Results of Range bars’ performance. Introduction and description of Heikin-Ashi chart
Today, I’ll describe Heikin-Ashi Candlesticks, applied to crypto analysis. I’ll deal with the constructing the chart and its signals.
But first, I’d like to analyze the results of the forecast, offered in my last training post, based on Range bars.
(BTCUSD price forecast dated 30.09.2018)
(BTCUSD real price as of 06.10.2018)
As it is clear from BTCUSD price chart above, the support level were indicated correctly and BTC price is moving inside the triangle, though there have been false breakouts of each leg.
Summing up the outcomes, I can suggest it is relevant to apply usual graphic patterns to the Range bars and to use the chart in combination with MACD indicators. Besides, I must note that moving averages are too late, and so, they are hardly efficient.
I’ll analyze the total performance of all indicators, describes, a little later; and now I’m going describe Heikin-Ashi candlesticks.
The chart is a kind of a compromise between Japanese candlesticks and other charts that filter off market noise, like Renko, Kagi, Tic-Tac-Toe, Line break and Range bars.
On the one hand, Heikin-Ashi really averages the price movements, facilitating to spot the trend, and somehow filters off random signals; on the other hand the candlesticks still take time into consideration and the series of candles are set apart by a time series.
To make it clearer, let’s see how the Heikin-Ashi chart is constructed
How Heikin-Ashi chart is constructed
To compare, I present two kinds of candlesticks in the chart above. Japanese candlesticks are on the left; and Heikin-Ashi candlesticks are on the right. At first sight they look alike; but if you look closer, there are really big differences between them.
They look similar because a Heikin-Ashi bar is constructed like a regular candlestick. It also consists of higher and lower shadows and the candle’s body, the distance between open and close levels. The chart differs from Japanese candlestick chart in the following way:
- Open level (see orange arrow) is the midpoint of the previous bar’ open and close price (Close+Open/2);
- Close level (blue arrow) is the average price of the current bar, its Open, High, Low, Close (Min+Max+Open+Close/4);
- High of the higher shadow (green arrow). It is the highest value of the current bar’s Open, Close, or High.
- Low of the lower shadow (red arrow) is the lowest value of the current bar’s Low, Open or Close.
This information can be found in numerous sources on the Internet, but few try ti make a conclusion. As, in facts, these data alone mean nothing.
However, there is something to consider:
- Conclusion one: as Open level is based on the values of the previous bar, and all the other parts of the bar include this level into the final values, the bar will be late in indicating the changes and display the results, considering the changes of the previous bar. That is, when the trend reverses, and the next Japanese bar indicates a reversal pattern, Heikin-Ashi candlestick won’t indicate it, being affected by the bar of the previous trend.
- The second conclusion results from the first one. As the Heikin-Ashi candles are drawn in series, the signal of the first bar must be proved by the next one; otherwise there is a strong risk of false signal. It means that there will be a time lag for already two bars.
- Conclusion three: Japanese candlesticks are popular because you can assess the market sentiment by each bar. In fact, a Japanese candlestick is a whole market profile during a certain period of time, indicating the fight between bulls and bears; it is always closed, indicating who the winner is, seller, buyer or a draw.
A Heikin-Ashi candlestick, because of the averaged values, obscures the situation, removes the clear support and resistance levels, real sellers’ and buyers’ victories and losses, highs and lows.
Therefore, before I go on, I’ll sum up and admit that Heikin-Ashi candlesticks are a lagging indicator that can’t provide exact information on the key levels, the support and resistance levels, profit targets and stop loss levels.
This fact facilitates reading trading signals. A wide range of the Japanese candlestick patterns of turns into just three simple questions that allow you to define the Heikin-Ashi signal and identify the trend:
- Is the candle’s body complete?
- What colour is the candle?
- Is there a shadow in the opposite direction?
To analyze the Heikin-Ashi bars, you need to answer these questions in the given order, and you’ll always know what to do.
Let’s study it in more detail.
Question 1. Has the candle’s body been complete?
If the answer is “No”, and the current bar has no body or a very small one, there is no trend, or it will end soon. That is, you are in trades, or you’re going to enter, it is a kind of amber light, meaning that the trend is going to reverse, or a new one may start in future.
Question two. What colour is the candle?
If the first question has been answered positively, the next step is to see the bar’s colour.
If the bar’s Close is below its Open, the bar will be red (filled) and indicate a downtrend, so you should exit long positions.
If the Close is higher than the Open, the bar will be green (hollow), you might want to add to your long positions exit short positions.
Question three. Is there a shadow in the opposite direction?
If a rising hollow or green bar has a lower shadow, the bullish trend is weak.
A filled or red declining bar has a higher shadow indicates a weak bearish trend.
Therefore, if there is no shadow in the opposite direction, the trend is strong and there is a strong corresponding signal to buy or sell, depending on the colour.
Answering these three questions, you have three types of bars.
To make it clearer, I numbered each type of bars in the chart above. So, if the first question is answered negatively, the bar is of type number 1. Next, answering the second and the third questions, you see that the bar can be of the second type, that is, having two shadows; or of type number 3, having only one shadow. As it is clear from the chart above, a strong entry signals is only a bar with large body and one shadow. The bars of the first and the second types are only warning signals, meaning that the trend is not so strong and clear and may reverse.
However, a bar of the third type seldom appears at the trend beginning; and so, if you enter, based on such signal, you may miss most of the trend movement, or you may even enter at its extreme points. Therefore, you need additional indicators, which will provide signals for the bars of the first and the second types. In addition, this indicator must filter off trading flat or sideways movements. I marked flat with red circles in the chart above. You see that there are many bars of types 1 and 2 in the zone. If you entered in these zones, you would obviously lose, as there would be rather many random signals.
I’ll describe how to solve these problems in my next educational post. I’ll finish the description of Heikin-Ashi candles and sum up the performance of the different indicators in my big experiment with unusual price charts
I wish you good luck and good profits!
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Price chart of BTCUSD in real time mode
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