The kagi chart is a graphical representation of price action or supply and demand levels which is not time-based. It resembles a point and figure chart in function, but offers more complexity. In a kagi chart, vertical lines are used to represent the action of closing prices, and the starting point of the chart is the first closing price. Horizontal lines are utilized for the action of reversals.
The thickness of these lines will be altered by closing prices penetrating the top or bottom of the previous column. This change in thickness will be interpreted by the user as an increase in demand. When thickness is reduced, it should be interpreted as increased supply when price drops below the previous low. Color is also used to reveal these characteristics; for example, black lines may be used for highs and red for lows.
Kagi charts were developed in Japan in the 1870s when the Japanese stock market began trading. Their original purpose was monitoring the price fluctuations of rice. Their strength is that they filter the “noise” of charts by bringing minimum price changes into focus; thus, it is easy to see significant lows and highs, and critical support and resistance levels.
Kagi charts, like point and figure charts, offer signals and setups, i.e., patterns. These patterns are employed for analysis and strategy. Some users believe that if a chart reveals rising shoulders, you must buy; or if there are falling waists, you must sell. There are many patterns for users to study and explore such as 3-Buddha reversals, tweezers, double windows, and much more.
These charts only change direction when a predetermined reversal amount is reached. This reversal amount can be a quantity of points, a percentage, or a variable ATR (average true range). It can also be associated with closing prices or the high-low range. The high-low range offers the most sensitivity and reversals.