Heikin Ashi Trading Tutorial – The Somewhat Different View Of The Markets

The Heikin Ashi Chart smoothes the price movements and makes trends or individual waves of buying and selling appear clearer.

Don’t fool yourself, trading is a shark tank, because what you want to win, someone else has to lose. It is not necessarily your direct counterpart in a trade who has to pay your bill, but at the long end someone has to pay. So to win in the stock market, you have to be smarter than the others. You have to be more disciplined than most traders and you have to see more than your “trading neighbor”. Against this background, it is surprising how homogeneous the mass of traders is. This starts with the chart. Have a look around, do you find anything other than candlestick charts? What do you trade with? Thanks to technical progress in recent years, it has become very easy for private traders to go their individual way. Most trading platforms already offer the trader a relatively wide selection of charts and thus individualisation options.

One of these charts is the Heikin Ashi Chart presented by Dan Valcu in 2004 in Stocks & Commodities and originally from Japan. Based on the candlestick chart, which was already relatively widespread at that time, Valcu tried to vary it in order to better recognize the individual trends. Optically, the methodology smoothes the up and down movements, resulting in a correspondingly more harmonious chart. Figure 1 shows the current course of the DAX in the classic candlestick chart (top) and the Heikin Ashi chart (bottom).

Harmonization of the price trend

As the comparison shows, smaller price fluctuations against the main direction of movement are filtered out. While the DAX candlestick chart (Fig.2) showed a correction candle within the current rally on November 28th, falling below the previous day’s low and thus generating a certain amount of attention within trends, the Heikin Ashi chart showed a still larger daily low. On this basis, the rally remains absolutely intact. The example shows how the Heikin Ashi Chart eliminates a certain “background noise of the market”. In order to end individual market swings, larger counter-movements are required in terms of price and/or time.

A further characteristic of the Heikin Ashi Chart, which improves the visual appearance especially in the case of narrow market values with the many gaps that are often found there, and thus enables easier interpretation, is the absence of gaps. These are eliminated by the way the Heikin Ashi Chart is calculated, which also contributes to a more harmonious picture of the individual candles and the resulting market swings (see red circle in Fig. 2 for an example).

Finally, the colour design of the candles also leads to a visual harmonisation of the price development. While the classic candlestick chart often shows alternating up and down movement between two candles, the candlestick colours of the Heikin Ashi chart usually show a constant trend. If a bullish day (white candle) follows in an upward movement, a minus day, the candlestick chart draws a red and thus bearish candle. The Heikin Ashi chart, however, often remains true to its line and continues to represent a white candle due to its calculation (see fig. 3 black circle). This is particularly impressive in the DAX course of the rally from mid-November. Similarly, in downward movements there are often isolated days when the market rose from the opening to the closing price. The white candle of the candlestick chart is often further depicted in direct comparison to the Heikin Ashi chart as a bearish red candle and thus in line with the trend (cf. fig.3 red circle).

Interpretation of Heikin Ashi Charts

These small but subtle differences in price movements can help visual traders in particular to better understand the structures of the market. In addition, further information on current price movements can be drawn from the size and shape of the individual candlesticks. For example, a white (green) candle without a shadow is bullish, while increasingly larger candlestick bodies indicate a stronger trend. Figure 4 gives you an overview of the basic rules of the Heikin Ashi chart and their meaning.

Apart from the basic information that the Heikin Ashi Chart provides on its own, there is nothing to stop you from combining it with indicators. Fibonacci retracements can be applied to a Heikin Ashi Chart in the same way as Bollinger Bands or moving averages. There are no limits for the trader and so every trader can experiment a little bit to find a suitable combination for him.

Conclusion:

In the game of games you need an advantage! Getting away from the masses and taking an individual look at the markets that interest you through the Heikin Ashi Chart, which Dan Valcu also made famous in the Western world, can help you gain such an advantage. He can visualize trends more easily and reliably than is possible with the classic candlestick chart, for example. Certainly the Heikin Ashi Chart is not a holy grail and will eliminate any bad trades, but it can help you to push and improve your own trading.


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