Candlestick Charts and Heikin Ashi

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In technical analysis, the Japanese candlestick is the most used tool as it immediately provides a picture or snapshot of what happened to the price over the analyzed period. The information contained is essential to understand this concept. The Japanese candlestick offer an immediate view of the following open price, close price, maximum price or high minimum price or this information depends on the time frame of the candle. If we use a daily candle, we will see the four prices of the daily trading session. If we use a 10 minute candlestick, we will see 10 minute prices.

[00:00:41.23] - Speaker 1
Candlesticks charts are characterized by several key elements that provide valuable insights into price movements. The candlestick body is the rectangular shape within the candlestick and and represents the price range between the opening and closing prices during the specified time frame. A green body indicates that the closing price is higher than the opening price representing a price increase. A red body indicates that the closing price is lower than the opening price representing a price decrease. Upper Shadow or Upper Wick the upper shadow is the vertical line that extends above the candle body.

[00:01:20.18] - Speaker 1
It shows the highest price reached during the time frame. It reflects the price movement from the highest point to the closing price. Lower shadow or lower wick the lower shadow is the vertical line that extends below the candle body. It represents the lowest price reached during the timeframe. The color represents whether the price has increased or decreased during the timeframe.

[00:01:44.26] - Speaker 1
If the candle is green, the closing price is higher than the opening. If the candle is red, the closing price is lower than the opening. In some charting applications, candlesticks can also be black and white. White represents the bullish candle and black the bearish candle. In our opinion, using the colors green and red is more effective.

[00:02:07.16] - Speaker 1
Japanese candles also form formations called candlesticks patterns or chart patterns that help identify trends that can confirm the direction of prices. Among the most important patterns we will have the hammer, the doji or the marubozu and many others. Heikin ashi candles are our favorite to be able to capture a trend more effectively. They are a variation of the Japanese candlesticks and were born with the aim of finding a system to make the classic candlestick chart cleaner. They give us the ability to ignore short term price movements like the Japanese candles.

[00:02:44.13] - Speaker 1
Heikin ashi candles also provide opening closing high and low values for a given timeframe. However, these values are not direct reflections of the actual price levels touched by the market. Instead, they result from straightforward arithmetic calculations. The opening level of a heikin ashi candle is derived from the average between the opening and closing prices of the previous candle. Here we can See the formula for calculating the values.

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This smoothing technique helps eliminate sudden price gaps and provides a more balanced representation of market sentiment. Similarly, the closing level of a Heikin Ashi candle is determined by the average of 4, the open, close, high and low of the current candle. The formula is as close, open, close, high, low divided by four. This averaging process further dampens extreme price fluctuations, revealing clearer trend signals. The Heikin Ashi approach to calculating the maximum and minimum values is particularly important.

[00:03:54.29] - Speaker 1
The maximum is determined by the highest value among the high of the current candle, the opening of the Heikin Ashi candle and the closing of the Heikin ashi candle. The minimum is derived from the lowest value among the low of the current candle, the opening of the heikin ashi candle and the closing of the Heikin Ashi candle. By adopting Heikin Ashi candles, traders can focus on the broader market trends while effectively filtering out temporary price noise. This approach enhances the clarity of price analysis and facilitates the identification of significant market movements. Now let's do some examples.

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Let's take an example and compare a candlestick chart with a Japanese candlestick and Heikin Ashi chart. The underlying problem with Japanese candlesticks is the fact that candlesticks show a lot of noise. Many times they can cause wrong decisions by giving false signals. For example, look at this chart. Positive green candles and negative red candles alternate.

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It is difficult to see a true trend pattern. This is why the Heiken ashi were created. From trading view, it is very easy to change the type of chart we can choose. Heikin Ashi like this, you can immediately see how the graph is cleaner and it is possible to interpret the current trend more efficiently. The advantage of Japanese candlesticks is that they display the information needed to identify a stock's sentiment and momentum.

[00:05:25.22] - Speaker 1
The color and length of the candle helps us understand whether there is bullish or bearish sentiment and momentum. Long body candles with no upper or lower shadows show strong direction. The color allows us to understand direction. Candles with long upper or lower shadows show us the clash between buyers and sellers, while doja candles show indecision. Having said that, in many cases, candles can provide false signals.

[00:05:54.01] - Speaker 1
In this chart, we analyze this movement and as in this example, looking at the Japanese candles, we could decide to exit the position or be in the presence of a trend reversal. Now let's edit the same chart and use Heikin Ashi candles. This chart shows us how these candles are able to give us an indication of the trend. While Avoiding false reversal signals Heikin ashi candles are used to eliminate short term movements. On Wall street they are called noises.

[00:06:24.06] - Speaker 1
In this case, we are talking about abrupt price movements that are reabsorbed just as quickly, creating spikes and confusion for those who observe the chart. Heikin ashi in this sense helps us to identify the trend more clearly. We always remember trend is your friend and being able to capture it when or stay in the trend can lead us to improve our performance in the long term. To leverage the full potential of heikin ashi candles, traders can follow these guidelines. To read the price action effectively.

[00:06:55.17] - Speaker 1
We can easily identify an uptrend or downtrend. A series of large bodied green candlesticks indicates the presence of an uptrend, while a sequence of large bodied red candlesticks signifies a downtrend. These trends provide valuable insights into the dominant market sentiment and direction. We can read the strength of an uptrend and downtrend. The strength of an uptrend is reinforced by observing large bodied green candles without a lower shadow.

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Such candles indicate strong buying pressure and a bullish market sentiment. A downtrend gains strength when we see red candlesticks with a substantial body and no upper shadow. This setup reflects strong selling pressure and bearish market sentiment. We can analyze a trend losing strength and entering consolidation. When small candles with both upper and lower shadows appear, it signals a potential weakening of the prevailing trend.

[00:07:53.18] - Speaker 1
This phenomenon indicates decreased momentum and suggests the market might be entering a consolidation phase with buyers and sellers balancing each other's influence. Finally, identify reversal signals. The presence of a doji candle or a small candle with an unusually long upper or lower shadow can signify a potential trend reversal. A doji indicates a market equilibrium between buyers and sellers suggesting indecision and a possible trend change. Similarly, a small candle with an extended shadow suggests that price tested significant levels but was rejected, potentially indicating an impending trend reversal.

[00:08:36.29] - Speaker 1
Using heikin ashi candles helps traders filter out noise, gain clearer insights into market dynamics and improve the precision of their trading decisions. The advantage of heikin ashi candles is their smoother look. During an uptrend, Heikin ashi candles remain predominantly green and during a downtrend they stay red for a more extended period compared to regular Japanese candlesticks. This persistent color continuity in heikin ashi candles helps traders maintain focus on the main trend as the visual representation filters out minor price fluctuations that can create noise in traditional candlestick charts. By eliminating short term noise, heikin ashi candles enable traders to better follow the underlying trend's direction and and strength.

[00:09:27.17] - Speaker 1
While heikin ashi candles offer valuable benefits in filtering out short term price noise and providing clearer trend insights, they do come with certain drawbacks that traders should be aware of. One notable disadvantage is that heikin ashi candles do not represent the actual market price of the asset. In a traditional Japanese candlestick chart, the closing price of each candle accurately reflects the real market price at the end of the selected timeframe. However, with heikin ashi candles relying on arithmetic calculations, the closing price of a heikin ashi candle will not necessarily match the current market price. This discrepancy can create a potential disconnect between the displayed heikin ashi candle price and the actual market price.

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It is important for traders to be mindful of this fact when analyzing and interpreting heikin ashi charts. Sat.