[Heikin-Ashi Trading Strategy] Steemit Crypto Academy | S4W2 | Homework post for @reddileep
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Define Heikin-Ashi Technique in your own words.
Candlesticks are very popular and a common tool used by traders to understand and monitor price movements of an asset in a chart. Unlike the traditional candlesticks, the Heikin-Ashi candelsticks provides traders with a more accurate price behavior and movement analysis as it considers the previous candlestick in determining the next candlestick. Heikin-Ashi is a Japanese word meaning average bar, and indeed the averages of the previous candles based on two periods to compute the next candle.
The Heikin-Ashi chart looks like a regular traditional chart with green candles indicating a bullish trend and a red candlestick, a bearish trend but like earlier said some computations are done to determine the candlesticks unlike in a traditional candelstick chart. The Heikin-Ashi chart tends to be smoother than the regular traditional chart because averages are used to compute the next candlestick so a slight change in price or trend may not necessarily change the trend like in the case of a traditional chart.
Below is an example of a Heikin-Ashi chart
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Make your own research and differentiate between the traditional candlestick chart and the Heikin-Ashi chart. (Screenshots required from both chart patterns)
Now let's discuss what differentiates the Heikin-Ashi chart from the traditional candlestick chart.
Below is a screenshot of both charts from Trading View.
Traditional candlestick chart
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Heikin-Ashi candlestick chart
A look at both charts at a first glance looks like the same thing but when you look for details you realize there are differences in the two.
The table below highlights the differences between the two.
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Explain the Heikin-Ashi Formula. (In addition to simply stating the formula, you should provide a clear explanation about the calculation)
Now, lets look at how these averages are computed. All four components of the candlestick (open, close, high and low) have their own formula.
To calculate the opening price, you add the opening price of the previous candlestick to its closing price and divide the result by 2.
Formula = (opening price of previous candle + closing price of previos candle)/2.
Illustration
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In the STEEM/USDT chart above the opening price of the highlighted candle stick is which was obtained by adding the opening and closing prices of the previous candlesticks which were 0.6338 and 0.6452 respectively and divide by 2.
Opening price = (0.6338+0.6452)/2
= 0.639
The result is $0.639 which then becomes the opening price of the candlestick.
Here, the opening, closing, high and low prices of the previous candlestick are added and divided by 4.
Formula = (opening price + closing price + high price + low price) / 4
Illustration
If the open price of the previous candle is $20; closing price, $27; high, $30; and low, 18. To find the Closing price of the next candle, this is what we do
Closing price = (open price of previous candle + close price of previous candle +high price of previous candle + low price of previous candle) / 4
= (20+27+30+18) / 4
= (95)/4
= $ 23.75
For the high price of the candle, the maximum price amongst the high, open or close price points of the current candle is chosen. That is simple.
Illustration
If the open price is $20; closing price, $24 and the high price $27, we simply choose the price $27 to be the high price because it is the highest value amongst the three prices.
For the low price of the candle, we simply choose the minimum price amongst the low, open or close price points of the current candle.
Illustration
If the open price is $20; closing price, $24 and the low price $16, we simply choose the price $16 to be the low price because it is the lowest value amongst the three prices.
Graphically explain trends and buying opportunities through Heikin-Ashi Candles. (Screenshots required)
Using the Heikin-Ashi candle chart, trends can be easily spotted. Candles with shadows or wicks above their body indicates an uptrend and the candles are usually green whereas candles with wicks below the body indicates a downtrend and the candles are usually red.
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With the Heikin-Ashi candle chart, the candles do not necessarily respond to slight price changes like it is with the traditional candle chart. The trend only changes when the price change is very significant and continues in that line for a significant period.
Using the Heikin-Ashi candle chart to spot buying opportunities in the market
Like we already know, a long position or buy position is chosen when the asset is entering a bullish trend. On the Heikin-Ashi candle chart, when the market moves indecisively and a clear bullish candlestisk follows, it sends a buy signal to traders. This is illustrated in the chart below.
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The accuracy of this strategy can be further improved by employing the Exponential Moving Average (EMA) using 55-EMA and 21-EMA. There is a buy opportunity in the market when the market is above the 50-EMA and 21-EMA and a sell opportunity when the market is below the 50-EMA and 21-EMA.
Below is an illustration of a buy trading opportunity using the Heikin-Ashi candle chart and the EMA strategy.
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Is it possible to transact only with signals received using the Heikin-Ashi Technique? Explain the reasons for your answer.
It is a very risky venture to enter trade after picking signals from a single indicator. This is because no indicator can be 100% accurate and other indicators should accompany the Heikin-Ashi indicator to confirm the signals the indicator gives to the trader. Moreover, the prices we see in the Heikin-Ashi candle chart are not the actual price of the asset remember they are averages so to get better price information, once we identify the trend we might consider switching to the traditional candle chart and employ some other good indicators before entering trade.
In the nutshell, it is almost impossible to trade using signals from only the Heikin-Ashi indicator and traders who do so do that at their own risk.
By using a Demo account, perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA.
Now lets do some real trade using the knowledge we have gathered from this lesson. This part of the work will be done using TradingView and Paper Trading.
Using the Heikin-Ashi Indicator and 55-EMA and 21-EMA to enter a sell trade
Below is BTC/USDT chart from TradingView.
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After spotting the indecisive candle and a bearish candlestick following and starting the bearish trend, the firt sell signal is seen. When the EMA strategy is employed too, we see the market fall below the 55-EMA and 21-EMA indicator which validates the sell signal earlier seen. Having see this, I enter a sell trade as seen below.
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Using the Heikin-Ashi Indicator and 55-EMA and 21-EMA to enter a buy trade
Below is ETH/USDT chart from TradingView.
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After spotting the indecisive candle and a bullish candlestick following and starting the bullish trend, the firt buy signal is seen. When the EMA strategy is employed too, we see the market move above the 55-EMA and 21-EMA indicator which validates the buy signal earlier seen. Having see this, I place the buy order as seen below.
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Conclusion
The Heikin-Ashi candle chart is a very useful tool that traders can use to make informed investment decisions though it should be accompanied with other good indicators. Unlike the traditional candlestick chart, it uses a computed average of prices of two periods making the chart smoother and reduces false signals.
It also makes it easy to identify trends in the market too.
Thanks for reading and hope this helped. Big credits to @reddileep for this lecture.
Regards
@kayduke