Heikin-Ashi Technique
Candlefocus EditorIn essence, Heikin-Ashi combines trading candle shadows with averages of each period’s open and close to create a modified candle stick. What this means is that the Heikin-Ashi candlesticks represent the average prices of open, close, high and low. This makes the chart easier to read, as it will show only the true trends rather than the intraday price volatility. It puts more emphasis on the overall direction, rather than on the price range of a single day.
The Heikin-Ashi technique also makes it easier to identify trends and reversals. A Heikin-Ashi chart pattern consists of long down candles with little upper shadows and long up candles with little or no lower shadows. These patterns generally indicate strong buying pressure when the long up candles are present, and strong selling pressure when the long down candles occur.
However, since Heikin-Ashi averages the values of open and close, traders should use caution as some of the price data is omitted. This could affect risk management since some information is lost. Therefore, traders should use Heikin-Ashi in combination with other indicators such as Fibonnaci Retracements and moving averages to confirm reversals and signals.
In conclusion, the Heikin-Ashi technique is becoming increasingly popular with traders and technical analysts. It is an offshoot of the traditional Japanese Candlestick and provides a better view of market trends as it eliminates some of the market noise. This makes it easier to identify potential reversals and trends, although traders should use caution as some of the price data is lost through averaging. Combining the Heikin-Ashi technique with other indicators should provide traders with a better risk management system.