Big Experiment (part 3). Kagi

3 сент. 2018 г.

BTCUSD
Dear friends,

I go on studying the most unusual price charts. In my previous training article, I described Line Break chart, its features and general signals. After that, I was testing it, using it in my daily forecasts.
To sum up, I have the following results:
1. I got the best results for Line Break chart when I was applying three (3) levels in the settings.
If you use two lines, the chart sends too many false signals and doesn’t perform its main function – filter out random noise and false movements.
If you use four lines and more, the Line Break chart sends signal too late; sometimes, signals may come when most of the movement has been already over.
2. The Line Break chart is more sensitive to the price movements than Renko, and, it is both its advantage and drawback. On the one hand, the signal comes earlier, but it is more likely to be a random one.

In the chart above, it is clear that the Line Break chart (in the middle) indicates two false reversal patterns (marked with circles); however, the ticker continued going up despite them.

3. MACD is the most efficient for checking the signals. Moreover, it is clear in the middle chart that MACD reversal signal in the Line Break chart comes a few days earlier than that, sent by the same indicator in Renko; and the latter perfectly filters out random signals.
The next unusual chart for technical analysis is Kagi.

The first thing that Kagi has in common with Renko and Candlestick charts is its origin. In the ancient Japan, Kagi was a plank, looking like letter L, to align a sheet of paper.
The chart is created with a series of vertical lines connected by short horizontal lines, looking like letter L.
The indicator consists of four lines:
Yin is a falling line (marked with red in the chart).
Yang is a rising line (marked with green in the chart).
Shoulder is a horizontal line linking an upward movement with a downward one.
Waist is the horizontal line linking a downward movement a rising one.
Kagi chart construction
Kagi chart looks similar to Renko. It is also mostly independent of time and the ticker tracks price movements. The price change is usually preset, but it can also be identified, based on the ATR (Average True Range) data. Some platforms suggest using percentage amount.
To draw a direct link to the Renko chart, I have selected the preset amount of the price change for the Kagi chart; it is 125.1 USD, applied to BTCUSD

As I’ve already written, Kagi won’t be constructed if the price movement is less than the preset amount. In our case, it is 125.1 USD. That is the point, similar to Renko. However, the Renko is made of bricks, but Kagi won’t advance further until the trend reverses.
To break down the Kagi construction, I suggest following the history in the Japanese candlestick chart.
As it is clear from the left chart above, on August 11, after a sharp price surge, indicated by the candlestick close at 6388.8, the price went down (see the bar under arrow 1). The movement was opposite to the previous one and longer than the set parameter of 125.1 USD.
That is two necessary conditions were met to form a new Kagi line, and so, there is the red vertical line downward. The close of the last Japanese candlestick is the base level in Kagi.
Next, you see that there is a series of bullish four-hour bars. When their total growth was more than 125.1 USD, a new Kagi line appeared, starting from the previous base level, where, there is a new horizontal line, a waist, in Kagi.
As you see, the second Kagi comprises as many as 9 bars, which proves that Kagi doesn’t depend on time.
While the nine-bar Kagi line was moving up, it changed the color to green from red. It occurred when the price had met the base level before the previous one, at 6388.8 USD. In other words, Kagi state changed from the Yin to the Yang, from bearish to bullish, which is an early buy signal.
However, at 6441.3 USD, the last rising bar closed, having formed another base level. Bitcoin dropped down and the first red bar made up a new Kagi line that was connected to the previous one by the horizontal shoulder at the base level before the previous one.
As it is clear from the chart, the last longest bearish bar met the base level before the previous one, the waist, and repainted the rest of the chart in to the red Yin colour.
The local trend reversed at the close level, 5975.30 USD. After that, the price was growing again. However, the fourth Kagi line sent its bullish signal at the very peak, when it had reached the shoulder of the base level before the previous one, at 6444.1 USD.
Summing up these observations, you see that Kagi combines the features of Renko and Line Break charts.
1. Kagi filters out sideways movements and random noise.
2. It marks the key levels of the trend reversal (potential support and resistance levels).
3. It sends signals of the trend reversal.
Kagi signals:
1. Two-colored Kagi line indicates that the market is balanced, and so, the trend may reverse; it is a warning signal!
2. A red line, the Yin, indicates the bearish trend, a sell signal.
3. A red line, the Yang, means the bullish trend, a buy signal.
4. Statistically, one trend is no longer than 10 Kagi lines.
Combination of Kagi and other indicators:


As it is clear from the chart above, because the Kagi chart is made of horizontal and vertical lines, looking like L the middle lines in the chart become uninformative due to their angularity.
However, the Kagi reversal signal dated August 21, was indicated by the MACD graph-bar, moving into the positive zone, which is a bullish signal, like other meetings of moving averages.
Finally, the signal quite accurately indicated the start of the new bullish trend at the moment when other indicators were selling no reversal signals.

Summary:
Kagi is one of the first technical analysis tools, mentioned as early as in 1870. It still provides the best results, and, in practice, proves to be efficient.
Kagi chart can:
• filter out random noise and sideways movements;
• send trend reversal signals.
So, that is all about comparison of Japanese candles and Kagi on BTCUSD example. In my next training post, I’ll describe the Tic Tac Toe Chart and compare it with Japanese candlesticks, to find out its advantages and drawbacks.
I wish you good luck and good profits!

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