V. 22:2 (16-17,20-22,24-26,28): Using The Heikin-Ashi Technique by Dan Valcu

Using The Heikin-Ashi Technique by Dan Valcu

Enter and stay on the right side of the trend — or when in doubt, stay out — with this Japanese charting technique.

Since the introduction of the candlestick method to the US some two decades ago, it caused a revolution in perceiving how the bullish and bearish forces perform in the Western markets. It has become a popular charting tool, as traders have used candlesticks to make chart formations easier to spot and name. But interpreting candlesticks can be challenging. To make things easier, the heikin-ashi technique modifies the traditional candlestick chart. Let’s take a look at how it works.

BALANCING ON ONE FOOT

The heikin-ashi method (heikin means “average” or “balance” in Japanese, while ashi means “foot” or “bar”) is a visual technique that eliminates irregularities from a normal chart, offering a better picture of trends and consolidations. Just by looking at a candlestick chart created with this method, you get a good idea of the market’s status and its strength. Take a look at the candlestick chart of Canon ADR in Figure 1A versus the heikin-ashi modified chart in Figure 1B. Which chart would you prefer to use?

CALCULATION

The heikin-ashi candlestick technique uses modified open-high-low-close (OHLC) values and displays them as candlesticks. The modified values are computed using these definitions:

• haClose = (O+H+L+C)/4

• haOpen = (haOpen (previous bar) + haClose (previous bar))/2

• haHigh = Maximum(H, haOpen, haClose)

• haLow = Minimum(L, haOpen, haClose)