What is the Kagi Chart trading strategy? Learn how to use Kagi Chart, to improve your trading

Have you heard traders talking about Kagi Chart? Watch our latest video and learn how to use Kagi chart in your trading.

How to use Kagi Chart – a simple, yet effective guide

Hello, and welcome to Diary of a Trader. Today’s video is going to be on another form of chart style, and that’s going to be called, Kagi. If you have watched one of our recent videos maybe on Renko, or Heikin-Ashi, then you know what to expect from this video. But, starting out right now, we are looking at the daily chart… Rather, the hourly chart of Bitcoin. And we can see that the candlesticks if you’re familiar with them… You know, there’s a lot that goes on with candlesticks, there’s a lot of definitions, a lot of theory, a lot of behavior and there’s a lot of storytelling that goes on within each one. And so, candlesticks, while they are, probably one of the most technical forms of chart styles that we normally see, it’s not one of the easiest to read. And, in fact, because of the noisiness, we call it “The Noise” because it’s hard to interpret, because of the noisiness of this chart style, it’s sometimes helpful to use another form of chart, to identify and analyze what exactly is happening.

And so, for today, we’re going to look at the Kagi chart. Now, Kagi charts are sometimes called, Gann Swing Charts, because William Delbert Gann, he used this kind of charting in his own charts, in his own trading. And this was developed in Japan. The Japanese have come up with pretty much all of the really effective forms of charts that we use today. But, the Kagi chart, while, it looks kind of silly and swirly and almost like that game, Snake, you know, there is a very strong method and operation going here. It’s very easy to read these, even if you don’t understand it right now. But I really want to point out, very quickly, that if you’re using TradingView and you’re watching this video, you probably, when you go to the Kagi chart, you probably have it set to ATR, and ATR is not something you want to leave on a Kagi chart, or rather any chart, like Renko, Heikin-Ashi, or… Just Renko and Kagi and Line Break. We don’t want to use the ATR, because that will adjust the past price action that has happened in the Kagi chart, so we can use this value, though, to determine what we want our static number to be, and so, 102, we’ll just say it’s 100. And we’ll leave it at 100. Now, Kagi charts are very similar to Renko in that price is what’s factored into the formation of these lines.

And there’s two parts and two components of the Kagi chart, that we really want to pay attention to. And the first one is the Shoulders. So, those are the top parts here, the peaks, sometimes they’re called, the flat tops. Those are called the shoulders and the bottom parts are called the Waist. So, anything that has a flat bottom, that is considered a Waist. And how they are formed is based on when a line crosses above or below a waist or a shoulder. And these lines are called the Yin&Yang lines sometimes, as well. But, let’s look at this chart, right here. So, we had price moving and then, when did it change? When did it start to change and turn green? When price moved beyond the shoulder, that was prior to it. So it moved beyond the prior shoulder. That means it turned green. And then, when does it turn red? When do we have a signal that we’re entering a possible down move? Well, that’s when price moved beyond the last waist. And you can see it traveling down, traveling down, and then once price moves ahead of that shoulder, changes again. And so, we see this pattern throughout and it gives us a really good heads up because we can look at this price action here, even right now, let’s just highlight this area. And, as I’m looking at this, I see that we’ve had a bit of a down drive here and now I’m looking at Bitcoin’s chart, and it says, well, we are trading up, we’re getting near the shoulder of this, right here, that’s at the 8371 zone. So, we’re not very far away from that shoulder and when we cross above it, we will start to turn green. So, if that happens, that’s a good signal that trend is about to change and it’s about to be bullish.

Now, that doesn’t mean that whenever the line changes, that means the trend is going to change. That’s not what it means. A strategy and a suggestion that a lot of the old market masters used to say, was that, “You should wait for a break of the previous three Shoulders or the previous three Waists.” And so, if we are looking right here, in this price area, we see that even though price crossed above the previous shoulder and turned green, what I really want, I really want price to cross above this shoulder, this shoulder, and this shoulder. I want price to get beyond the last three shoulders and that’s right here, that’s where I would have gone long. Additionally, I want to go short, only when the last three Waists have been broken. So, here we are trading in a bull move, and then, we turn red, we start to trend down, because we crossed below this waist, but I want to wait. I want some more confirmation, so we trade below this waist, form another waist here, here’s a third waist, and now I’m going to wait to go short, right here. This is where I would go short. Small retracement, but ultimately, we keep falling down. And until the conditions are met for a new long or short, we just continue to follow that. And what’s great about this form of analysis is that, let’s say, currently, I want to know when to go long and let’s look at the candlestick chart. So, this highlighted zone that we’re looking at, is the same price action area as this chart, in Kagi. Kagi chart is a lot easier to read. And what’s fantastic is, if I follow the three-shoulder rule, then, where’s my entry point? My entry point is going to be up, probably a little bit above at 8800. That’s going to be my entry area because that will be above this waist, this waist, and this waist. It will actually be above the last one, two, three, four, five, six, seven waists, or shoulders rather. The last seven shoulders. Something to watch and keep track of.

Now, additionally, we can use another tool to help us identify where these trend changes may happen in Kagi. and that’s using the Stochastic RSI. So, if I rotate back here, for example, let’s see, I see that price is trending up, and we’re continuing to make higher highs, but then, what do I notice here? I notice that in the Stochastic RSI, I’m in this extended overbought condition, which tells me that we’re going to have a high probability of lower prices in the future. So, I know that this is probably going to start trending down. I see it sloped down. I’m going to follow my three-waist rule. Okay, so I’ve got a waist here, waist here, waist here, this is where I entered my short, we get a small pullback, and then we fall down. And then, what happens here? We looked at this one before. We’re now kind of right on top of the default oversold conditions and I would follow my three-shoulder rule, where I want to take a trade in the countertrend, only when I see price trade above the last three shoulders. So, here’s one shoulder, two shoulders, three shoulders, once price is above, I go long, and I had a high probability of that happening because Stochastics was in an oversold condition. And what’s nice about following the rule of three waists and three shoulders, is that it keeps you out of trades and keeps you in trades. So, if I went long here, and all of a sudden, I saw, oh my gosh, we’re going to have to probably exit the trade here, or we’re going to want to go short. We’re kind of getting into shorts sometimes too early, but we can avoid a lot of the chaff if we just follow the three-waist and three-shoulder rule with the Kagi charts.

But, for the most part, what we’re going to find a lot of strength in Kagi charts, is implementing this type of chart mechanic, in conjunction with our own Candlestick charting. We should look at Kagi charts, as another tool in our toolbox for trading. We use Kagi and other chart styles to help us identify a trend and changes in trends, and we use candlesticks to facilitate the execution of entries and exits. I hope you found this video interesting and I look forward to talking with you in our future videos. Have a great day!