traders identify potential entry or exit points.
- Support and Resistance Levels: Kagi charts can also provide insights into support and resistance levels. In an upward trend, the bottom points of the green lines act as support levels, indicating areas where buyers are willing to step in and push the price higher. Conversely, in a downward trend, the top points of the red lines act as resistance levels, where sellers may come in and drive the price lower. Traders can monitor these levels for potential trading opportunities or to set stop-loss orders.
- Trend Identification: Kagi charts excel in capturing the overall trend by filtering out noise and minor price fluctuations. By focusing on significant price movements, traders can easily identify the prevailing trend and adjust their trading strategies accordingly. The change in line color and direction helps in visualizing the shifts in trend and potential trend reversals.
Kagi chart trading strategy:
Kagi charts can be developed using a combination of chart patterns, trend identification and price breakouts. Here's a simple trading strategy using Kagi charts-
- Identify the Trend: The first step is to determine the prevailing trend using the Kagi chart. Look for a series of rising green lines indicating an uptrend or falling red lines indicating a downtrend. Confirm the trend by observing higher highs and higher lows in an uptrend or lower lows and lower highs in a downtrend.
- Wait for a Reversal: Once the trend is identified, wait for a reversal to occur. A reversal happens when the price reverses by a predetermined amount, as specified in the reversal criteria. For example, if the reversal amount is set at 2%, wait for a 2% price reversal in the opposite direction of the trend.
- Confirm the Reversal: It's crucial to confirm the reversal before taking any trading action. Look for additional technical analysis indicators or price patterns that support the reversal signal. This could include support/resistance levels, trendline breaks, or other technical indicators like moving averages or oscillators.
- Enter the Trade: Once the reversal is confirmed, consider entering a trade in the direction of the new trend. If the Kagi chart reverses from an uptrend to a downtrend, initiate a short or sell trade. Conversely, if the Kagi chart reverses from a downtrend to an uptrend, initiate a long or buy trade.
- Set Stop-Loss and Take-Profit Levels: As with any trading strategy, it's essential to manage risk by setting appropriate stop-loss and take-profit levels. Place a stop-loss order below the recent swing low in an uptrend or above the recent swing high in a downtrend. Determine a target price based on your risk-reward ratio and set a take-profit order accordingly.
- Trail Stop-Loss or Exit: As the trade progresses in your favor, consider trailing your stop-loss order to lock in profits and protect against potential reversals. You can trail the stop-loss order below each subsequent swing low in an uptrend or above each subsequent swing high in a downtrend. Alternatively, use other technical indicators or trailing stop-loss techniques to manage the trade.
- Monitor for Breakouts: Keep an eye on potential breakout opportunities. If the price breaks above the previous swing high in an uptrend or below the previous swing low in a downtrend, it may indicate a strong continuation signal. Consider adding to your position or adjusting your trading strategy based on the breakout.
Remember that trading strategies should be tested, refined and adapted based on individual preferences, risk tolerance and market conditions. It's important to practice proper risk management and thoroughly back-test any strategy before implementing it with real money.
