A Kagi chart is an advanced charting tool used in technical analysis. This type of chart dates as far back as the 1870s when Japanese traders used it.
How to Use Kagi Charts For Binary Options TradingAlthough Kagi charts are used in analyzing chart patterns, they are different from the traditional candlestick or bar charts; Kagi charts do not depend on volume or time. Here, you will learn more about this type of chart and how to use it as part of your binary options trading strategy.
How Do Kagi Charts Form?
As noted earlier, this chart formation does not depend on trade volume or time. Instead, it utilizes tick data, which is also known as the continuous price data. Vertical and horizontal lines characterize these charts. The horizontal lines reflect trend changes while the vertical lines represent price changes in one direction.
In other words, the vertical line moves in the direction toward which the price is moving. This line extends in line with the price movement; every slight price movement causes the vertical line to extend. A horizontal line forms when the price moves in the opposite direction by a specific, predetermined amount. At this time, the vertical line is constructed in the opposite direction and should continue to be extended in this direction.
Note that the predetermined amount is usually measured in percentage or by pips and it is typically set at 4%.
You will not draw a line in the event that the closing price moves in the opposite direction of the horizontal line by less than the pre-determined amount. Remember that the change in direction is constructed only in the event that the price movement is in the opposite direction and moves by more than the predetermined amount.
The thickness of the vertical and horizontal line is also important to take into consideration. The thickness of the line will change if the line constructed in the opposite direction goes past the high or low of the previous column.
In the event that the line goes past the prior swing high, the Kagi line is drawn to be thicker as an indication of a strong uptrend. When the line goes past the prior swing low, the line is constructed to be thinner as an indication of a strong downward movement.
Thick Kagi lines indicate an increase in demand for the asset while thin lines indicate increased supply. It is also possible to use colors to identify the lines by making the thick lines blue or green and the thin lines red or orange.
How to Trade Using Kagi Charts
As a technical analysis tool, a Kagi chart can be effective in analyzing the supply and demand trends of an underlying asset. Several thick lines on the chart reflect mounting demand, an indication that the asset is on an upward trend. On the other hand, several thin lines are an indication of increasing supply, an indication that the asset is on a downward trend. When thick and thin lines alternate, it is an indication that the supply and demand are relatively equal.
When the Kagi line moves from being thin to becoming thick, it could be an indication to purchase a put option. When the line moves from being thick to thin, you may purchase a call option.
Put option signals are more reliable when prices are on high highs and higher lows because this is an indication that the market is bullish. Call option signals are more reliable when market movements are on lower highs and lower lows because this is an indication of a bearish market. Generally, when the higher highs are between 8 and 10, it could be an indication of an impending reversal. At the same time, lower highs and lower lows could be an indication of a weakening trend.