Heikin-Ashi Trading Strategy - Steemit Crypto Academy | S4W2 | Homework Post for @reddileep

Question 1 - Define Heikin-Ashi Technique in your own words

The Heikin-Ashi is basically a type of chart pattern that is very similar to the regular candlesticks but very different in how they work. The Heikin-Ashi technique is basically a type of candlestick on a chart that works by averaging price data to generate candlesticks. The colour of the Heikin-Ashi shows the direction of the price movement. The main of the Heikin-Ashi technique is that it generates candlesticks that filters out noise due to high price volatility. This is done by averaging out the price moves.

The Heikin-Ashi technique was created all the way back in the 1700s by Munehisa Homma. While it is very similar to the regular candlesticks based on their characteristics, it is very different in how it works and how the candlesticks are generated. The Heikin-Ashi technique makes use of specific calculation to generate its candlesticks and it is based on the averages of two-period. This helps the Heikin-Ashi filter out noise in the market by creating a smooth chart that helps to show the direction the market is moving and also show trend direction.

Heikin-Ashi Chart on Tradingview

Question 2 - Differentiate between the traditional candlestick chart and the Heikin-Ashi chart

Traditional candlestick on AAVE/USDT chart

Heikin-Ashi chart on AAVE/USDT chart

• The traditional candlesticks changes colours from green and red more frequently due on the up and down price movements. While the Heikin-Ashi chart colors changes is smoother and successive.

• In the traditional candlestick, the can be presence of noise due to price volatility. While the Heikin-Ashi does not have the noise because it averages out the price action.

• The traditional candlestick chart uses only the open, high, low, and close to generate the candlesticks chart. While the Heikin-Ashi chart uses mathematical formula and calculations to generate the candlesticks chart.

• On the traditional candlesticks chart, candles can still be alternating colours from red to green in an uptrend direction. While on the Heikin-Ashi chart, candles are more likely to remain in the green colour in an uptrend direction.

• Traditional candlestick chart uses the exact market prices. While the Heikin-Ashi chart uses average prices which may not match the market prices.

• In the traditional candlestick chart, it is very difficult to get entry and exit signals. While the Heikin-Ashi chart can show good entry and exit signals.

• The traditional candlestick chart shows price gaps. While the Heikin-Ashi chart hides price gaps.

• The traditional candlestick chart usually have a new candlestick that opens after the previous close. While the Heikin-Ashi chart usually have a new candlestick that opens from the center of the prior candle.

• On the traditional candlesticks, directional moves are rougher. While the Heikin-Ashi chart smoothens out the directional moves.

• On the traditional candlesticks, it is more difficult to interpret the chart due to the roughness and presence of noise. While on the Heikin-Ashi chart, it is a lot easier to interpret the chart.

Question 3 - Explain the Heikin-Ashi Formula

When it comes to the Heikin-Ashi formula calculation, one thing to note is that each of the Heikin-Ashi candlesticks includes both the price action in the current time period and the price information in the past time period. On the Heikin-Ashi, there are four parts;

Open of the candlesticks
Close of the candlesticks
High of the candlesticks
Low of the candlesticks

For Open

((OP of previous candlestick) + (CP of previous candlestick)) / 2

Where;
OP = open price
CP = close price

This means that for the “Open” of the Heikin Ashi candlestick, it is equal to the average value of the previous candlestick. From the formula, the average price is gotten by adding the open price of the previous candlestick and the closing price of the previous candlestick and diving the result by 2 to get the average price of the previous candlestick.

For Close

(O(open) + H(high) + L(low) + C(close)) / 4

Where;
O = open
H = high
L = low
C = close

This means that for the “Close” of the Heikin Ashi candlestick, it is equal to the average value of the open, high, low, close of the current candlestick. From the formula, the average price is gotten by adding the open price, high price, low price and close price of the current candlestick and the result is divided by 4 to get the average price of the current candlestick.

For High

The highest price reached
This is basically the highest price which can be open or close that the current candlestick reached of the period

For Low

Lowest price reached
This is basically the lowest price which can be open or close that the current candlestick reached of the period

Question 4 - Graphically explain trends and buying opportunities through Heikin-Ashi Candles

Trends on the Heikin-Ashi chart

On the Heikin-Ashi chart, it is easier to identify trends because of the smoothness and consistency of the candlesticks and also the elimination of noise that is caused as a result of frequent price volatility. The Heikin-Ashi generates a smoother and more consistent candlesticks by using the average price values. Because the Heikin-Ashi chart eliminates noise, the colours of the candlesticks is smoother and more consistent since the candlesticks will remain green in an uptrend regardless of price rise and fall. Same with a downtrend, the Heikin-Ashi candlesticks will remain red in a downtrend regardless of price rise and fall. The Heikin-Ashi candlesticks with no lower shadow or wick indicates a strong uptrend move. In contrast, the Heikin-Ashi candlesticks with no upper shadow or wick indicates a strong downtrend move.

AAVE/USDT chart

AAVE/USDT Chart

On the AAVE/USDT chart above, In the uptrend, we can see that the Heikin-Ashi candlesticks do not have a lower shadow or wick which is an indication that the market is in an uptrend. There are consecutive green candlesticks that show the uptrend direction. Also, in the downtrend, we can see that the Heikin-Ashi candlesticks do not have an upper shadow or wick which is an indication that the market is in a downtrend. There are consecutive red candlesticks that show the downtrend direction

Buying opportunity through the Heikin-Ashi chart

The Heikin-Ashi chart is very powerful because it can also show buying signals. When using the Heikin-Ashi chart for buying opportunities, it is a good idea to look out for candlesticks that have small bodies or doji candlesticks at the bottom of a downtrend or consecutive red candles. The small body candlesticks could mean that the selling pressure is slowing down and the sellers are about to get suppressed by the buyers which could possibly mean a trend reversal is about to occur. When these small body or doji candlesticks are spotted on the chart below the consecutive red candlesticks, it can be a good entry point.

AAVE/USDT Chart

Question 5 - Is it possible to transact only with signals received using the Heikin-Ashi Technique?

In my opinion, it is very possible to use only the signals from the Heikin-Ashi Technique to trade. However, it is not advisable to rely on one technique. It is a good idea to combine it with technical indicators like MACD to get better confirmation before making any trading decisions. Using the Heikin-Ashi chart alongside the MACD indicator, it is possible to confirm the direction the market is going. When there are large body candlesticks at the end of consecutive red candlesticks, and the MACD line crosses above the signal line, it is a confirmation of an upward price movement.

The Heikin-Ashi chart with the MACD indicator on MATIC/USDT chart

Question 6 - By using a Demo account, perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA

Buy – MATIC/USDT

Using the Heikin-Ashi and the 55 EMA+21 EMA on the MATIC/USDT chart 4-hour timeframe, the price was about the cross above the 55 EMA+21 EMA. The large body candles that formed after a small body candlestick was a strong indication that the upward movement would continue. This for me was a good entry point to place a buy. I entered the market at 1.383 USDT and using the 1:2 risk-reward, I set my take profit at 1.484 USDT and my stoploss at 1.334 USDT.

Sell – BNB/USDT

Using the Heikin-Ashi and the 55 EMA+21 EMA on the BNB/USDT chart 4-hour timeframe, the price was below the 55 EMA+21 EMA lines. Even though there were large body candles that formed after a small body candlestick, because the price was still under the 55 EMA+21 EMA lines, I decided to take a short position because there is still a possibility that the price could reverse downwards. For me, I placed a sell. I entered the market at 415.7 USDT and using the 1:2 risk-reward, I set my take profit at 401.1 USDT and my stoploss at 423.6 USDT.

Conclusion

The Heikin-Ashi chart has proven to be a very powerful technique and very beneficial when it comes to trading. The colour of the Heikin-Ashi candlesticks is great for showing the direction of a trend and also show when there is about to be a trend reversal just by the candlesticks alone. This is why it is very useful in trading. Nonetheless, regardless of how great the Heikin-Ashi is, it is always important to combine it with technical indicators like MACD or the 55 EMA + 21 EMA so as to make the best trading decision.