CANDLESTICK charts have been a popular tool for technical analysis in financial trading since the 1700s. They provide traders with information about the open, high, low, and closing prices of an asset in a given time period.
Candlesticks are made up of a body and wicks (or shadows) at either end that display the price range between the highest and lowest points of a trading period.
While candlestick charts are popular, there is an alternative approach that can be even more useful for traders: Heikin-Ashi charts.
Heikin-Ashi, which means “average bar” in Japanese, is a technique used to identify and analyze market trends. It can be used in conjunction with traditional candlestick charts and provides a smoother, more accurate representation of trends.
This is because the Heikin-Ashi technique uses a modified formula to calculate each bar, with a focus on the average price instead of the open, high, low, and closing prices.
The Heikin-Ashi formula uses the following calculation for each bar:
Close = (Open + High + Low + Close)/4
Open = (Open of the previous bar + Close of the previous bar)/2
High = Max[High, Open, Close]
Low = Min[Low, Open, Close]
The chart is constructed like a traditional candlestick chart, but the formula for each bar is different. The down days are represented by filled candles, while the up days are represented by empty candles. The Heikin-Ashi charts tend to stay red during a downtrend and green during an uptrend, providing a smoother look to the chart.
Heikin-Ashi charts provide five primary signals to identify trends and buying opportunities:
- Hollow or green candles with no lower “shadows” indicate a strong uptrend: Let your profits ride!
- Hollow or green candles signify an uptrend: You might want to add to your long position and exit short positions.
- Candles with a small body surrounded by upper and lower shadows indicate a trend change: Risk-loving traders might buy or sell here, while others will wait for confirmation before going long or short.
- Filled or red candles indicate a downtrend: You might want to add to your short position and exit long positions.
- Filled or red candles with no higher shadows identify a strong downtrend: Stay short until there’s a change in trend.
Using Heikin-Ashi charts can help traders to spot market trends and predict future prices. It’s particularly useful for making candlestick charts more readable and trends easier to analyze.
Traders can use Heikin-Ashi charts to know when to stay in trades while a trend persists but get out when the trend pauses or reverses. Most profits are generated when markets are trending, so predicting trends correctly is necessary.
While Heikin-Ashi charts can be used in any market, traders should still use caution and risk management techniques when trading. It’s important to remember that no trading strategy is foolproof, and losses can still occur.
However, by using Heikin-Ashi charts, traders can gain a better understanding of market trends and make more informed trading decisions.