Trading with Focus – All out of time
Link copied to
Come with us on now on a journey through time and space, to the world of The Mighty Kagi chart!
There is a lot of noise in financial markets. The media flip between ‘the end of the financial world is next Tuesday at 3.15pm’, then in the next article are talking about how ‘this bullmarket definitely has a lot more to run’. Analysts talk up a share when its running, then when the share falls they talk it down again. A strong start to the trading day sucks you in, then a weak end to the day leaves you stressing about the overnight markets.
The more people are bragging on chat rooms about how well their company stacks up and how much it is going to go up from here (especially one that has already run), the more likely I am to avoid that company. This means that I often miss out on some pretty big trading pay-offs. Maybe it’s because I’m arrogant and think I know better, or maybe its because I’ve seen too many companies with a cheer squad end up cratering.
I’ve always been one to follow the fundamentals as a starting point. Look for a good company, with good management, that have some news flow coming up, but are currently unloved – but just because they’re just in a lull, not because they are a piece of crap. Then, I monitor the candlesticks, wait for it to start to stabilize, and watch the depth like a hawk. Once the buyers start stacking back up, its time for me to pounce! Mmm, tasty bear meat!
But that takes a lot of time, and sometimes, I can be sitting on the sidelines or be stuck in an underperforming stock in a market that is running away from me. When your strategy is to not run with the bulls but feast on the last of the endangered bears, it can mean a bit of time between feasts! (But I still get fat, don’t you worry ‘bout dat!)
So, after many, many years of bear-eating, I decided I’d better check out some of the other trading tools we have in Marketech Focus. These days I don’t like learning new things all that much and still have nightmares about turning up to an exam without having studied for it, sometimes naked, so it was much to my surprise that I now follow some new technical indicators.
They include the ‘Average True Range’ for my stoplosses, the ‘Stochastics’ to highlight a change in momentum, and the ‘Donchian Channels’ to show me the breakouts that I never buy because I hate buying stocks above their absolute lows like an idiot.
Now because I am already wasting soooo much time with my stupid “I picked the low in an unloved stock!” strategy, it was with much joy that I discovered the joys of a chart-type that removed ‘time’ from the trading equation. Yes, that’s right, a chart that is not time-based! Plus, it all seems a bit Rick and Morty with a twist of Monkey Magic, so I was intrigued.
Like a lot of the things that are good for you, it was invented by the Japanese. You know what I’m talking about – sushi, meditation, rice paper instead of inedible paper on lollies, Ninja Warrior etc.
The Kagi chart is based on the open, high, low, and closing (OHLC) prices, so you won’t be getting a read on it until after the market closes; freeing up your day to actually do your day job. But even better, if the trend is intact, it won’t noticeably change at all to stop you stressing about it!
What you want to see with the Kagi, in its simplest read, is the chart changing from red to green, or from green to red. Then, its all action!
“Learn to fight, not to flail.” (Street Fighter; The Movie. Videogame, 1995)
In the oldest form, when it was used by the 19th century Japanese rice-traders (no, I’m being serious…) the ‘up’ trend was called ‘yang’ and it was thicker, and the ‘down’ trend was thinner and was called ‘yin’, (but we just made them red and green, because there was no colour in the world back then, until John Logie Baird invented it for TV in the 20’s, and all charting was done with calligraphy, aka the Art of Shodo).
So, according to Kagi charting mythology, one simple strategy is buy on yang and sell on yin, or on Marketech Focus, its ‘green is good, red is bad’. Even I can get that bit right.
To explain, let’s have a look at everyone’s favourite company, Afterpay. This is a normal time-based candlestick.
This next one is the same chart, but shown as a Kagi. Now, if you can’t see this chart properly, you should pop over to our website, sign up for a free two week trial with live streaming pricing, then read on….otherwise this won’t mean very much…and I guarantee you, the pay-off at the end is huge!
Note that there are still dates down the bottom, but it is not a linear scale and the latest price isn’t even shown on there. As I mentioned, it only adds a channel each time the stock does a particular move, so if its staying in trend there is nothing to do, even if its off a bit, and you won’t see the effect of each trading day.
Apart from the yin and yang, there’s a couple of other ways to trade Master Kagi involving the addition of trend lines in the same way that you would add them to a normal chart. But the best bit by far is that they have a thing called ‘Inverted 3 Buddha bottoms’. It is where the stock is having a sell-off, dips lower, then reverses and voila – a breakout!
So so so!!! Dōitashimashite… (transation: Yes, yes, yes. You’re welcome…)
Oh I do love these ‘Buddha bottoms’ as they are very much like my Tired Bear-eating’ strategy! I have learnt nothing!!!!! (Obviously I won’t start telling people I have a Buddha-bottom-eating strategy.)
So does it even work? Well, let’s go back to old-mate at Afterpay and do some historical back-testing…
So the green numbers under the line are where the Kagi changed from red to green. Not the absolute bottom, but they are designed to show where the stock changed direction for the better. The red numbers above the line show where you were supposed to take profits.
In this most simple case you would have had four very lucrative trades, and stopped out of them at $134 before they were slapped back to $100. Note that you had to buy back in higher, but then its such an overvalued stock that it could have collapsed at any time, so maybe its better to take the trade than take the loss, and your brokerage is only $5 or 0.02%. (Don’t pretend you knew it was going to keep rallying! Sometimes bull-runs end, sometimes they keep going longer than logic would dictate.)
But there is also the ‘trend trading’ strategy in the Kagi-verse, so you could have just hung on to see if it broke its uptrend, in which case it was in at $39 and out at $125. Nice.
“The harp does not play music if its strings are too tight or too loose.” (Monkey Magic, 1978)
Looking now at my current holdings, I can see that eating bears is sometimes expensive, and all of my current holdings are still very much in the red section of the Kagi. But a couple of them are ‘half Buddha-ing’ now, so perhaps, like the jaggy bastard I am, they will go full Buddha and then maybe next time I’ll watch the Kagi to time my entries better!
Alright, alright. A bit of a disclaimer. I literally just learned about the Kagi for this article. I used Afterpay, who were quite obviously in an uptrend until recently, because I love to pick on them. I didn’t test this over a series of different stocks in different markets, and like any technical indicator they should not be followed blindly. And if you only looked at the Kagi you wouldn’t even know that 88E took a hit until the day after…so perhaps use it like a samurai sword as a part of your arsenal, not as your entire military complex.
There is a lot of information on the internet about all of the different chart types that we have in Marketech Focus, as well as all of our plentiful technical overlays (at the click of a button). But if this can only add a small percentage to your wins and save you from some losses, then the $45 a month for our full live-streaming trading platform should be a very small price to pay in comparison to the ‘website with prices on it’ that you are currently using in a bullmarket (where it is easy!), and that you have to madly click away at to refresh to the latest price each time. (Not me, I’m live-streaming the action baby, while you’re stuck reading comics!!!!)
And, I am definitely not going to admit defeat and sell the stocks I have at the moment even though they are in the red-zone, because now that I have developed a taste for bear I’ve decided that I like it. The Japanese invented sushi, bears eat raw fish, the Kagi has a Buddha bottom, so it’s all related but time is probably just a construct. Just like money…
“Time moves, not like a river from here to there – we do that. Time moves in waves, it ebbs and flows.” (also from Monkey Magic)
At Marketech our platform is about technology, providing you the tools and technology to trade. We encourage our high-function trading platform to get you live pricing, live charts, live market depth to ensure you have the tools and trading capability at your fingertips, and on your mobile phone or PC.
You trade your own stock on your individual HIN. It is your cash in your own Macquarie account where you keep the competitive interest you earn.
Our subscribers get access to brokerage starting at $5, and then 0.02 per cent for trades over $25k. If you want to trade the market you need immediate access wherever you are and the seamless Marketech mobile app means you are live anywhere anytime.
Go to www.marketech.com.au to set up a free trial – you will be astounded by the simplicity and tools that this technology gives you. No spin, just low-cost trading and the tools that give you advantage over hype.
This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.