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Hey steemians,
In this post i will be submitting my homework task for professor @reddileep.
DEFINE HEIKIN-ASHI TECHNIQUE IN YOUR OWN WORDS
The Heikin-Ashi technique (from what i understood) is one used for carrying out analysis of a price chart of an asset only to then use it for placing trades in the market to make profit.
Its also interesting to note that In Japanese Heikin-Ashi can be translated into 'Average bar or pace' which implies that the pattern Heikin-Ashi makes or rather creates runs at an average pace and in turn gives a smooth pattern, unlike your regular candlestick patterns where volatility can be spotted.
WHAT DOES HEIKEN ASHI REFLECT IN A PRICE CHART THAT HELPS TRADERS?
Heiken-Ashi makes use of the information from the candle before to then form the next candle accordingly by taking the average of the data of the previous candle, hence in that sense one can say that the Heiken-Ashi technique is simply the average of two-periods.
three situations will be clearly observed and they include
(a) A Trend reversal
(b) A strong trend
(c) Indecision or a sideways trend
The data that is required to create the next candle using the Heiken-Ashi technique is:
(a) initial(opening) price of the previous candle
(b) Closing (or ending ) price of the previous candle
(c) The Highest point or price of the previous candle
(d) The Highest point or price of the previous candle
By taking the average of the previous candle a new candle is created and thus it leads to the formation of a smooth pattern with observable trends unlike in your traditional candlestick pattern. Now, the candles in the Heikin-Ashi are all connected to each other which isn't like how it is in a traditional candlestick pattern, so the Heikin-Ashi indicator or rather chart tells us about the clear indication of the trend in the market.
its important to note that Heikin-Ashi is a 2-period average which means it won't lag as much as other moving averages because the smaller the period the smaller the lag.
We can also see all of the trends above can be seen in a normal candlestick chart but by using or taking the average in Heiken-Ashi these trends can be seen clearly.
In summary using the Heikin-Ashi indicator or rather chart we are able a clear view of the chart along with the trends without any volatility and noise in the chart of an asset and all this is made possible by taking data from the previous candle and averaging it.
Who developed or created the Heiken-Ashi chart??
It was developed or created by Munehisa Homma in the 1700s without the use of any modern tools. The Heiken-Ashi chart to get a clear view of the market in the 1700s, he is also the developer or inventor of candlestick charts.
Make your own research and differentiate between the traditional candlestick chart and the Heikin-Ashi chart. (Screenshots required from both chart patterns)
- Their Susceptibility
The Candlestick chart is more susceptible to any change in the market but compared to the candlestick chart the Heikin-Ashi chart is less susceptible to any change in market and that provides a smooth pattern or trend.
- Appearance
The Candlestick chart looks more complicated and thus unable to give a clear view of trends. Heikin-Ashi chart gives off a smooth appearance and thus gives a clear view and indication of trends.
Complex candlestick chart
Smooth Heikin-Ashi chart
- Trend indication
The Candlestick chart doesn't give a clear view of trends where as the Heikin-Ashi chart gives a clear view of trends which helps in trading.
Presence of noise or fluctuations
in the candle stick chart Noises and fluctuations can easily be spotted in the the form of bearish and bullish candle in an obvious uptrend and downtrend. Noises and fluctuations can't be spotted easily in the Heikin-Ashi chart because of the calculation involved and averaging the data gotten from previous candle.Candle
Candles in Candlestick chart have shadows or wicks on both sides of the candle while In Heikin-Ashi, candles in strong uptrend have wicks or shadows in an upward direction and candles in a strong downtrend have wicks or shadows formed in a downward side or direction.
- Formation of next candle
In the candlestick chart, the next candle starts from the closing of the previous candle while in the Heiken-Ashi chart, the next candle is created based on calculations.
- Price tracking
The current candles in the candlestick chart show the recent or updated price of an asset which also serves as the closing price of the candle where as it is not as important that the current candle in the keikin-ashi chart shows the recent or updated price of an asset because of the averaging of the data, and that's why it sometimes comes with two price scales.
Candles having wicks on both sides in a strong trend in candlestick chart
Candles having wicks in upward/direction sides in a strong trend in Heikin-Ashi chart
EXPLAIN THE HEIKIN-ASHI FORMULA (In addition to simply stating the formula, you should provide a clear explanation about the calculation)
Heiken-Ashi formulas
There are 4 types of calculation involved in the Heiken-Ashi technique and these calculations are:
(A) Heikin-Ashi Opening Price
(B) Heikin-Ashi Closing Price
(C) Heikin-Ashi High Price
(D) Heikin-Ashi Low Price
(A) Heiken-Ashi Opening price: Opening price is the price at which the very first trade of the day/candle took place. In the Heiken-Ashi technique or indicator, the Heiken-Ashi Opening price depends upon the opening and closing price of the previous day or candle.
Heiken-Ashi Opening price: (The opening price of the previous candle + The closing price of the previous candle)/2
Simply put, we should take the arithmetic mean of the opening and the closing price of the previous candle and we can get the Heiken-Ashi opening price for the current candle.
example
Calculation of Heikin-Ashi opening price
Closing price of the previous candle: 48191.29
Opening price of the previous candle: 48009.54
Heikin-Ashi open: (48009.54+48191.29)/2 = 48115.81 (approximately)
(B) Heikin-Ashi Closing price: Closing price is the price at which the very last trade of the day/candle took place. In the Heikin-Ashi technique or indicator, the Heikin-Ashi Closing price is determined by highest price, lowest price, opening price and closing price of that current candle.
Heikin-Ashi closing price: (The opening price + The closing price + High + Low(all data of current candle))/4
this means we ought to take the arithmetic mean of the opening price, the closing price, high and low of the current candle and we can get the Heikin-Ashi closing price for the current candle.
Open, low, close, high shown from 18th april
Calculation of Heikin-Ashi closing price
High of candle: 1.25
Low of candle: 0.91
Open of candle: 1.19
Close of candle: 1.02
Arithmetic mean of high, low, close, open: (1.25+0.91+1.19+1.02)/4
Heiken-Ashi closing price of 18th april: 4.37/4 = 1.09
correct, close @ 1.09
(C) Heikin-Ashi High: High price is the price at which the transaction with the highest price took place. In the Heiken-Ashi technique or indicator, the Heiken-Ashi High price depends upon the high, opening price and closing price of the current candle.
Simply put, out of the opening price, closing price and high of the current candle whichever value or price is the highest is said to be the Heiken-Ashi high.
Heiken-Ashi High via taking maximum value
Calculation
High of candle: 1.25
Open of candle: 1.19
Close of candle: 1.02
Heikin-Ashi high: Max[1.25, 1.19, 1.02]
Heikin-Ashi high: 1.25
(D) Heikin-Ashi Low: low price is the price at which the transaction with the lowest price took place. In the Heikin-Ashi technique or indicator, the Heikin-Ashi low price depends upon the low, opening price and closing price of the current candle.
Simply put, out of the opening price, closing price and low of the current candle whichever value or price is the lowest is said to be the Heikin-Ashi low.
Heikin-Ashi low via taking minimum value
Calculation
Low of candle: 0.91
Open of candle: 1.19
Close of candle: 1.02
Heikin-Ashi low: Min[0.91, 1.19, 1.02]
Heikin-Ashi low: 0.91
GRAPHICALLY EXPLAIN TRENDS AND BUYING OPPORTUNITIES THROUGH HEIKIN -ASHI CANDLES (Screenshots required)
The reversal of the trend and buying and selling opportunity can easily be determined by using the Heikin-Ashi technique
Strong trend(Uptrend/Downtrend)
Heikin-Ashi candle has Main body and wicks and wicks are very important to determine the trend and its strength.
(A) Strong uptrend: In a strong uptrend, the green candle will come up and if the wicks of the green candles are in the upward direction then we can say that the trend is an uptrend or a strong uptrend.
(B) Strong downtrend: In a strong downtrend, the red candle will appear and if the wicks of the red candles are in the downward direction then we can say that the trend is a downtrend or a strong downtrend.
In the example below, it can be seen clearly that wicks on green candles are pointing upwards leading to an uptrend and wicks on red candles are pointing downwards leading to a downtrend.
Identifying trend and its strength using wicks of HeikIn-Ashi candles
Trend reversal
It is very important to know about the reversal in a trend when you are trading so that you can enter and exit at the right places.
So it is easy to get an idea of reversal but it is not 100% efficient as it doesn't guarantee that a reversal will happen so you should either wait for the confirmation or use another indicator with it.
So in the HeikIn-Ashi chart or technique, when a trend comes to an end, its indecision candle must appear(red indecision candle at end of a bearish trend or vice versa) then another indecision candle must appear of different colour that indicates a potential reversal.
We can get an idea of reversal by the example below, in the example, you can see a bullish trend and an indecision green candle appeared, following that green indecision candle a red indecision candle appear that indicates a reversal and a reversal can be seen.
Identifying potential trend reversal using indecision HeikIn-Ashi candles
Buying opportunity
Buying signals are very important to enter the market and buying signals can be spotted easily using the HeikIn-Ashi chart or technique.
So if a market is moving sideways and consists of indecision candles that don't get the idea of a trend and then a clear bullish candle with its wick in the upward direction can be said to be a buy signal.
In the example below, you can see an indecision market that is followed by an indecision candle and then a clear bullish candle with its wick in the upward direction appears and that candle serves as a buy signal, we can enter at that point and can ride the trend and gain profit.
Buying signal using clear bullish candle in HeikIn-Ashi candles
Buying opportunity(2)
As i have already mentioned the trend reversal in the above section, we can use it as a buying opportunity.
We must wait for a downtrend to end and then the appearance of an indecision red candle following that indecision red candle an indecision green candle must appear and after that a clear bullish candle must appear to confirm the reversal, that clear bullish candle is our buy signal and buy point.
In the example below, you can see that a downtrend had ended and was followed by an indecision red candle and then a green indecision red candle that appeared telling, after that, a clear bullish candle appeared indicating a potential reversal and serving as a buying opportunity or point.
Buying signal using clear bullish candle in a trend reversal in HeikIn-Ashi candles
IS IT POSSIBLE TO TRANSACT ONLY WITH SIGNALS REICEVED USING HEIKIN-ASHI TECHNIQUE Explain the reasons for your answer
it is not possible or very risky in my own opinion to trade or transact using signals received via the Heikin-Ashi technique. The a smooth appearance of the candles and the trend I would not use the Heikin-Ashi technique alone.
Traders will always prefer to trade only when the trend or signals gotten are confirmed via more than 1 indicator so it is recommended that one should always use another indicator together with the Heikin-Ashi technique.
Indicators like RSI(Relative strength index) and MACD(Moving average convergence divergence) can be used in conjunction with the Heikin-Ashi technique because the indicators mentioned above also tell us about the strength of the trend as well as momentum, so it will be easier to trade using Heikin-Ashi technique and one of the above-mentioned indicators to reduce the risk of Loss and filter false signals in the market. We can also use Moving averages in conjunction with the Heikin-Ashi technique as they act as dynamic support and resistance for the price.
False signal
False signals occur sometimes in the market and traders get caught in those signals without confirming those signals like you can see in the example below.
After an indecision market an indecision red candle appeared and following that red indecision Candle a clear bearish candle appear with its wick down indicating a downtrend, some traders often sell their asset here thinking they're making use of the best opportunity they can, but as we can see that was a false signal, instead of a downtrend another uptrend started. So it is recommended to use any other indicators together with the HeikIn-Ashi technique.
False signal in HeikIn-Ashi chart
So, owing to the incessant volatility in the cryptocurrency markets we can't rely on only one technique or indicator whether it is HeikIn-Ashi technique or RSI.
By using a Demo account, yo then perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA.
EMA stands for the exponential moving average and it is also a technical indicator used by the traders as they act as the dynamic support and resistance and keeps track of the price.
Using EMA in conjunction with the Heikin-Ashi technique reduces the risk involved in trading.
We are using two EMA's, one of length 21 and the other one of length 55, length represents the candle and it can vary with the period. The more the period the more the lag (as mentioned) and vice versa. So it is obvious that EMA55 has a larger period and will lag behind EMA21 which has a smaller period.
Now i would demonstrate how to buy an asset Heikin-Ashi technique and EMA55 and EMA21.
BUY
(a) EMA21 and EMA55 was below the price.
(b) Waited for the price to bounce back from the EMAs that are acting as support and in my case, it happened. There was an indecision market and then a clear bullish candle appeared after a green indecision candle which gives a buy signal.
(c) Waited for the confirmation of the buy signal from the EMAs waiting for the bounce from the EMAs acting as support.
(d) At a bounce, buy from the green bullish candle.
BUYING TRX
Buy trade entry: $0.106
Take profit level: $0.107
Stop loss level: $0.105
R:R = 1
SELL
(a) MAde sure EMA21 and EMA55 was above the price.
(b) patiently waited for an indecision candle showing rejection at EMA
(c) Waited for the confirmation of the sell signal from the EMAs by the bounce at EMAs, acting as resistance.
(d) entered the sell trade at bearish candle.
SELLING TRX
Sell trade entry: $0.1057
Take profit level: $0.1047
Stop loss level: $0.1067
R:R = 1
CONCLUSION
The Heikin-Ashi technique is an amazing technique, well for someone who understands how to take advantage of the benefits that this technique is able to offer. This technique is very helpful in determining or indicating a trend and it gives a smooth appearance of trends.
Candles in the Heikin-Ashi chart are created on the basis of calculation that includes data of the current candle and some time previous candle. When comparing to the candlestick chart, the Heikin-Ashi chart is much better, clearer and dependable than the candlestick chart.
The reversal and continuation of the trends can be spotted with the help of the indecision candles, wicks and certain patterns. If one knows how to enter the trade using the Heikin-Ashi technique, one can easily make a profit.
The Heikin-Ashi technique is one that isn't without its faults and limitations it is recommended to use the Heikin-Ashi technique in combination with other indicators like RSI, MACD, ADX and EMA.
I'd personally love to thank @reddileep for amazing, informative and interesting lecture
NB: unfortunately, turns out screenshots from my phone (where I trade) have refused to upload, this is becoming a problem. Maybe the format is not supported or a bug.