Kagi charts display a series of connecting vertical lines where the thickness and direction of the lines are dependent on the price action. The charts ignore the passage of time. Kagi charts have no time axis and are made up of a series of vertical lines, however in the case of kagi charts, the vertical lines are based solely on the action of closing prices. Another difference is that the thickness of a kagi chart line changes when closing prices penetrate the previous column top or bottom
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. Kagi charts illustrate the forces of supply and demand on a instrument. 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). Alternating thick and thin lines shows that the market is in a state of equilibrium (i.e., supply equals demand).
Kagi charts are an excellent way of viewing the underlying supply and demand of a market. When the most recent kagi line is thick (and green), it indicates that demand is exceeding supply, and that the market is in an upward trend. Thin (red) lines, on the other hand, show that supply is exceeding demand and that the market is in a downward trend. Alternating thick and thin lines indicate that supply and demand is in an approximate state of balance.
Kagi charts take the ‘noise’ out of the market, giving you a chart of the market’s overall moves. You can gauge the strength of a trend by noting whether or not, in an upward trending market, a swing bottom is above, equal to, or below the previous swing top. The more ‘above’ it is, the stronger the trend. Normal technical analysis techniques can be used very effectively.
Kagi charts are of great value to a trader of trending markets. Traders can use kagi charts for their entry and exit signals, and to place their stop-loss orders to lock in profits. They would consider buying an instrument when the line changes from thin to thick. They would consider selling the instrument when the line changes from thick to thin.
More experienced traders can use a smaller reversal percentage when entering a trade, then when the trade is in profit, change this to a larger percentage. Should the instrument commence an almost vertical climb, called a blow-off top, a smaller reversal percentage can be used to help lock in profits. As a general rule, when a kagi chart has made eight to ten higher highs, the market is considered to be due for a correction.