Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XVII the focus will be on Heikin Ashi Candlesticks.
Heikin Ashi Candlesticks
The Heikin Ashi Candlestick is a term that means "average bar" in Japanese. It is a form of Candlestick used on chart which can help in spotting market trends and predicting future prices. It is useful because it makes the candlesticks easier to read and therefore trends easier to spot and analyse. Traders often make use of Heikin-Ashi candlesticks on their charts to know when to remain within a trade as the trend persists. It also helps them to know when to exit a trade as the trend pauses or reverses. Most profits are generated when markets are trending, so predicting trends correctly is necessary. They can be used in any market, and there are five primary signals associated with them.
Calculating Heikin Ashi Candlesticks
To calculate the Heikin Ashi Candlestick chart the rules are similar to that of a standard candlestick chart. The standard chart is composed of a series of open-high-low-close (OHLC) candles set apart by a time series, while the Heikin Ashi uses similar characteristics but makes use of a modified formula of close-open-high-low (COHL).
These values are calculated making use of the following formula to plot the Heikin Ashi Candlestick.
How to use Heikin Ashi Candlesticks
As shown above, the formula for calculating the chart differs from a standard one. The time frame is chosen by the user and the Heikin Ashi Candles work on any time frame, similar to a standard candlestick chart. The chart works as simple as the down periods are represented by a filled candle, and the up periods are shown with a hollow candle. They can also have colour applied to them in the chart pattern, such as up periods being green or white, and down periods being red or black.
The Heikin Ashi candles have a smoother look than the standard candles due to the fact they are working off the average of the movement. Unlike traditional candles, Heikin Ashi candles have a habit of remaining red during a downtrend and green during an uptrend, instead of the alternating colours often seen in a traditional candlestick chart.
It is important to note that because the Heikin Ashi candles take the average, the current price shown on the candle does not always match the price of the asset in the market at that moment. A standard candlestick chart matches the price of the candle to the trading asset price, so often on the Heikin Ashi chart there are two prices shown on the Y-axis, one for the calculation of the Heikin Ashi and another for the current price of the asset.
There are five primary signals that are used to identify trends and buying opportunities when using Heikin Ashi Candles:
Hollow or green candles with no lower "shadows" indicate a strong uptrend
Hollow or green candles signify an uptrend, therefore it might be time to add to a long position or close a short trade
Candles with a small body surrounded by upper and lower shadows indicate a trend change
Filled or red candles indicate a downtrend, therefore it might be time to add to a short position or close a long trade
Filled or red candles with no higher shadows identify a strong downtrend
Making use of these trends and trading opportunities makes it easier to trade with Heikin Ashi Candlesticks, which they are also less prone to giving false signals as often.
Below are some example of the Heikin Ashi Candlesticks in use on Binance for the BTC/USDT 15 minute chart. I have applied the green colour for up candles and red for down candles to make it easier to read, along with notes to show the five key rules applied from above.
PURPLE NOTE - Hollow or green candles with no lower "shadows" indicate a strong uptrend
GREEN NOTE - Hollow or green candles signify an uptrend, therefore it might be time to add to a long position or close a short trade
BLUE NOTE - Candles with a small body surrounded by upper and lower shadows indicate a trend change
RED NOTE - Filled or red candles indicate a downtrend, therefore it might be time to add to a short position or close a long trade
YELLOW NOTE - Filled or red candles with no higher shadows identify a strong downtrend
Limitations of Heikin Ashi Candlesticks
The biggest limitation of the Heikin Ashi Candlestick chart is its use of averages. This means that when you look at the chart it may not match the prices which the asset is actually trending at. The Heikin Ashi candles smooth out the trends on a chart to give better trend indicators, but users should makes sure to use it with additional Technical Analysis to ensure they find the best entry and exit points. Moving averages, Bollinger bands, and the Relative Strength Index are examples of indicators that are beneficial in conjunction with Heikin-Ashi candles.
Conclusion on using Heikin Ashi Candlesticks for TA
As a trader, whether it be day trading or long term trading, using the Heikin Ashi Candlesticks can be very beneficial in spotting the overall direction of a tend, while also indicating any potential upcoming changes to the trend. The Heikin Ashi Candlesticks are similar to traditional candles except they make use of averages instead of the current price. They are shown in green or red usually, and have five rules to follow when using them to spot trends and trend reversals. If a trader follows these rules they are less likely to be caught out by a false signal as they are not commonplace within these candles, although they are possible. To maximise the use of the candles a trader should combine them with other indicators, such as trend indicators which will strengthen the signals of the Heikin Ashi Candles.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to jump in when you believe that a candle is showing one of the five signals, therefore it is always beneficial to wait until the candle closes and see whether the next one is following the trend you believe the market to be in.
It is important to use the Heikin Ashi Candlesticks along with other TA to get the correct signals for understanding the strength of a trend. Always zoom out, if trading on a 15 minute chart check the 1 hour or 4 hour or even 1 day chart to give you a better idea of the overall trend strength via the Heikin Ashi Candlesticks, along with checking the trend strength of the larger overall trend compared to short term ones.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Technical Analysis Part XIV - The Arnaud Legoux Moving Average
Technical Analysis Part XV - Ichimoku Cloud
Technical Analysis Part XVI - Footprint Charts
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on the True Strength Indicator. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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