Kagi

Point & Figure charts define a reversal using an arbitrary box size (e.g., dropping 3 boxes). But what if the market's natural rhythm doesn't fit your arbitrary box? What if a stock usually pulls back ₹15 before rallying, and you set your reversal at ₹10? You will be constantly shaken out of a perfectly good trend.

Is there a chart that defines a reversal naturally, based on the actual swing highs and lows the market creates, rather than a mathematical formula?

Kagi charts (Japanese for "key" or "L-shaped key") were developed in the 1870s for tracking the Japanese stock market.

Like Renko and P&F, Kagi charts ignore time. But instead of drawing boxes or Xs, a Kagi chart draws a single, continuous line that moves left to right. The magic of Kagi is not in the shape of the line, but in its thickness.

A Kagi line alternates between two states:

1. Yang (Thick line): Demand is in control.
2. Yin (Thin line): Supply is in control.

The rules for switching between Yin and Yang are elegantly simple:

• The line becomes Yang (Thick) the exact moment the price breaks above the previous swing high.
• The line becomes Yin (Thin) the exact moment the price drops below the previous swing low.

Every price in this module is an illustrative example, not a real quote. [illustrative]

Below is a fixed example with a ₹4 reversal. The line runs vertically to each new extreme and only turns after price reverses by ₹4; it thickens (yang) when it breaks the prior peak and thins (yin) when it breaks the prior trough.

Kagi shines when you are holding a long-term position and want a mechanical rule for when to exit.

1. The trailing stop-loss: You buy a stock when the Kagi line turns Yang (breaks a previous high). You decide you will only sell when it turns Yin. For the next two years, the stock goes up, pulls back, goes up, pulls back. Because it never breaks a previous low, the line stays thick and Yang the entire time. You never panic sell.
2. The choppy range: A stock trades in a tight range. The Kagi line just bounces up and down without breaking highs or lows, staying entirely Yin. You know not to touch it until a breakout occurs.

Just like Renko and P&F, time is erased. A single horizontal connection line on a Kagi chart could represent a gap of three days or three months.

Also, a Kagi line does not tell you how far a breakout will go. When the line turns Yang (breaks a previous high), the breakout might fail immediately, plunging back down and turning Yin on the very next swing. Kagi is reactive, not predictive.

Because Kagi relies on breaking the previous high/low, it forces you to take on significant risk during massive trends.

If a stock rockets from ₹100 to ₹300 without forming any swing lows along the way, the "previous low" is still technically ₹100. If the stock crashes from ₹300 to ₹150, the Kagi line will remain thick and Yang, because it hasn't broken ₹100 yet! You could watch half your profits evaporate while waiting for the Kagi chart to give you permission to sell.

The other trap is the thickness itself. People treat a fresh yang line as a promise.

Before you trust a fresh yang line, ask: what would change your mind? If the thick line holds above the broken peak and prints a higher swing low, the strength reading gets stronger; if it thins back to yin below that peak within a swing or two, the failed-breakout reading wins.

Kagi fixes the problem of arbitrary box sizes by relying on swing highs and lows. But it struggles with massive, uninterrupted trends because the "previous low" can get left far behind.

What if we wanted a chart that dynamically tightened its reversal rules based on the most recent candles, so a reversal could trigger faster during a steep rally?

That brings us to the Three-Line Break chart.