Compositedge E-learning- Heikin-Ashi charts

If you’re familiar with candlestick charting, at the outlook you may find Heikin-Ashi charts visually indistinguishable from candlestick charts. That’s because they’re an offshoot of the Japanese charts with a few modifications resulting in noise filtration in the latter, thereby assisting in capturing the trend of a security in a much more robust fashion and giving them a smoother look. The basic setup of the two charts such as up-down bars, time frames, colouring method etc. are very similar, however, there are a few differences in the way the two charts are plotted and analysed.

Key differences between Heikin-Ashi and candlestick charts-

1. In candlestick charts, the open, high, low, closing prices for each candle are pretty straightforward and easy to follow since they’re completely based on the time frame of the chart. However, when it comes to Heikin-Ashi charts, OHLC prices are defined by pre-set formulas which are highlighted below

  • Opening price: Average of the sum of the previous bar’s opening and closing prices
    HA Open= Open + Close / 2
  • High price: Highest value of Open, High, Close
    HA High= Max of Open, High or Close
  • Low price: Lowest value of Open, Low, Close
    HA Low= Min of Open, Low or Close
  • Closing price: Average of the sum of the bar’s open, high, low, last prices for the current period.
    HA Close= Open + High + Low + Last / 4

2. In candlestick charts, each candle is independent from the other; in the sense they have no relation to the previous or the next candle whereas in the case of Heikin-Ashi charts, the current candle is derived from the prices of the previous candle and the next candle is plotted from information obtained from the previous candle.
3. Candlestick charts generally comprise of two or more candles that form the basis for trend reversals. However the same method is not used in the analysis of Heikin-Ashi charts. Rather, they are used to identify trends and classic reversal patterns.
4. Heikin-Ashi charts are typically devoid of gaps since data from the previous bar is used in calculating the value of the current bar, leading to smoothening of prices.

Analysing Heikin-Ashi charts-
Analysing HA charts is very similar to some of the other classic charts such as bars and candlesticks. You can employ trendlines, retracements and other indicators to monitor breakouts and reversals just as in most of the other chart types. In case you find a doji or spinning tops, place your supports/ resistances in the direction of the ongoing trend to confirm breakouts and trend reversals.
For enhanced analysis, plot the Heikin-Ashi and the candlestick charts on the same panel or side by side and analyse the price movements in both.

Weekly Heikin-Ashi chart of Reliance on Protrader


Source: Compositedge- Protrader terminal

Pros and cons of Heikin-Ashi charts-
Beginning with the positives,

  • A typical candlestick chart is a recurring combination of bull/ bear candles, sometimes making them difficult to read. On the contrary, Heikin-Ashi charts have more identical candles grouped together making it easier to identify price trends.
  • Price information used in defining these charts are calculated over two periods, smoothening the chart and making price trends, chart patterns and reversals easier to detect.
  • HA charts reduce false signals during volatile markets, often associated with candlesticks and provide one valid entry point. It also eliminates the need to wait for two or more candles to confirm a reversal.
  • On the flip side, since HA charts are dependent on price information from the previous bar, it could lead to a delay in trend confirmation, thereby mostly rendering them unsuitable for quick entries and exits.

 

Conclusion-
HA is a versatile charting tool that filters noise, allows you to identify chart patterns, plot trendlines, define supports and resistances and use retracements and chart studies much like candlestick charts.
Having said that, no chart pattern is foolproof and not all signals are 100 percent perfect. Always have your stops in place in the event of adverse price movements.

 

 

Compositedge, incorporated in 1995, is a leading discount broker and provider of algo trading solutions for retail customers in India. Headquartered in Bangalore, we provide the internationally acclaimed Protrader platform which comprises of charts, scalper, matrix, grid, time & sales, market-depth and options master in addition to the state of the art algo trading platform. We combine discount broking and algo trading solutions to ensure all our retail clients experience the finest trading amenities at affordable costs.