A Comparison of Japanese Kagi Charting with Point Figure Charting - PDF document

1 A Comparison of Japanese Kagi Charting w
A Comparison of Japanese Kagi Charting with Point & Figure Charting Julia E. Bussie, CMT Introduction As the world shrinks to become one global community with borders and language barriers disappearing, individuals become more receptive to the ideas, methods and techniques of other cultures. Such has been the case in recent years in the C.S. con- cerning market analysis methods historically used by Japanese investors. Thanks in most part to the efforts of analyst and au- thor Steve Nison, CMT, who researchedJapanese methods of tech- nical analysis for his books Jananese Candlestick Chartirw Tech- niques and Beyond Candlesticks, such terms as “candlesticks,” “kagi” and “renko” are familiar to American Kagi Kagi charts are drawn with straight lines, the thickness of the line depending on whether the market is in a bullish or bearish mode. A bullish or rising trend in prices is designated by a thick kagi line called the �“-ang” line. The thin up to down and “waist” when it turns the line from down to up. Breaking the previous waist engenders a change 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

2 a previous shoulder or waist) is an ele
a previous shoulder or waist) is an elementa? buy or sell signal. MTA JOURNAL l Summer - Fall 1998 Illustration A --- l--LIT Multi-level Break ={ -\ breakout Illustration B J -- tddiue Three-Buddha (reverse) Illustration C wmdow i 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 importance of double tops and double bottoms, referring to then as “tweezer tops” and “tweezer bottoms.” Taken together, these features strengthen the analyst’s bullish or bearish interpretation and help with stoploss placement. Point-and-Figure In point-and-figure charting, displaying price movement u: ing Xs and OS to fill in squares or boxes Illustrations of Basic Patterns Point-and-Figure Charts Illustration E Ex :: X %0x x ZOE oxoxoxoxox ~~~X~cE&XO 0 Fulcrum or basing i- b- ‘t S : i_ t- it IS -t ;. IS :t n IS e X Ii- ts X e jr 3 i- a )r :e a Cl t1 I\ a : rl Sl S a si 0 SC b fc Illustration F False catapult ^x $0 X0 x0 x x0 x0x0x lx xX0 z X+True catapult xgx x WOE x0x xoxoxox xoxoxoxox 0X0X0 oxoxoxoxoxoxo oxox oxoxoxoxoxo gxg go gxo a& 0 8X 0 Fulcrum o\;;;ng pattern: Illustration G Es 00 0 : 0 :: ox 0x0 :: Fulcrum ok;;;iyg pattern: Illustration I :x 0X0X0 oxoxox %KE: Ooog 0 0 Triple Illustration H Signal formation Point-and-figu

3 re patterns de\-elop, as in kagi chartin
re patterns de\-elop, as in kagi charting, that are onsistent and classifiable, providing guidelines for judging fu- ire market activity In earlvwritings, the point-and-figure method ‘as often described as “sc~entif? or “mechanical” because it is nalogous with the physical principle of leverage utilizing a price ongestion as a “fulcrum” and the invisible forces of supply and emand as the “lever.” As those forces shift, a “catapult point” is eached and the market “springs” away MTA JOLXNAL l Summer - Fall 1998 extended price mores offering an improved chance of profit. ;Ul patterns are a combination or expansion of the three el- ementam fulcrum or basing patterns: ideal or full, broad, and recoil. “Catapult points” or “breakout points” also come in three styles: true, false, and semi-catapult. The “ideal fulcrum” pat- (Illus. E) is similar to a head-and-shoulders pattern and the three-Buddha kagi pattern, which develop when supply and de- mand are in balance. Prices mol-e up and down but remain in a range. The “catapult point” occurs when a column of Xs exceeds the tops of previous X columns. The reverse occurs on the down- side when a column of OS exceeds the no correction from the breakout. A “false catapult” is a failure, usually indi- cated by a greater than 50 R correct

4 ion of the breakout column and warns tha
ion of the breakout column and warns that the consolidation may not have been fulcrum. A “semi-catapult” (Illus. H) develops during a pause in a price move after prices have traded sideways and the chart shows one or more reversals in a narrow range. The “secondary signal” or “semi-catapult” occurs when the on a normal bar chart con- necting a series of highs or lows. An exception is on three-box reversal chart, where trendlines are most frequently drawn at a degree angle up from a low point or down from a high point. Although these display the trend, they are more accurately de- scribed as support and resistance lines. In either method of trendline construction, penetration of a trendline needs accom- panying buy or sell signals Test A comparison of trading signals on daily kagi and point-and- figure charts in several markets over sub- jectivitv. Specialists in these analytical techniques may see more esoteric trading signals that were either missed or ignored in this studv. More aggressive traders may also use different rules for stop-loss placement. No consideraiion was given for transaction costs. This study is meant as a guideline for the analyst or trader who is considering adding kagi or point-and-figure analysis to his/ her blend of technical methods. Test Results - Simple Signals Kagi Point and Figure Market It Trades Net Profit/Loss # Trade

5 s Net Profit/Loss (in points) (in points
s Net Profit/Loss (in points) (in points) Exxon i t 7.125 9 t 19.500 CocaCola - 6.500 9 t 5.500 Telefonos de Mexico 6 t 31.875 9 t 32.000 TOTAL 42 - 42.344 50 - 48.875 Standard Deviation -8.469 + 38.699 -9.785 + 53.329 o = -4.569 0 = -5.450 (Without soybean data 5.647 + 24.367 + 30.932 (T = 4.315 CT = 2.402) Test Results - Complex Signals Kagi Point and Figure Market # Trades Net Profit/loss # Trades Net Profit/Loss (in points) (in points) Exxon 2 t 12.250 3 t 18.500 CocaCola 3 t 12.125 t 10.500 Telefonos de Mexico 3 t 51.745 ; 22.000 U.S. Bond futures 9 t 5.719 4 t 4.313 Soybeans 5 t 20.000 6 t 20.000 TOTAL 22 t101.839 18 t 75.313 Standard Deviation 20.368 + 18.256 + 7.515 o = ,896 0 = ,499 MTA JOURWL l Summer - Fall 1998 Results Using simple signals. no advantage was found using either kagi or point-and-figure as both resulted in losses, although losses us- ing kagi techniques were less than with point-and-figure. In both cases, severe losses in the soybean market were a primal? factor in the negative results. This was likely due to the volatile nature of soybean price movement and mav be representative of futures markets in general, requiring optimized reversal and/or box sizes to improve profitability, but again, that is a topic for another study. Disregarding the results of the soybean test improved the overail outcome and gave Conclusion Both kagi and point-and-fi

6 gure charts provide excellent illus- tra
gure charts provide excellent illus- trations of trend and offer Trendlines (or support and resistance lines) and 30% corrections can add confidence to trading signals, provide caution flags to uncertain signals and enhance stop placements. The profitabil- im of complex trading signals in both techniques makes it worth- while to initiate a system of periodic searches for these patterns Bibliography Robert D. Edwards and John hlagee, Technical Analrsis of Stock Trends. Fifth edition. Boston, RL-\: John Rlagee Inc. 1966 Steve Sison, Beyond Candlesticks-More Tapanese Charting Tech- niques. New York, !KY John iVile!- 8: Sons, Inc. 1994 Steve Nison, T/v 1771 nrzd Futures Slapazine, Oster Communications, November 1994 \‘ictor de \‘illiers and Owen Taylor, The Point and Figure Method of Anticipating Stock Price Rlovement, Basic Princinles - Book 1. New York, AY distributed by Morgan, Rogers and Roberts, Inc. 1931 h.12: Cohen, How to Use the Three Point Reversal Method of Point and Fiwre Stock Market Trading. Sew Rochelle, AY published by Chartcraft, Inc. 198’7 Alexander H. IVheelan, Study HelDs in Point and Fizure Tech- -. New York. PUY Morgan. Rogers and Roberts, Inc. 19.51 The Sew Grolier hlultimedia EncycloDedia. Release 6, Groliers Inc. 1993, Online Computer Systems Inc. 1987-1993 Charts from Metastock b!- Equis International. version 45 RT, 19851994 Data from Signal by Dat

7 a Broadcasting Corporation, San Mateo. C
a Broadcasting Corporation, San Mateo. CA Julia Bussie is currently a private trader in southern Cali- fornia concentrating on the futures markets. Prior to this, she was an analyst with A.G. Edwards in Chicago. She was a member of the Chicago Mercantile Exchange for eleven !-ears and member of the Chicago Board of Trade for ten years. She has been involved in many aspects of the futures in- dustry over the past twenty-five years and has written numer- able market commentaries, newsletters and long-term out- looks with a more fundamental bias, but is now focusing al- most entirely on technical analyis. Julia is the Admissions Chairperson’for the Market Technicians ,%ssociation, Inc. and can be reached at Jebussie@aol.com. MTA JOLXML l Summer - Fall 1998 EXXON !&gi 1.5 point reversal Simple Sionals 1. Buy 2. Sell 3. Buy 4. Sell 5. Buy Liquidate 64.625 (at end of chart) Net Profit, 5 COCA-COLA Kaoi 1.5 point reversal Simple Sianals 1. Buy 2. Sell 3. Buy 4. Sell 5. Buy 6. Sell 7. Buy 8. Sell 9. Buy Liquidate Net Profit, 9 trades 42.750 (at end of chart) -6.500 Comfllex Signals 1. Multi-level break, Sell 40.000. MTA JOLXML l Summer - Fall 1998 TELEPHONOS DE MEXICO Kaoi 3 point reversal Simple Sionals 1. Buy 2. Sell 3. Buy 4. Sell 5. Buy 6. Sell 7. Buy Liquidate 55.875 65.250 31 .OOO (at end of 56.000 2. Buy 59.000 3. Sell 60.000 4. Buy 54.000 5. Sell 64.

8 000 6. Buy 59.000 7. Buy 49.000 a. Bu
000 6. Buy 59.000 7. Buy 49.000 a. Buy 37.000 9. Buy 30.000 Liquidate 31.000 (at end of t32.000 1. Bullish signal formation, Buy 60.000. Stop at 54.000 and hit. 2. Bearish signal formation, Sell 59.000. Stop at 64.000, lowered to 55.000, Liquidated at the end of chart at 31.000. Net Profit, 2 trades t22.000 U.S.TREASURYBOND FUTURES,DEC1994 Kaoi 1.5 (1 Al 6) point reversal Simole Sianals 1. Sell 113*09 2. Buy ii3Aoa 3. Sell IllA 4. Buy 113”13 5. Sell 112~14 6. Buy 104AO3 7. Sell iOlA12 a. Buy 104*06 9. Sell lOlAl4 Liquidate 99AO6 (at end of chart) Net Profit, 9 trades - 2*11 (-2.344) Complex Sianals 1. Multi-level break, Buy 114*02. Stop at 111*03, raised to and hit at 112A14. 2. Tweezers top, Sell 112A14. Stop at 1 OVO7, lowered 2. 3. Sell 113AOO 4. Sell lllA16 5. Buy 114AOO 6. Sell 112”16 7. Buy 104”16 a. Sell lOl”16 9. Buy 104A16 10. Sell lOiAl6 11. Sell 101 A00 Liquidate 99AO6 (at end of chart) Net Profit, 11 trades -3A28 (-3.875) 1. Bearish signal formation, Sell llifi16. Stop hit at 114~00. 2. Double top, Sell 112A16. (Proximity to MTA JOURUAL * Summer- Fall 1998 61 SOYBEAN FUTURES, JULY 1995 KgLi 9 point reversal Simole Sionals 1. Sell 658.5 ;: 89: “,I3 10. Buv 592.0 11. Seil 585.0 1;: 3 Liquidate Net Profit, 13 trades 592.5 :;Mi:i (at end of chart) Comolex Sionals 1, Multi-level MTA JOURN.iL l Summer - Fall 19