A Comparison of Japanese Kagi Charting with Point & Figure Charting

A Comparison of Japanese Kagi Charting with Point & Figure Charting Julia E. Bussie, CMT Introduction Kagi As the world shrinks to become one global community with Kagi charts are drawn with straight lines, the thickness of the borders and language barriers disappearing, individuals become line depending on whether the market is in a bullish or bearish more receptive to the ideas, methods and techniques of other mode. A bullish or rising trend in prices is designated by a thick cultures. Such has been the case in recent years in the C.S. con- kagi line called the “>-ang” line. The thin kagi line, called the cerning market analysis methods historically used by Japanese “yin” line, is used when prices are falling in a bearish trend. The investors. Thanks in most part to the efforts of analyst and au- line changes from thick to thin or pang to yin (bullish to bearish) thor Steve Nison, CMT, who researchedJapanese methods of tech- and lice versa when the trend changes, allowing a quick and clear nical analysis for his books Jananese Candlestick Chartirw Tech- reading of whether a market is in a bullish or bearish trend. The niques and Beyond Candlesticks, such terms as “candlesticks,” proportion of a line that is yang versus yin (thick I-ersus thin) “kagi” and “renko” are familiar to American technicians. Candle- indicates the relative strength or weakness of the market. ‘Kn” sticks are now included in most computer programs for technical and ‘Yang” are ancient Chinese philosophic and religious terms analysis. These methods have similarities with certain techniques that fbrmed the basis for Chinese medical practices as far back as that have been in use in the IVest for manv vears,~ but each has its the 8th century B.C., and it is likely through medicine that the\ own unique flavor providing differing vantage points for viewing were introduced into Japanese culture. They signify opposing markets. Of particular interest is kagi charting and its compari- forces that are naturally seeking equilibrium and a dynamic bal- son to M’estern-style point-and-figure chart analysis. Both meth- ance. In market terms, they characterize the struggle between ods belong to the older, chart-reading analvtical school as opposed supple and demand. to the more modern mathematicallv-derived technical anah-sis. Selecting a “reversal size” is the first step in constructing a kagi .4.s a consequence, they engender a ckrtain amount of subjec&ity chart. The “reversal size” is the amount market prices must re- in the interpretation of trading signals. In comparing the two verse before a change is made in the direction of the line on the techniques, this paper presents a brief description of how kagi chart. This dictates the sensitivity of the chart and the magnitude and point-and-figure charts are created and the strengths and of the trend sought. A small reversal size can lead to many minor weaknesses of both. Using a compilation of simple and complex fluctuations that obscure the trend. Conversely a larger reversal primary trading signals, the effectiveness of each method is re- size reveals only major trends. \hlatility and the general price viewed. Of necessity, only the basics are studied in an attempt to range of a market should be considered when determining rever- delineate an objective contrast between the two techniques, pro- sal amounts. Commonl>; the reversal size on a kagi chart is stated viding the analyst with a clearer choice of tools. as a fixed number of pomts. However, it is sometimes calculated Kagi and point-and-figure charting originated at approximately as a percentage of the price. offering advantages similar to a semi- the same time. Although no definite date or inventor of either logarithmic bar chart. By reducing all price movements to the method is known, both began to appear in the 1870s. In the same relative significance, a percentage reversal size allows a di- IVest, the writings of Charles Dow contained the theories preced- rect comparison between high-and-lowpriced charts. For ex- ing the development of point-and-figure charting. In the East, it ample, a chart of a Sl price change when prices are at $10 will is interesting to note that Japan had a functioning forward rice look identical to a chart of a $10 price change when prices are at market since the 16OOs, and technical analysis was already in use. $100. This is most helpful in analyzing a long-term trend that In 1868, an imperial government was restored in Japan and the displays a significant price increase or decrease. Emperor invited foreign advisors into the country to help mod- Price is marked on the vertical axis with only a column num- ernize the near-feudal society A stock market opened for trad- ber (optional) on the horizontal axis. If prices are rising, a thick, ing in the 1870s. The increased commingling of East and LVest or yang line, is drawn from the beginning price until a change in facilitated the transfer of information and ideas on market anal?- price equal to or greater than the reversal size occurs. At this sis, furnishing a common breeding ground for both analytical point, a horizontal line is drawn to the next column where the techniques. line is then drawn down to the new lower price. The horizontal The two charting techniques share an ideology that seeks to line is called an “inflection point.” The downward line is contin- present a clear visualization of the forces of supply and demand ued until the next reversal occurs and another inflection point is and bullish and bearish trends while excluding irrelevant price drawn. An inflection point is called a “shoulder” when it turns fluctuations. Neither time nor volume are factors in the creation the line from up to down and a “waist” when it turns the line or analysis of either method. Recurrent chart patterns are used from down to up. Breaking the previous waist engenders a change to infer market action. in the line from vang (thick) to yin (thin). This denotes a trend change from bullish to bearish. \2’hen a preceding shoulder is broken, the line changes from yin to yang or thin to thick indicat- ing a change from bearish to bullish. ,\ change in thickness of the line (breaking a previous shoulder or waist) is an elementa? buy or sell signal. MTA JOURNAL l Summer - Fall 1998 55 Illustrations of Basic Patterns Illustration D Kagi Charts IllustrationA ------- ={ ---- -\ breakout l--LIT Multi-level Break Illustration B Record Session Illustrations A-D show four patterns presenting important trading opportunities. The names reflect the images symbolized b! the patterns. The “multi-level break” pattern (Illus. A) is an am- plification of the basic buy/sell signal. Instead of acting on the -- -- initial signal, some traders look for verification bp waiting for a tddiue second or even third shoulder (or waist in a bear market) to be broken, hence the name “multi-level break.” The inflection points being broken should be close to each other in price. The “three- Buddha” and “reverse three-Buddha” patterns (Illus. B) are similar to the standard head-and-shoulders patterns on IVestern bar J charts and are topping and bottoming formations. A “two-le~el break” pattern is created when the “neckline” i.e., the highest Three-Buddha (reverse) shoulder in the pattern, is exceeded. The “double-windows” for- mation is an extension of the three-Buddha. At a double-windows top, (Illus. C) shoulders bracket one or more waists follow- ine an uptrend. LVhat differentiates this pattern from a multi- Illustration C le;el-bre’ak pattern is that neither shoulder is as high as the waist(s), leaving a small “window )( on either side. The reverse is true for a double-windows bottom. These patterns give clear by and sell signals on breakouts. Several techniques allow the analyst to more objectively assess the strength of the current trend. The length of the yang portion of a line versus the yin portion of a line indicates whether bulls or bears are the stronger force. The midpoint of a kagi line window offers significant support or resistance, much as do 30% correc- tions on bar charts. If a correction halts before the 30% level is wmdow reached and then reverses to break a previous shoulder or wAst, that break becomes a stronger buy or sell signal. h grouping of i waists or shoulders at the same price level indicates important support or resistance. As on most charts, a series of higher highs and higher lows or lower highs and lower lows creates an image of the trend. Trendlines are useful as secondan tools. X trendline break often occurs after a kagi reversal, pro&ing confirmation of the earlier Double-Windows signal. On a kagi chart, a series of nine (not necessarily consecu- I tive) higher shoulders or lower waists is called a “record session” 1 (Illus. D) and indicates that the trend may be reversing soon. 56 MTA JOLXSAL * Summer - Fall 1998 Previous areas of support become resistance after a market rt verses and vice versa. Adherents of kagi charting recognize thl IllustrationF importance of double tops and double bottoms, referring to then as “tweezer tops” and “tweezer bottoms.” Taken together, these False catapult ^x features strengthen the analyst’s bullish or bearish interpretation $0 z and help with stoploss placement. X0 xX0 X+True catapult x0 x x x0 x0x0x lx xgx x WOE Point-and-Figure x0x xoxoxox xoxoxoxox In point-and-figure charting, displaying price movement u:i- 0X0X0 oxoxoxoxoxoxo oxox oxoxoxoxoxo ing Xs and OS to fill in squares or boxes on graph paper as OFb- gxg go gxo a& posed to a straight line going from point to point gives the char ‘t a different look from the kagi chart.

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