115# Heiken Ashi Technique

Submit by Joy22 Written by (Nani Desuka) 25/01/2012

At first glance, Figure 1 shows that the heikin-ashi chart looks more compact and smooth compared to the traditional chart. White candles display a rising trend, while black candles indicate a downtrend.

A very small body with tall shadows on the first trading day in 2000 warned about a possible change of the rising trend. As consolidations contain several bodies with tall shadows, it is not safe to assume that the presence of a small body with tall shadows will indicate a change in trend. Figure 2 summarizes the five scenarios that can be identified on a heikin-ashi candle chart.

EXAMPLES

To give you an idea of how to apply the heikin-ashi charting technique, I will show you three examples using the Standard & Poor's 500 index (SP500-HA), the price of gold (XGLDHA), and Pfizer (PFE-HA). The heikin-ashi OHLC values were calculated as indicated in the sidebar and plotted. Each chart contains two candlestick subcharts: The top contains the modified OHLC values, while the bottom has the real values. Each number in the table in Figure 2 (1 to 5) applies to the chart whenever a relevant scenario appears. They are labeled in

different colors to differentiate descending and ascending trends. For each chart I'll discuss how this technique can be used to either enter and stay on the right side of the trend, or avoid trading during periods of consolidations.Standard & Poor's 500 (SP500-HA):

Figure 3 offers no doubt about the usefulness of this method, even for a novice: All trends are visible, with short consolidations marked as (4) occurring in February and July. Strong rising trends (2) were marked by long white candle bodies with no lower shadows, while strong falling trends (2) were accompanied by filled candle bodies with no upper shadows. Using the observations in Figure 2, note how the smaller bodies (3) in January 2003 warned about a weakening of the trend, and subsequently, a reversal (4). Trend changes (5) were pointed out by small bodies with longer shadows, but as an exception, the reversal in March occurred without any such sign. Although a rising trend, the segment AB was composed

The heikin-ashi is a visual technique that eliminates irregularities from a

normal chart, offering a better picture of trends and consolidations.

Gold (XGLD-HA):

Another example of the simplicity gained by using modified heikin-ashi values is in the chart of gold prices in Figure 4. A longer rising trend (April-May) was dominated by white candles (1) and (2) with a small consolidation (4) toward the end of April. The very small body in May was just a pause before the next leg up; most of the candles were white bodies with no lower shadows. The smaller bodies toward the end of May announced either a weakening of the trend (3) or the start of a consolidation period (4). The consolidation in May-June was well defined

(small bodies with both long upper and lower shadows). In August, there was another consolidation (4). Given the presence of an ascending triangle, there was a very good chance that price would break out of this short consolidation.

Pfizer (PFE-HA): If you have been trading Pfizer (PFE), you should be familiar with its behavior, which is highlighted in both charts in Figure 5: many small consolidations on the way both up and down. Gaps are not shown on the modified chart, which makes it easier to read. The small body with long upper and lower shadows (5) confirms a change of trend in April. As shown on the daily chart, the longer trends are not continuous (as in the previous examples), but interrupted by small consolidations. In this case, it would be worthwhile to analyze weekly charts.

HEIKIN-ASHI AND SIMPLE INDICATORS

From a visual standpoint, the heikin-ashi technique is based on the effect of the size and color of the candle bodies. For additional confirmation, many traders use indicators, so to make life easier I defined two simple indicators: haOpen and haClose. I applied these to the chart of Ultimate Software Group (ULTI). See the second sidebar, "Defining Simple Indicators Based On Modified OHLC Values," for details on these indicators. You can see them in a separate window in

Figure 6. In these indicators, long bodies correspond to large differences between the modified close and open (2). Small bodies (3) represent these two indicators getting closer, and mean either the start of a consolidation (4) or a possible change of trend. Between February and March 2002 (trend AB), the stock was in an uptrend, but the modified chart ULTI-HA records this as a series of white candles with both lower and upper shadows (4). This is an exception.

I created another simple indicator, haDiffCO, which is displayed in a separate subchart. Positive values correspond to white bodies (ascending trends), while negative values indicate downtrends. In addition, you can apply a shorter moving average (Mov-haDiffCo) to this indicator, and observe that:

• Crossings will point, with good accuracy, to changes in

the trend. Unfortunately, the whipsaws may eliminate

some good trades.

• Positive values of Mov-haDiffCo indicate an uptrend,

while Mov-haDiffCo values below zero show a

downtrend.

Both of these indicators are also discussed in the sidebar.

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