Heikin Ashi • We now turn our attention to the world of Japanese charting and take a look at our first chart type that we need to know – Heikin Ashi (HA)! • We will build Heikin Ashi up to include other indicators to create one of the 4 key set ups that I call Ichimoku Heikin Ashi (IHA)… • 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…. 1 Summary of 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! 2 • 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. 3 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) 4 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 5 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!! 6 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? 1. The HA is a lot smoother making trends easier to spot. Excellent for Trend traders. 2. 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 7 Some other important things to note: 1. Traditional classical technical Analysis patterns like Triangles, Heads & Shoulders still work on HA charts. 2. You will notice that HA charts eradicate ‘gaps’. 3. On HA big down bars with little or no upper shadow signify strong selling pressure 4. On HA charts big up bars with little or no lower shadow highlight strong buying pressure. 8 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. 9 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 08/07/15 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 10 Heikin Ashi Strategy Example: 11 STA methods at THE STOP HUNTER: • Before we move on to the other 3 types of chart, just a brief overview, so you can get your head around why we use Heikin Ashi in combination with other indicators i.e. the Heikin Ashi / IHA set up and why we look to use Renko, Kagi and Line Break charts. • Heikin Ashi and the IHA set up method is rarely used (maybe unique in its combination of tools) – it is great for trend following, continuations and reversals. The next 3 types of charts (Line Break, Kagi, Renko) is what really make THE STOP HUNTER methodology different from the rest. • It is a blend of East meets West. The best of both worlds in our opinion! Again, a rarely used / known combination. Todays technologies allow us to build these charts. • Why do we adopt this approach to TA? Its simple to analyse, clear, takes away the noise, removes time (just deals with price), aids trading psychology: easier to make decisions, creates discipline. 12 What’s the difference between the next three chart types: Renko, Kagi and Line Break? They all serve a different purpose. Whether that be spotting a trend, a reversal point an entry or an exit, they all individually give us something that the others don’t, so in combination and together with a particular strategy and market they can make very powerful analysis and trading tools. Renko: very good for Breakouts / trend Following / Reversals Line Break: very good for Reversals (and some Trend Trading) Kagi: very good for Breakouts / trend Following / Reversals To see how different the charts will look like, I’ve laid out a very basic example example…. 13 Example of what the basic Japanese charts will look like using the same hypothetical price data: 14 What would: Line Break, Kagi and Renko charts look like based on the same Stock XYZ Plc data? Line Break Chart: Kagi Chart: Renko Chart: 15 Now it is time to move onto Renko Charts…… 16.