Heikin-Ashi is a superior, quantifiable charting technique that offers a clearer, more objective visualization of market trends and reversals compared to traditional Japanese candlesticks, enabling traders to filter out noise and make more precise analytical decisions.
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Heikin-ashi is a visual representation which clearly shows trends and reversals.
More importantly, it is a quantifiable technique that is easy to implement and use.
While traditional price candles appeal to the more artistic and subjective judgement,
Heikin-Ashi is a far more evident way to display trends and reversals.
Japanese candlestick patterns have very flexible rules and interpretations "in the context."
everyone translates them, more or less, in a subjective manner.
My personal interpretations may be different from yours.
These facts lead to the reality that candlestick patterns are subjective, artistic, and challenging,
so traders need a more objective, quantifiable tool.
And that tool is the Heikin Ashi.
The very simple quantification makes the Heikin Ashi technique attractive to those who tend
to take a more analytical, more precise approach.
Any heikin-ashi chart filters out price noise; as a result, trends, consolidations, and reversals
are more visible and clearer to the naked eye.
Sentiment, trend, and momentum are three elements every trader should take into account-and
all are addressed by heikin-ashi.
A big advantage of the Japanese candles is that they show participants' sentiment.
Candle color and body length are reliable measures for determining the degree of bullishness
or bearishness.
Long-body candles with no or small shadows appear as a result of strong buying or selling.
Excessive shadows or wicks underscore buyers' and sellers' mood swings.
A doji shows indecision or waiting for the next action.
The closing price relative to the open is a clear indication about the bullish or bearish
clouds hanging above the trading period.
Heikin-ashi candles make it easier to identify and follow trends.
Green bodies with no lower shadows show an uptrend.
On the other hand, red bodies with no upper shadows represent the price being in a short
or longer downtrend.
A doji-like modified candle with shadows emerging after an uptrend or downtrend suggests a reversal.
Finally, price consolidations are translated as sequences of two or more heikin-ashi doji-like
candles.
With heikin-ashi candles, the sentiment is measured by the color and size of the candle
bodies together with the position of the shadows.
Big green and red bodies are features of solid underlying trends.
Smaller bodies warn about trend exhaustion.
A doji-like candle that follows a sequence of green or red modified candles raises caution
about either a reversal or the beginning of a consolidation.
While Japanese candlestick theory requires many definitions and flexible interpretation
rules for most common and exotic patterns, the heikin-ashi technique works with only
the five simple rules.
1.
A sequence of green bodies identifies an uptrend.
A sequence of red bodies identifies a downtrend.
2.
The uptrend gets stronger with longer green bodies and no lower shadows.
The downtrend gets stronger with longer red bodies and no upper shadows.
3.
The trend gets weaker with smaller bodies and, possibly, with the emergence of both
lower and upper shadows.
4.
A consolidation is revealed when a series of smaller bodies with both upper and lower
shadows emerge.
5.
A trend reversal is likely with the emergence of a small body with long upper and lower
shadows (doji-like candle) or a sudden color change.
Multiple time frame analysis in trading requires an increased attention because of the better
odds in catching trends and remaining in them longer.
Obviously if an uptrend is just starting in daily (tfi), weekly (tf2), and monthly (tf3)
time frames, the winning odds for a long entry now are far bigger than when the entry is
initiated in a daily time frame with weekly and monthly charts casting bearish signals.
The ideal scenario is to have trend alignment in all three time horizons and to initiate
the trade as early as possible in the trend.
As a compromise, two consecutive time frames may replace the ideal scenario.
So, one option is to work only with two consecutive time frames instead of three and to apply
a simple strategy: • buy when the current modified candle color
changes from red to green in the two consecutive time frames.
• sell when the current modified candle color changes from green to red in the two
consecutive time frames.
Another great strategy involves the RSI indicator.
There are three horizontal lines plotted on RSI indicator window: 30, 50, and 70.
RSI 50 level can be used as a strong tool to confirm the different kinds of trade setups
using Heikin Ashi.
I mainly prefer to use the relative strength index (RSI) indicator for centerline crossovers.
A movement from below the centerline (50) to above indicates a rising trend.
A rising centerline crossover occurs when the RSI value crosses above the 50 line on
the scale, moving towards the 70 line.
This indicates the market trend is increasing in strength, and is seen as a bullish signal
until the RSI approaches the 70 line.
A movement from above the centerline (50) to below indicates a falling trend.
A falling centerline crossover occurs when the RSI value crosses below the 50 line on
the scale, moving towards the 30 line.
This indicates the market trend is weakening in strength, and is seen as a bearish signal
until the RSI approaches the 30 line.
A simple strategy would be to • buy when the current modified candle color
changes from red to green and the RSI is above 50
• sell when the current modified candle color changes from green to red and the RSI
in below 50.
This way you have additional confirmation that you are in a healthy trend, determined
by both Heikin Ashi and RSI centerline.
For an uptrend, you want to see the Heikin Ashi trend built primarily by bullish candles
and absent of lower candlewicks, with the RSI above 50.
When the price is shooting up, the price action creates very little to no lower shadows.
The bearish scenario has the same functions as the bullish one but in the opposite direction.
This means that it is built mainly by bearish Heikin Ashi candles.
You want to see a strong bearish trend on the Heikin Ashi graph that has very little
to no upper candle shadows, in addition to the RSI below 50 level.
Simple, and powerful.
Here are some examples of uptrends and downtrends, using this approach.
The second strategy involves the Ichimoku indicator.
The Ichimoku cloud consists of several components which give it a unique capacity to detect
trends, to determine whether we are in a trend, its direction and when the trend reverses.
One of the components is the Kumo cloud which is one of the most unique aspects of the Ichimoku.
The Kumo is typically looked at in terms of support and resistance; if it is thick, then
the support/resistance is strong (depending on the position of price in relation to the
cloud).
By contrast, if it is thin, then the s/r levels are considered weak.
Generally, if the price is above the Kumo, then there is an uptrend in place and/or more
buying opportunities.
If the price is below the Kumo, then it is under resistance and it is better to be looking
for shorts instead of longs.
The longer price action stays above or below the Kumo, the stronger the trend and the more
support/resistance the Kumo offers.
A simple strategy would be to • buy when the current modified candle color
changes from red to green, Kumo cloud is green and price is above the cloud
• sell when the current modified candle color changes from green to red, Kumo cloud
is red and price is below the cloud For an uptrend, you want to see the Heikin
Ashi trend built primarily by bullish candles and absent of lower candlewicks, and the candles
above the Kumo cloud.
A strong bearish trend consists of Heikin Ashi that has very little to no upper candle
shadows, in addition to the price below Kumo cloud.
Again, simple, and effective.
Here are other examples of trends using Heikin Ashi and Ichimoku cloud.
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