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Hello everyone. This post is my submission to Professor @reddileep's lecture homework on Heikin-Ashi trading strategy. The assignment was given as below:
> 1- Define Heikin-Ashi Technique in your own words.
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> 2- Make your own research and differentiate between the traditional candlestick chart and the Heikin-Ashi chart. (Screenshots required from both chart patterns)
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> 3- Explain the Heikin-Ashi Formula. (In addition to simply stating the formula, you should provide a clear explanation about the calculation)
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> 4- Graphically explain trends and buying opportunities through Heikin-Ashi Candles. (Screenshots required)
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> 5- Is it possible to transact only with signals received using the Heikin-Ashi Technique? Explain the reasons for your answer.
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> 6- By using a Demo account, perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA.
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## Define Heikin-Ashi Technique in your own words.
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<center><sub>Screenshot of Hekin-Ashin chart of TRXUSDT (taken from Tradingview)</sub></center>
Formed in the 1700 time by Homma Munehisa, the Heikin-Ash technique has become one of the common trading tools for modern-day traders. In Japanese, “Heikin” stands for “ mean or average”, and Heikin-Ashi, accordingly, is a trading tool that computes the average of the price points of assets to create a noise-free chart which makes it simpler for traders to recognize trends or directions of the asset’s price on the market. This in turn assists traders to assess the future direction of the price with a decent level of accuracy and secure profits or avoid damaging losses.
Heikin-Ashi, as a technical tool for traders, employs candlestick charts with varied colors to signal the performance and direction of the price points within a select window of time. The candlesticks for this particular technique are dissimilar to those of the conventional candlestick charts in the sense that the computations are based on averages of previous price points of the asset. As a result, the Heikin-Ashi technique presents a graphically smooth chart.
The sleekness of the candlestick charts in the Heikin-Ashi technique helps traders to recognize the incidence of reversals and position themselves to capitalize on the market trend. The incidence of false signals in trading is abated with the usage of this technique. Also, due to its calculation based on averages, the Heikin-Ashi technique does not show price point gaps on the market.
Furthermore, the absence of the definite closing and opening price with regards to the Heikin-Ashi technique means that traders who resort to it will not be able to know the actual respective prices for these areas unless the traders switch back to the traditional candlestick chart. This demerit is the result of the unique calculation that the Heikin-Ashi technique is established upon.
Additionally, the Heikin-Ashi technique can be used with other technical trading tools like the Exponential moving average, Simple moving average, and many others. This helps improve its overall accuracy.
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## Make your own research and differentiate between the traditional candlestick chart and the Heikin-Ashi chart.
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<center><sub>Screenshot of traditional chart of BTCUSDT (taken from Tradingview)</sub></center>
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<center><sub>Screenshot of Hekin-Ashin chart of BTCUSDT (taken from Tradingview)</sub></center>
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The Heikin-Ashi technique may share some similarities with the traditional candlesticks, such as the possession of properties like the Low, Opening price, High, Closing price features of the candlesticks as well as their ability to be used successfully with other indicators. However, there are pronounced distinctions between the two forms. The table below highlights some of the differences between the Heikin-Ashi chart and the Traditional Candle charts.
Traditional Candlestick Chart | Heikin-Ash Candlestick Chart
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This traditional chart displays the definite opening and closing price of the asset with each candlestick | This Heikin-Ashi chart does not display the exact open and close price. Its open and close are based on average calculations of previous price points.
There is the existence of gaps in the price of the asset | Since computations are based on averages, the gap in price points cannot be observed
There is insignificant lagging when it comes to the display of price points | Since this technique needs older data to perform computation, there is a significant lag.
There is considerable observed noise on the market | Noise on the market are filtered out by this technique
Identifying trends can be cumbersome with the traditional technique | It is fairly easy to determine trends on the market with this technique
A significant number of false signals are generated with the traditional technique | The number of false signals generated reduce with the usage of the Heikin-Ashi technique.
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## Explain the Heikin-Ashi Formula.
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As mentioned earlier, the Heikin-Ashi technique uses averages to calculate its data. So in this section, I shall indicate the formula for the various data types and put the formula into action with hypothetical scenarios.
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#### Open
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* To calculate the <b>Open</b> point for a new candlestick concerning the selected time interval, the mean value of the close and open values of the former candlestick is used. Hence the formula for the Open of a Heikin-Ashi technique is
<code>Open = ( Open of former candlestick + Close of former candlestick) / 2</code>
Let consider the instance where the previous open and close of an asset's candlestick on a Heikin-Ashi chart are $30000 and $40000 respectively. The open of the new candlestick with regards to the designated time interval will be the average of these two price points.
Open = (30000 + 40000) / 2
Therefore, the value for the Open of the new candle will be $35000
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#### Close
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* To calculate the <b>Close</b> point for a new candlestick concerning the selected time interval, the mean value of the close and open values of the former candlestick as well as the high and low of the current asset's candlestick used. Hence the formula for the Close of a Heikin-Ashi technique is
<code>Close = ( Open of former candlestick + Close of former candlestick + High of the current candlestick + Low of the current candlestick) / 4</code>
In the hypothetical situation where the Open and the Close of the previous Heikin-Ashi candlesticks are $20 and $15 respectively, and the High and Low of the current candlestick are $22 and $16 respectively, the close of the current Heikin-Ashi candlestick will be mean of these prices points.
Hence Close = (20 + 15 + 22 + 16 ) / 4
Therefore, the value for the Close of the current candle will be $18.25
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#### High
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The calculation of the <b>High</b> is relatively simple. The largest value among the High, Open, and Close of the current candlestick with regards to the selected time interval is selected as the High. Its formula is as below:
<code>High = Maximum ( High of current candle , Open of current candle, Close of current candle) </code>
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#### Low
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The calculation of the <b>Low</b> is simple as that of the High. The least value among the Low, Open, and Close of the current candlestick with regards to the selected time interval is selected as the Low. Its formula is as below:
<code>Low = Minimum ( Low of current candle , Open of current candle, Close of current candle) </code>
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## Graphically explain trends and buying opportunities through Heikin-Ashi Candles
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<center><sub>Screenshot of Hekin-Ashin chart of BTCUSDT (taken from Tradingview)</sub></center>
Heikin-Ashi technique is predominantly utilized for the identification of trends. Since it eliminates noise, it becomes easier for traders to notice trends. There are two main trends on the market: the bullish trend and the bearish trend. The Bullish trend is an indication that the market is dominated by buyers, and as a result, the price of the asset keeps on increasing. Alternatively, a bearish market is a market where the sellers are the dominating force. During such periods, the price of the asset reduces.
Bullish sticks are the green color candles in the image above, whereas the bearish candles are assigned the red color. The colors can be configured to one’s preference, but the red/green and white/black pair are the common defaults on various trading platforms. Strong bearish candlesticks have a lengthy wick below them, whereas a strong bullish candle has a lengthy wick above it.
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<center><sub>Screenshot of Hekin-Ashin chart of BTCUSDT (taken from Tradingview)</sub></center>
There are also candlesticks with bullish and bearish wicks above and below them respectively. These candles are alluded to as Indecisive candles. It happens when there is not a definite direction for the price of the asset on the market. Also if the indecisiveness of the market sustains for a considerable length of time, bullish trends are bound to take place. Hence, a buying opportunity presents itself so traders can capitalize on the upward trend of the price and reap profits.
In the screenshot above, BTCUSDT was indecisive between 14:00 and approximately 14: 50 interval. However, this period of the indecisive market trend was shortly followed up by a bullish or upward direction of the asset's price. This is a buying opportunity for the trader. If the trader had placed buy orders at the onset of the bullish trend, that individual would have gained significant profits from the order.
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## Is it possible to transact only with signals received using the Heikin-Ashi Technique?
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Performing trade with solely the Heikin-Ashi tool is dangerous because no trading tool is perfect. Each technical tool has its merits and demerits. The Heikin-Ashi for instance cannot account for gaps of price points on the market due to its mean-based computation. Hence, traders can miss out on insights from voluminous entry or exit of the market. There are many instances where the Heikin-Ashi technique would not prove useful, and this is normal among trading indicators as every single one has its blindspots and disadvantages.
Therefore, it is recommended that the Heikin-Ashi strategy is used in combination with other indicators during the trade. The other indicators will highlight vital insights on the market that the Heikin-Ashi technique might fail to demonstrate. Hence, the overarching trading experience will be a better one as patterns and opportunities will be spotted with a higher degree of accuracy. This will in turn help traders to gain more profits and minimize the event of losses.
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## By using a Demo account, perform both Buy and Sell orders using Heikin-Ashi+ 55 EMA+21 EMA
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#### SELL ORDER of BTCUSDT
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For the Bitcoin/TetherUS pair, I used the Heikin-Ashi chart, and I also added two exponential moving averages: the 55 Exponential Moving Average and the 21 Exponential Moving Average. The Heikin-Ashi chart showed a strong bearish direction of the market as wicks were seen below the red candlesticks. Also, the two exponential moving averages crossover, and the 55 EMA moved above the 21 EMA. The strong bearish trend sustained, so I entered the market and placed a Sell order. The respective Take Profits and Stop Loss margins were set.
I closed the Sell order with a profit of $7.84 after few minutes of executing the Sell order. The collaboration among the Heikin-Ashi and the Exponential Moving Averages generated solid trading signals that helped me to secure significant profits in this trade.
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#### BUY ORDER of BNBUSDT
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For the Binance/TetherUS pair, I also utilized the Heikin-Ashi candlestick chart, and I further added the two exponential moving averages accordingly. The Heikin-Ashi candlestick chart potrayed a strong bullish trend of the asset’s price on the market as wicks were seen above the green candlesticks. The two exponential moving averages crossed over, and the 21 EMA moved below the 55 EMA. The strong bullish trend maintained for a while, so I entered the market and placed a Buy order. The corresponding Stop Loss and Take Profits margins were set.
The Buy order closed with a profit of $0.50 after the price of the asset spiked and touch the TL margin. The combination of the Heikin-Ashi and the Exponential Moving Averages also generated good trading signals that helped me to secure significant profits in this trade as well.
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## Conclusion
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The Heikin-Ashi technique indeed eliminates noise on the market and makes it clearer for traders to spot trends and reversals. It functions perfectly with other indicators, and I was able to use these to acquire some profits during trades. As a technical tool, the Heikin-Ashi certainly has its merits and demerits just like any other tool. Hence it is not one hundred percent reliable.
Traders must trade with caution when solely depending on the trends portrayed by this technique. Better yet, it is recommended that other indicators are used alongside the Heikin-Ashi technique to improve upon its accuracy and make up for its disadvantages.
I thank Professor @reddileep for this educative lesson.
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