The Heikin-Ashi technique can be used in conjunction with candlestick charts when trading securities to spot market trends and predict future prices. Most profits are generated when markets are trending, so predicting trends correctly is necessary. For this reason, it is useful for making candlesticks more readable and trends easier to analyze.
The Heikin-Ashi Formula
Normal candlestick charts are composed of a series of open-high-low-close (OHLC) candles set apart by a time series.
- The HEIKIN-ASHI formula is:
- Close = (Open + High + Low + Close)
- Open = (Close of Prev. Bar)+(High + Low of Prev Bar) (Max[High, Open, Close])
- Low = (Min[Low, Open and Close])+(Close)
Heikin-Ashi is constructed like a regular candlestick chart, except the formula for calculating each bar is different.
The time series is defined by the user, depending on the type of chart desired, such as daily, hourly, or five-minute intervals. The down days are represented by filled candles, while the up days is represented by empty candles.
Putting It to Use
There are five primary signals that identify trends and buying opportunities
- Hollow or green candles with no lower “shadows” indicate a strong uptrend: Let your profits ride!
- Candles with a small body surrounded by upper and lower shadows indicate a trend change: Risk-loving traders might buy or sell here, while others will wait for confirmation before going long or short
- Filled or red candles indicate a downtrend: You might want to add to your short position and exit long positions
- Fill up your Heikin-Ashi chart until there’s a change in trend
