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Heikin Ashi Trading Strategy: Understanding Heikin Ashi Candles
As part of the candlestick charting method, Heikin Ashi has solidified its place in the technical analysis realm as a valuable tool to study and eventually incorporate into traders' strategies, assisting them in identifying trending markets, price action patterns, and unveiling underlying market sentiment.
Throughout the following sections, you can explore the possibilities for trading cryptos with this type of candle. By understanding Heikin Ashi Candles, traders can establish a difference from the traditional candlesticks, and choose the most convenient according to a specific trading strategy.
Key Takeaways
- Heikin Ashi consists of a calculation formula that gives them a particular formation.
- Heikin Ashi differs from traditional candlesticks in formation, calculation, and the information provided.
- Heikin Ashi candles present a market chart based on averaged fluctuations.
- Heikin Ashi candles enable traders to detect trends easily.
What is Heikin Ashi?
The Heikin Ashi is a type of charting tool that reflects the price fluctuations of an instrument in the financial markets, indicating the opening, highs, closing, and lows of quotations of a specific period. It is recognized as a type of candlestick originating from Japan, developed by the Munehisa Homma in the 18th century.
Heikin Ashi Vs. Candlesticks
The Heikin Ashi significance translates into an average bar, which means we are speaking of a unique method to reflect market price data according to a calculation. As it relies on averages, it screens out market noise while smoothing the manifestation of market trend movements.
So, here, traders have clues about the potential differences to consider when choosing between Hekin Ashi and traditional candlesticks. In summary, the goal of Heikin Ashi is to let traders develop techniques to read a price chart shaped by averaged fluctuations, emphasizing significant market moves and reducing unnecessary price swings.
By understanding the definitions stated previously, look at the following classification that explores the differences between Heiken Ashi and traditional candlesticks.
Formation
- Traditional candlesticks have a body representing the open and closed prices followed by wicks representing the high and low price points reached in a period.
- A Heikin Ashi candle has a colored body, a shadow, and a wick. The color of the body discloses the direction of the trend.
Calculation
- Traditional candlesticks calculate the open, high, low, and close prices based on a specific period.
- Heikin Ashi candles average the open and close prices of the previous candles, as well as the open, high, low, and close of the current candle.
Information
- Traditional candlesticks provide precise information concerning price movements, including the open, high, low, and close.
- Heikin Ashi candles are smoother reflections of the price and focus on the prevailing trend direction.
Traditional Candlestick
Heikin Ashi Candle
Understanding Heikin Ashi Formation: Unveiling The Formula
As we have seen, Heiken Ashi candles are a bit different from traditional candlesticks due to the calculation formula that influences the formation of each candle.
If we break down this calculation formula, it will look as follows:
| High |
The maximum value for high open and close prices of candlesticks from the current period. Where:
|
| Opening |
The opening price of every candlestick is the average either between the current and previous open OR close prices. Where the math looks as follows:
|
| Closing |
The average of the Open, High, Low, and Closing prices for a current period. Where the representation will be:
|
| Low |
The lowest of the candlesticks is determined as a minimum value from the current period's Low, Open, and Close prices. Where:
|
Advantages of Heikin Ashi
- Smoother charts: Since Heikin Ashi candles filter out noise, they make it easier to detect and follow trends.
- Less false signals: The Heikin Ashi candles calculation can filter out market noise and decrease the likelihood of fake signals, notably during choppy markets.
- Better trend following: Heikin Ashi candles enhance the trend following strategies by smoothing the market fluctuations.
Disadvantages of Heikin Ashi Candles
- Heikin Ashi candles can lag in their responsiveness to price movements as a consequence of the calculation process using the average of previous and current prices.
- Heikin Ashi candles can reduce false signals, but they are not infallible and can still generate false signals under certain market conditions.
- Heikin Ashi candles lack broadly detailed information compared to traditional candlesticks, such as exact open, high, low, and close prices.
Heikin Ashi And Strategies: Brief Mention
The implementation of Heikin Ashi average bars suits the most significant movement in a market and extends its virtues along the most popular strategies and concepts used by traders.
We can pinpoint some of those, such as follows:
- Trend Trading: This strategy consists of identifying the direction of a market for a sustained period. Using Heikin Ashi candles, traders can spot the underlying market sentiment and enter trades in the direction of the trend.
- Reversal Trading: In this case, traders can seek weakness in specific price areas of the market and look for signals of a trend reversal, such as a series of red Heikin Ashi candles in an uptrend or a series of green candles in a downtrend.
- Support and Resistance: These levels represent supply and demand zones. With the smoothing character of Heikin Ashi candles, traders can identify refined support and resistance levels.
- Combining other indicators: Heikin Ashi candles can be combined with other technical indicators, such as moving averages or RSI, to provide additional confirmation.
Choosing the Right Candle Technique
Depending on the trading style and strategy to implement, choosing between the traditional candles and Heikin Ashi could signify a crucial decision for the correct analysis of crypto charts.
Consider molding a framework for the correct review of the strategy and the market disposed to trade as the previous step to choose Heikin Ashi charts. In any case, the key is to explore the market charts with both types of candlesticks to see which one works best for you.
Conclusion
Overall, Heikin Ashi has demonstrated to be a valuable charting technique to analyze and interpret the price movements in a trend. The fluctuations in this case will be averaged under a calculation formula that will result in a smoothened chart that can suit the expectations of certain traders and strategies.
In Altrady you can find this type of charting technique and start testing strategies through a wide range of markets with a free trial account and paper trading features.