Eliminating the Noise Trade Using Kagi Charts
Karl Montevirgen of Independent - Writing for Multiple Companies - InsideFutures.com - Fri Feb 08, 1:30PM CST

Unless the exploitation of market noise plays a role in your trading strategy (a strange idea, by the way), you probably want to eliminate as much noise as possible from your outlook. After all, noise may be consistent and repetitive, but the rhythm and frequency of its repetitions are hardly ever consistent.

Many long-term investors have a simple solution to reducing noise. Its called setting a price alert. Regardless of what may be going on in the markets, some investors have resolved to buy an asset when it moves up or down to a preferred price. When it comes to trading for shorter-term profits, however, such an approach might not work, as critical short-term information may be left out of the mix.

But how much information is too much information? And to what extent might an abundance of information interfere with an otherwise well-informed bias or well-planned trading strategy? It all depends on which pieces of information carry more weight in your strategy.

When it comes to technical trend trading, it seems that identifying critical price reversals and differentiating between longer- and shorter-term trends may be crucial to entering the right trade.

In other words, it might help to view a chart that eliminates everything but critical price levels and comparative trends. And instead of distributing price according to time, it may even help to distribute time according to price.

This is where Kagi Charts might come in handy.

Canopy Growth Corp - Daily from July 16, 2018 to February 8, 2019

In addition to presenting us with a number of interpretable patterns and a varying range of volatility, this chart also presents us with clear swing high and low points (swing highs in red, swing lows in green). Viewing it in this matter is already taking a minimal price action-based approach to technically analyzing CGCs movements.

We can go deeper, of course, but would analyzing the nuances be helpful or distracting? It depends on your approach. Paying attention to the swing points may be adequate enough to find potential trading opportunities. So what if we were to eliminate most of the extra details which for some interpretive systems may be critical info but for others may be viewed as market noise?

Canopy Growth Corp - Kagi Chart from June 28, 2018 to February 8, 2019

As you can see, the basic swing points and patterns are still present. The arrows dont quite line up to the exact price levels as Kagi charts typically take into consideration closing price rather than highs or lows. Plus, as you can see the double green arrow in November and the red arrow subsumed within the red line, the Kagi chart simplified what had been two separate swing lows and one swing high into the same movement by distributing (crunching) time according to price rather than price according to time.

If you zoom out on a wider scale you can also clearly see the movements that might be considered smaller or larger formations and trends; potential support targets; and general movement of price over time.

Its not that you cant see this with a regular bar or candlestick chart, but the Kagis time reduction might make it much easier to see the big picture (particularly if time, in a given interpretive context, can sometimes function as noise).

Caveat: if you place your buy or sell orders according to breakouts or breakdowns of closing price, note that your orders can be triggered by highs and lows that dont appear on the chart. So if your trading approach is one that enters trade prior to closing confirmation, then a Kagi chart might not necessarily be the best type of chart to use (this too is relative). In such a case the chart may eliminate noise but the noise can also unfavorably impact your trade.

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