To The Moon

Continuing my theme of Japanese Chart type articles, I will be looking at Heikin Ashi charts. A chart type I use a lot of! Its great for many reasons as you will find out..... Understanding this ancient method of candlestick charting can certainly reap dividends for your trading! Why? TRADING MISTAKES: I’ve noticed with both new and old traders alike, the propensity for them to cut out of trades far too early and regret their actions as they see the trade move in the direction they first sort to a much bigger degree. The reverse can also be said for setting stop limits and pulling them too tight and again being forced out of a potentially winning trade unnecessarily. ‘AMATEURS WANT TO BE RIGHT. PROFESSIONALS WANT TO MAKE MONEY!’ This trait is most prevalent (and understandably so) in new traders. I put this down to new traders falling into the trap that ‘Amateurs want to be right. Professionals want to make money!’ Due to inexperience they force trades to a conclusion rather than sticking to their original mental trading model strategy. AS WE START TO WIN WE BECOME MORE RISK AVERSE AND AS WE START TO LOSE WE BECOME BIGGER RISK TAKERS! Another major psychological problem is that as we start to win we become more risk averse and as we start to lose we become bigger risk takers! The old adage that you must let your profits run is very true! Of course, that is what makes trading fun and also very difficult! Pareto’s 80/20 rule is very relevant here. I believe trading is 80% psychological, using the other 20% to store your trading knowledge and skills. TRADING IS 80% PSYCHOLOGICAL Having a clearly defined trading plan and strategy would aid this process but I have noticed whilst teaching and mentoring many of my students that they simply like to tinker. They struggle with the psychological movement of the price of any given asset and get too absorbed in the now and become clouded when trying to decipher the current trend: adjusting stop losses, pulling in limit orders and making irrational decisions. So even with the best laid plans the actual trade can go horribly wrong! So you may now be asking: “What has this got to do with Japanese Candlestick charting methods?” Quite simply, I introduce traders I see having these issues to the world of Heikin Ashi candles as a method of smoothing out some of the noise that impacts their decision making processes - it makes them more 'robust' and 'disciplined' traders. Heikin Ashi candles I use quite considerably in my own trading and technical analysis. They are also a fantastic charting method for creating highly effective, automatable trading strategies, which can be adapted to many trading styles: swing, trend, scalping etc and work across all trading timeframes. So what are they and now can they be used to better your trading? What Are Heikin Ashi (HA) Charts? What is it: In simplified terms it is a modified candlestick chart, that smooths out the data to make the trends more obvious and keep you in your trades longer and hopefully for the better. “It is a strong psychological trading tool especially for those new to trading.” The other good thing with the Heikin Ashi chart over the ordinary Candlestick chart is that you don’t have to learn all those hundreds of bizarre sounding patterns. There are only a few key ones you’ll need to learn…. Heikin Ashi Candles is a method of smoothing out some of the noise / volatility that impacts the decision making processes and presents to the user a clearer visual representation of the trend. HA candles are simply a derivative of the candlestick chart Heikin Ashi translated from Japanese means Average Bar. The trend is easier to see and HA charts will help keep you in a trending trade. Also it will be easier to spot price reversals. Advantages of Heikin Ashi charting: Takes out a lot of the psychology and noise around the charts. Traders often cut out of trades far too early and regret their actions. This trait is most prevalent (and understandably so) in new traders. Try to force trades to a conclusion rather than sticking to original mental trading model strategy. Another major psychological problem is that as we start to win we become more risk averse and as we start to lose we become bigger risk takers! The old adage that you must let your profits run is very true! A lot of people struggle to deal with the psychological movement of the price – become to absorbed in the now: Heikin Ashi is here to help you! The math behind Heikin Ashi: Each HA bar as you guessed is calculated using 2 bars. The output is very similar to a traditional candlestick. Like the candlestick you are aiming to produce an Open, Close, High and low. X = current period X-1 = prior period The formula for each of these is: 1. The Heikin-Ashi Close is the average of the open, high, low and close for the current period. HA Close = (Open(X) + High(X) + Low(X) + Close(X)) / 4 2. The Heikin-Ashi Open is the average of the prior Heikin-Ashi candlestick open plus the close of the prior Heikin-Ashi candlestick. HA Open = (HA-Open(X-1) + HA-Close(X-1)) / 2 3. The Heikin-Ashi High is the maximum of: the current period's high, the current Heikin-Ashi candlestick open or the current Heikin-Ashi candlestick close. HA High = Maximum of the High(X), HA-Open(X) or HA-Close(X) 4. The Heikin-Ashi low is the minimum of: the current period's low, the current Heikin-Ashi candlestick open or the current Heikin-Ashi candlestick close. HA Low = Minimum of the Low(X), HA-OpenX) or HA-Close(X) You’re wondering how to calculate the first candlestick in your range? Simple; just take the data from the current open, high, low and close. Example: We have 2 HA candlestick bars of data on the S&P500: X= Open 2049, High 2064, Low 2049, Close 2057 X=1 Open 2044, High 2066, Low 2045, Close 2054 Therefore the current Heikin Ashi Bar Open, High, Low, Close would be: X = Open 2049, High 2064, Low 2049, Close 2057 Example Using Under Armour Inc. On A Daily Chart: Left Candlestick, Right = Heikin Ashi Look how much more ‘obvious’ the Heikin Ashi chart data is!! The only candlestick chart bars / patterns you’ll need to know using HA: What can we draw out from the HA chart that we can utilise in our trading? The HA is a lot smoother making trends easier to spot. Excellent for Trend traders. There are still traditional candlestick patterns in play on the HA chart although many are lost: Dojis and Spinning tops are very important in the HA chart and show key ‘indecision’ levels and often points of reversal Some other important things to note: Traditional classical technical Analysis patterns like Triangles, Heads & Shoulders still work on HA charts. You will notice that HA charts eradicate ‘gaps’. On HA big down bars with little or no upper shadow signify strong selling pressure On HA charts big up bars with little or no lower shadow highlight strong buying pressure. Notes On The Strength Of Trends: You will notice when a strong trend is underway that the shadows (wicks) of the candles will not be visible. When a trend becomes weak / weaker then, the shadows will start to appear. This is not necessarily a sign of a reversal just the possibility of a slowdown of the trend. HA trading works in any time frame whether it be intraday: 5min, 15min, 60min, 240min or End of Day e.g. Daily and weekly charts. HA charts also work across all assets whether they are Commodities, Equities or FX for example. It is advisable to use indicators to confirm HA trade signals e.g. Stochastics, MACD etc. The following EUR 15 minute chart from below highlights 6 possible trading strategies you could use. Again see how the Heikin Ashi candles interact in this instance with pre-set pivot lines, moving averages and trend lines! The Bounce The Continuation The Reversal The Pause The Pullback The Breakout Heikin Ashi Strategy Example: TIP: You can make Heikin Ashi even stronger and put the odds more on your side if you can combine it with other indicators. Example: Ultra Bond Futures (UB1) Patterns + Indicators (Charts: TradingView): If you'd like to learn more about Heikin Ashi charts and how to use them in your trading and investing then visit my YouTube channel for my totally free course that covers: Nearly 2hrs of content, 5 sections, 21 lectures, taking you from zero to Heikin Ashi hero!!! This is a course for all levels of ability - beginners through to the more experienced interested in learning about another unique concept from the world of Japanese technical analysis. It is relevant to many different styles of trading e.g. day, scalping, trend following, swing trading etc. It would be very useful for any trader struggling with the 'psychology' of chart trading. You will learn how to master this chart type, be able to enhance it further and be able to construct your own trading strategies across markets and timeframes: Stocks, Indices, Forex, Commodities, Crypto etc, utilise risk and trade management processes around the Heikin Ashi concept. YouTube course link (copy and paste into your browser): https://youtu.be/eUmaobhQ75w If you’d like to find out more about what I do, you can get in touch with me via: Email: info@thestophunter.co.uk Website: www.thestophunter.co.uk YouTube: thestophunter Visit my YouTube channel for loads of free educational content / courses / tips / analysis /ideas via my TIGER Intro post: THE STOP HUNTER (Links to YouTube at bottom of post) Risk Warning: This course is purely for educational purposes and should not be construed as investment advice. Always be aware that trading and investment comes with a high degree of risk - always speak to your financial adviser first before investing and trading.