Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we will be taking a look at the indicator known as Heikin Ashi and how it can help us to retain more of our profits by realising trend strength.
Heikin-Ashi derives from Japanese meaning average bar. The Heikin Ashi indicator can be used in conjunction with candlestick charts when trading to identify market trends and predict future prices.
It’s useful for making candlestick charts a lot more readable and trends easier to analyse by cancelling out some of the noise or less useful information.
We as traders can use Heikin-Ashi charts to know when to hold our trades while a trend persists but also when to close out when the trend pauses or reverses. Most profits are generated when markets are trending, so predicting trends correctly and securing all the profit we can from them is necessary.
The Heikin-Ashi candlestick Formula differs from that of a Normal candlestick chart in that they are composed of a series of open-high-low-close or (OHLC) candles which are set apart by a time series. The Heikin-Ashi technique differs in that it uses a modified formula of close-open-high-low or (COHL) candles.
So as discussed the Heiken ashi Chart is derived from a different formula. What does this different formula provide us with exactly. Firstly The time series is defined by the trader depending on the type of chart desired, such as daily, hourly or five-minute intervals.
The main differences to note between the two types of charts are Heikin-Ashi generally is smoother and less contradictory look, as it is essentially taking an average of the price movement. There is a tendency with Heikin-Ashi for the candles to stay red during a downtrend and green during an uptrend giving more definitive trend signals, normal candlesticks tend to alternate color even if the price is moving dominantly in one direction.
Some would argue that heikin ashi is better than traditional candlesticks and maybe they are for certain applications, but they do negate a lot of what you have already learned about Candlestick behaviour, if we change the rules surrounding how candlesticks are formed ultimately we have changed the way in which we can view them.
The price scale is also something to be considered. The current price shown on a normal candlestick chart will also be the current price of the asset, and that will match the closing price of the candlestick.
Since Heikin-Ashi is taking the average, the current price on the candle may not match the price the market is actually trading at. For this reason, many charting platforms show two prices on the y-axis. one for the calculation of the Heiken-Ashi and another for the current price of the asset.
Let’s now look at how we can put this indicator to use, as previously stated the rules surrounding candlestick formations change if we change the formula. Let’s take a look at some simple rules to follow when trading with Heikin Ashi.
There are five primary signals that identify trends and opportunities within Heikin ashi.
1. Green candles with no lower shadows indicate a strong uptrend. In this case you want to let your positions run as it’s a strong bullish signal.
2. Green candles signify an uptrend,You might want to add to your longer term positions and exit short positions if you have any open.
3. Candles with a small body surrounded by upper and lower shadows indicate a potential trend reversal. As always it’s Good to wait for confirmation before making your decision to engage.
4. Red candles indicate a downtrend, You might want to add to your short position and exit long positions.
5. Red candles with no higher shadows identify a strong downtrend. Stay short until there’s an indicated change in trend.
These simplified signals may make locating trends or trading opportunities easier than traditional candlesticks. The trends are not interrupted by false signals as often and are more easily identified.
This chart example shows how Heikin-Ashi charts can be used for analysis and making trading decisions.
Here we have long red candles established, and at the start of the decline, the lower wicks are quite small at first but as the price continues to drop, the lower wicks get longer, indicating that the price dropped but then was pushed back up. Buying pressure is starting to build. This is followed by a strong bullish move.
The upward move is very strong and doesn’t give major indications of any apparent reversal, until there are several small candles in a row, with shadows on either side. This reflects indecision and we may look to the bigger picture to help determine whether they should go long or short.
It’s usually best to stay in a trade until the Heikin-Ashi candles change colour or show potential reversal indications. A change of colour doesn’t always mean the end of a trend it could just be a period of low volatility such as we see in some trading sessions or during holidays.
In summary Heikin ashi can offer us a more rounded approach to reading charts as it’s rooted in reading averages. They may not be a replacement for conventional candlesticks but they are a great indication of trend strength. If you are considering using this indicator then take the time to at least remember its key principles.
I hope you have enjoyed our educational session today ladies and gentlemen, please take some time to contemplate what you have learned here today and remember contemplation is the key to learning.