Heikin-Ashi : How better it is than a Normal Candlestick ?

      For a trader, most of the profits or losses are experienced only during the trending periods. As a matter of fact, certain traders lose more money in trading periods rather than trending periods. Because, A trending period lets you realize the direction of the trend and your stop loss may save you from incurring huge losses. But, during a trading period, it is never an easy task to setup the stop loss or escape from the nuances of periodic fluctuations all day, sometimes spanning over multiple days.



So, It is important for a trader to differentiate between Trending periods and Trading periods (consolidation periods).  Though there are many indicators which assist a trader in determining the nature of the market phase, none of them prove to be worthy enough to bring him out of the trading phase.

Under this condition, the Japanese developed an advanced version of candlestick charts, i.e. the Heikin-Ashi Candles. The Heikin-Ashi candles, if used effectively will help a trader determine the current phase of the market and help him in making most of the trending phases and preserving his capital in the trading phase. Heikin-Ashi candles are the better derivatives of normal candles and are mostly used in Stock and Commodity trading.

What is the difference between a normal candle and Heikin-Ashi candle?

Heikin-Ashi or Average bar is the technique developed in order to smooth out the trend and differentiate it from trading phase and assist the trader to set the target price more easily and accurately.

A normal candlestick chart is the combination of OHLC candles spread through the time frame. But, a Heikin-Ashi candle is an advanced version of the normal candle stick chart, using a smoothed out formula to calculate its parameters.

The Heikin-Ashi formula:

Current Candle Open = (Previous candle open + Previous Candle Close)/2   (Mid-point of previous candle)

Current Candle High = Max (High, Open, Close)         (All values of the present candle)
i.e the highest of the above three values.

Current Candle Low = Min (Low, Open, Close)           (All Values of the Present candle)
i.e. the lowest of the above three values.

Current candle Close = (Open + High + Low + Close)/4   (All values of the present candle).

The below images give you a clear picture of how Heikin-Ashi candlestick chart differs from a normal Candle stick chart.

Normal Candle Stick Chart

Heikin-Ashi Candle Stick Chart

How to trade a Heikin-Ashi Candle stick …… (to be continued)