Heikin-Ashi candles are a different way to calculate time-based movements of price. They help to indicate clear trends and continuity while also clearing up trends, whether up or down.
Regular candles are not normalized based on an average so sometimes it is hard to find the trend. Heikin-Ashi candles help to solve this issue and give clearer information as to when there is a downtrend versus an uptrend. This indicator is useful for swing trading (multi-week to multi-month) and longer term plays.
Could be used for day trading and shorter term though with day trading and high-frequency trading there is more noise which means that it is riskier to execute.
Most people are already familiar with regular candles, which simply looks at the price after the period ended (body), the lowest price (lower wick), and highest price (upper wick), and the close of that period (body). As we will see though, Heikin-Ashi normalizes the candle sticks to make information easier to understand.
Heikin-Ashi Candle Calculation
Heikin-Ashi candles are an indicator that calculate candles differently than the regular candle patterns we are used to seeing. It normalizes the candles by averaging prior history in combination with the current history of the candle that was printed.
Because Heikin-Ashi candles need all the information before a candle can be printed this is a lagging indicator. Heikin-Ashi candles are calculated in the following way:
➢ Close = open of current period + high of period + low of period + close of the current period / 4
➢ Open = open of prior period + close of prior period / 2
Also calculates average
➢ High = Max (high of open, open of current period, close of current period) (max = highest price)
➢ Low = minimum (low of open, low of current, close of current) (low = lowest price)
As we see there is no current price change and only candles. This means that it is a lagging indicator. A candle will only be printed after the period has ended to show general trends and shifts. Generally an uptrend is prevalent when there is a combination of large candle bodies, long upper wicks, and no lower wicks. On the other hand, downtrends are characterized by large candle bodies, long lower wicks, and no upper wicks.
Reduction in momentum = wicks to the reverse of the candle trend
Generally, a reduction in momentum signals a potential reversal. Inside bars can help to determine when this happens. They occur when a bar is completely within the range of a previous bar. This type of move, coupled with wicks of the opposite end of the trend, could signal a momentum shift. This means that if an inside bar was printed after a bullish run, this signals a potentially bearish move.
There are two types, bullish and bearish inside bars.
➢ Bullish = both candles are green
➢ Bearish both candles = red
➢ Inside bars occur after substantial moves.
Before jumping to conclusions and selling or buying at every inside bar, it is important to note support and resistance levels. That is, times when price historically “bounced” off of. These types of trends can be identified by simply finding straight lines that have historical data to signify whether or not the price went lower or higher based on prior history.
The more times resistance or support is tested, the more historical data there is to support whether or not these price levels are worth keeping an eye on. Since a straight line is drawn by at least two vertices, there must be at least that many historical data points to signify a trend. This trend however is very weak. The more points the more historical data, the more likely an event will occur if past performance indicates future results (which most of the time it doesn’t).
The more information the more chances of success. This means that it is important to look at information that is not correlated with a particular indicator. Because Heikin-Ashi uses averages, an indicator like the smooth moving average might not be the best counter-indicator. That said, using indicators that support each other could be a good idea depending on what the person is looking for and their strategy. It is important to keep in mind though because confirmation-bias is an issue, so make sure to plan accordingly.
Using Heikin-Ashi candles in combination with moving averages is a viable strategy and can help to support information that Heikin-Ashi candles are giving. For example, if a moving average is going down, then the price is logically also going down and vice versa.
At the same time, Heikin-Ashi candles could be following along these moving averages. Typically, it is also possible to identify support and resistance levels using moving averages to find buying and selling opportunities or momentum shifts. In the case of momentum shifts this would mean that the price goes from below the moving average to above the moving average, signaling an uptrend.
As we have covered previously, the moving averages with the most historical data for bitcoin are the 8 week moving average, the 21 week moving average expontential, the 50 week smooth moving average, the 100 week, and the 200 week. If we were to look at the Heikin-Ashi candle chart now, coupled with the MACD we could very well be seeing a momentum shift. As we can see, the blue line of the MACD is starting to converge with the yellow line and the Heikin-Ashi candles are reversing from red to green.
As we have seen, Heikin-Ashi candles is a technical analysis indicator that helps to normalize candles which could help to identify uptrends and downtrends. This same graph looks very different from the perspective of normal candles. If the trend is indeed our friend when deciding to buy and sell, Heikin-Ashi candles could be a worthwhile indicator to add to a trading strategy.
Once a strategy is made though it is of course important to stick with it and not change it. Changing strategies and trying to fix what isn’t broken is a good way to get wrecke