Heiken Ashi Technique
The Heikin-Ashi technique averages the price data to create a Japanese candlestick chart that filters out market noise. The Heikin-Ashi Diagram, developed by Munehisa Homma in the 1700s, has many characteristics with standard candlestick charts but is different because of the value used to make each bar. Instead of using the open – high – low – close (OHLC) price bar as a standard candlestick chart, the Heikin – Ashi technique uses a modified formula:
Heikin-Ashi Close = (Open + High + Low + Close) / 4
Heikin-Ashi Open = [Open (previous bar) + Close (previous bar)] / 2
Heikin-Ashi High = Max (High, Open or Close)
Heikin-Ashi Low = Min (Low, Open or Close)
Heikin-Ashi techniques are used by technical traders to identify certain trends more easily. White (or green) candlesticks with no lower shadows are used to signal strong uptrend, while candles containing black (or red) with no upper shadows are used to identify strong downtrend. The Candlestick reversal using Heikin-Ashi technique is similar to the traditional candlestick reversal pattern; They have small bodies and long upper and lower shadows. There is no gap in the Heikin-Ashi table because the current bar is calculated using information from the previous bar price.
This technique should be used in combination with standard candlestick charts or other indicators to provide technical information to technical traders to generate profitable trades.
Benefits of Heikin-Ashi Technique
Providing Clarity: Since Heikin-Ashi techniques refine pricing information over two periods, trends, price patterns, and reversal levels are more easily recognized. Candlesticks on traditional candlestick charts often change from white (light) to black (dark), which can make them hard to read. Heikin-Ashi diagrams usually have more successive color candles, helping traders to easily identify past price movements.
Reducing False Signals: The Heikin-Ashi technique greatly reduces false trading signals in the sideways market and waves to help traders avoid trading during this period. For example, instead of getting two wrong reversal candle before the trend started, a trader using Heikin-Ashi technique will likely only receive the correct signal.
Limitations of Heikin-Ashi Technique
Slower to form: Because Heikin-Ashi techniques use price information from two periods, trading setup takes longer to develop. Usually, this is not a problem for swing traders who have time to let their trades be played. However, day traders who need to take advantage of fast price movements may find the Heikin-Ashi chart not responsive enough to be useful.