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Trading with Kagi

Kagi Chart Patterns

It’s believed that Kagi charts were created around the time the Japanese stock market began trading in the 1870’s. Kagi charts display a series of connecting vertical lines where the thickness and direction of the lines are dependent on the underlying price action. The charts ignore the passage of time.

If prices continue to move in the same direction, the vertical line is extended. However, if prices reverse by a "reversal" amount, a new Kagi line is then drawn in a new column. When prices penetrate a previous high or low, the thickness of the Kagi line changes.

Turnaround Thin/Thick Line

Kagi charts illustrate the forces of supply and demand on a security. A series of thick lines show demand is exceeding supply (a rally). A series of thin lines show supply is exceeding demand (a decline). Alternating thick and thin lines show the market is in a state of equilibrium (i.e., supply equals demand).

The basic trading technique for Kagi charts is to buy when the Kagi line changes from thin to thick, and sell when the Kagi line changes from thick to thin. A sequence of higher-highs and higher-lows on a Kagi chart show the underlying forces are bullish, whereas, lower-highs and lower-lows indicate underlying weakness.

The following chart is a good example of a bullish reversal. The emergence of the thick line at $58 offers a good entry point, setting a protective stop just below the last significant support level ($54).