It is a great week again. Good day every one.
The season 4 has been going on smoothly. This post is submitted to Professor @reddileep in response to the assignment given to the students at the end of his lecture. Professor taught "Heikin-Ashi Trading Strategy" and after the lecture he gave six (6) questions. So I will be attending to these questions one after the other. Follow me closely.
Define Heikin-Ashi Technique in your own words.
Heikin - Ashi technique is a substitute technique for traditional Japanese candlestick technique. Heikin-Ashi technique is used by traders to determine the trend of an asset. The technique has been popular because of the usefulness of the candlesticks being formed on the chart which is quite simple to read and understand. The Heikin -Ashi candle is developed by a man called Homma Munehisa. Take a look at the chart of Heikin-Ashi below.
Fig. 1: Heikin-Ashi Chart | tradingview.com
Heikin-Ashi just like traditional candlestick can be used to trade any type of market. It can be used to trade crypto markets, forex market, stock market etc. The Heikin-Ashi candlestick is similar to traditional candlesticks, but just it is differs because it takes the average of the price where as that of traditional candlestick tracks every movement. Heikin-Ashi candlesticks contains body and shadow or wick just as traditional candlestick, but the close of Heikin-Ashin candle is determined as the average price of the previous candle formed.
Heikin-Ashi chart is very neat and smooth to read. This is one of the reasons why it's popular. As it can be seen in the figure above, the direction in which price moves is very clear and smooth. The Heikin-Ashin charts give clear uptrend and downtrend movement. The candlesticks majorly form in the direction of price which is the beauty of this technique.So, the technique is used to clearly determine the direction of price of an asset, how strong the trend is, predict the shift in trend and to know when to enter and exit the market.
Make your own research and differentiate between the traditional candlestick chart and the Heikin-Ashi chart. (Screenshots required from both chart patterns)
In this section of the question, we are going to see difference between traditional candlestick chart and Heikin-Ashi chart.
A. Heikin -Ashi chart is very neat and smooth, whereas that of traditional candlestick is more complex.
Let's see the screenshot of Heikin-Ashi chart below.
Fig. 2: Heikin-Ashi Chart (Very Smooth Chart) | tradingview.com
We can see that the graph is very smooth and looks clean. See the screenshot of traditional candlestick chart below.
Fig. 3: Traditional candlestick chart | tradingview.com
B. The formation of candlesticks in Heikin-Ashi chart is very different to that of traditional candlestick.
In Heikin -Ashi chart the close of the new candles is formed by calculating the average price of the previous candle, but in traditional candlestick chart, it's not like that, but the new candle begins forming at the previous candle's close level.
See the screenshots below
Fig. 4: Formation of New Candle on Heikin-Ashi Chart | tradingview.com
We can see from the figure above that the candle starts form almost from the middle of the body of the previous candle. Now, let's see that of traditional candlestick.
Fig. 5: Formation of New Candle on Traditional Candlestick Chart | tradingview.com
C. The trend of an asset can easily be read and understood in Heikin-Ashi chart, whereas, it is a bit difficult in traditional candlestick chart.
Let's see the screenshots below.
Fig. 6: Example of an Uptrend on Heikin-Ashi Chart | tradingview.com
Fig. 7: Example of an Uptrend in Traditional Candlestick Chart | tradingview.com
The chart of Heikin-Ashi shows when price of an asset in uptrend or downtrend clearly and that makes it easy to determine which trend the asset is. If you look at the screenshot attached above, you will notice that when the market are in uptrend, the wicks are above the candles, and when the market is a downtrend, the wicks are below the candles.
D. In traditional candlestick chart, a little bit change or pause in the direction of trend changes the color of the candles, whereas, it doesn't or very minimal in Heikin-Ashi Chart.
We know that the direction of price is not like a straight path. Price moves and sometimes pauses to breathe before continuing its direction. When price pauses in Heikin-Ashi chart, you will notice that the color of the candle may not change. But the color changes when the price seems to pause in traditional candlestick chart. Let's see the screenshot below.
Fig. 8: The color of thecandle was slightly Affected during a Pause on the Heikin-Ashi Chart | tradingview.com
Fig. 9: The color of the candle was Affected on Traditional candlestick chart | tradingview.com
Explain the Heikin-Ashi Formula. (In addition to simply stating the formula, you should provide a clear explanation about the calculation)
There are four (4) important data required to calculate the formula. We need:
Each of these data is calculated differently. Let's see how to calculate each one after the other.
Calculating the Open
To calculate the open, we need the opening of the previous candle and the closing of the previous candle.
The open is calculated by adding the opening and closing of the previous candle together and then divided it by two (2).
Let's see how it is done mathematically in the figure below.
Fig. 10: Formula for Open | Hand writing
Calculating the close
To calculate the close, the four data are required. That's, open, close, high and low. The close is often calculated by adding the open, close, high and low of a current candle and divided it by four (4).
I attached a screenshot below showing how it is calculated mathematically.
Fig. 11: Formula for Close | Hand writing
Calculating the High
The data needed here is either maximum high, close or open. High is the highest high of the current candle. It's also the highest or maximum points of close or open points of the current candle.
See the mathematical calculation in the screenshot below.
Fig. 12: Formula for High | Hand writing
Calculating the Low
Here, we need the lowest or minimum low, or close or open of the current candle. Thus, low is equal to the minimum points of the low, close or open.
The screenshot below shows the mathematical calculation of the open.
Fig. 13: Formula for Low | Hand writing
Graphically explain trends and buying opportunities through Heikin-Ashi Candles. (Screenshots required)
Like I mentioned above, Heikin-Ashi is popular because it clearly shows the trend. Traders use Heikin-Ashi technique because they can easily identify which trend the price of an asset is.
When the trend is bullish or in an uptrend, the wicks will appear above the candle. Let's see the screenshot below.
Fig. 14: Uptrend Illustration with Heikin-Ashi Chart | tradingview.com
In the figure above, it can be seen that wicks of the green candles are above the candles. See the candles which the red arrows are pointing to.
Conversely, what the wicks are seen to be below the candles, the market is in a downtrend. Let's see the screenshot below.
Fig. 15: Downtrend Illustration with Heikin-Ashi Chart | tradingview.com
In the figure 15 above, the arrows are pointed to the lower wicks. And we can see that the wicks are shown below the candle. This means that the market is in a downtrend. So, it is very easy to read and understand then using this technique.
Now, let's quickly look at the buying opportunity which is the next thing in the question.
To spot buying opportunity with Heikin-Ashi candles, the first thing you should focus on is that market must be in a period of indecision. This period signifies low reaction between buyers and sellers, that's it is period where there's no buying momentum, neither there is selling momentum. The candlesticks that forms at this period is often in form of indecision or doji candles.
After the period is over, if the next candle that forms after this period is a strong bullish candle with very great volume and wick appear above it, then it signifies a buying opportunity. This means that buyers have taken control of the market after a moment of dragging the between they and the sellers.
To understand this better, let's see the screenshot attached below.
Fig. 16: Buying Opportunity Using Heikin-Ashi Technique | tradingview.com
In figure 16 above, we can see that the market enters a period of indecision, pointed by the red arrows and written "indecision in market." Then the last indecision candle formed, followed by a large bullish candle with wick above the candle. This is a buying opportunity when it's spotted on any Heikin-Ashi chart.
Is it possible to transact only with signals received using the Heikin-Ashi Technique? Explain the reasons for your answer.
In finance trading, trading use a single indicator or strategy is not advisable because of the noise or fake signals that are often occur. It's possible to transact with the signals received from the Heikin-Ashi technique, but it's not advisable. The reason is, no strategy or technique gives 100 percent accuracy.
There's what is called confluence trading. Confluence trading means having many reasons to take and exit a trade. If one have many reasons to take a trade, he or she will be confident to enter the market. Also the more reasons you have, the more the tendency of predicting the direction of the price rightly.
If you transact with only signals received with Heikin-Ashi technique, you will not have many reasons. And sometimes, the signals could be fake out. So, the price of the asset won't go as it's predicted. Whereas, it could have been avoided if the Heikin-Ashi technique is combined with other indicators, such as EMA 55 and 21.
So, it's often recommended that traders combine technique or indicators so as to filter noise in the market, avoid fake outs and to go for trades which can bring maximum return for them. It's therefore pertinent that when Heikin-Ashi technique is combined with other indicators, it would reliable and effective.
By using a Demo account, perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA.
In this section of the question, we are going to use Heikin-Ashi technique and 55 and 21 EMA to take trades. Let's quickly see it.
For buy Order
To place a trade for buy order using Heikin-Ashi technique plus moving average strategy, the price must be above the EMA or MA. Once the price is above the EMA, then look at the market and make sure it goes a moment of indecision. Then after the indecision, a strong bullish candle must form which is often the signal that the buyers have taken hold of the market.
The screenshot below shows what I'm trying to explain.
Fig. 17: Buy Order of BTCUSD Using Heikin-Ashi Technique + Moving average | tradingview.com
- The price has been above the moving average which is the first indication we must look for.
- Then, the moment of indecision in the market occurs. The indecision or doji candle that formed in the screenshot below represents the moment of indecision.
- Then a strong bullish candle formed which ends the moment of indecision which is often the last indication.
As soon as the bullish candle forms, I entered the trade since the indication for buy order is complete.
Fig. 18: Buy Order of BTCUSD Using Heikin-Ashi Technique + Moving average | MT4 Platform
The figure 18 above shows a buy order trade taken using the Heikin-Ashi technique and moving average.
The stop loss was placed below the open of the strong bullish candle. The take profit was set to have a risk reward ratio of 1:2.
For Sell Order
When using an Heikin-Ashi technique plus moving averages, the price must be below the candles. Then a moment of indecision must take place where there's no clear direction for price, the buyers drag the price and the sellers also drag the price. After this moment, a strong bearish candle must form showing that the sellers have taken over and that the trend is shifting to downside.
The screenshot below is a sell order taken on ETHBTC chart.
Fig. 19: Sell Order of ETHBTC Using Heikin-Ashi Technique + Moving average | tradingview.com
As it can be seen in figure 19:
- The price is below the moving average. This is the first indication to look for.
- The next thing is that, the period of indecision in the market happened. The period is circled in the figure above.
- Then, a strong bearish candle formed which ends the indecision in the market.
So, as this indications were given, I entered a sell order position.
Fig. 20: Sell Order of ETHBTC Using Heikin-Ashi Technique + Moving average | MT4 Platform
The stop loss and take profit was properly set. I placed my stop looking above the open of the strong bearish candle which means that if the trade should reverse and come back to that place, the set up is invalidated.
The take profit was placed at a level to have a risk reward ratio of 1:2.
Below is the screenshot of the two trades taken after some minutes.
Fig. 21: The running trades | MT4 Platform
The trades are still running. I will keep monitoring them.
About five (5) hours after the two trades were taken, I checked back to see how the trades are doing. Thanks trades are running well, going in our predicted direction. See the screenshot below.
Fig. 22: The running trades after 5 hours | MT4 Platform
Heikin-Ashi trading strategy is one of the strategies used in finance trading. The strategy is quite simple to use because of the candles that form on its chart is very simple to read and to understand. For example, when a trader looks at the chart and see that the candles forming contain wick at about the candles, they will quickly know that the market is in an uptrend.
The strategy works for any kind of market being it crypto market, forex market, stock market etc. Heikin-Ashi chart is very similar to traditional candlesticks just the the formation of the candles in Heikin-Ashi is different from that of traditional candlestick chart. Also, the graph of Heikin-Ashi looks smooth and neat, but that of traditional candlestick chart is a bit complex.
It's advisable to combine other indicators with the Heikin-Ashi technique for more effective signals and to avoid fake out. Thanks to Professor @reddileep for the teaching. I have been able to place trades with the Heikin-Ashi technique, and it's great one.
Written by : @msquaretk