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Heiken Ashi indicator

Heiken Ashi indicator
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Technical analysis vs Fundamental analysis

There are two possible methods for analyzing markets in order to make decisions regarding trading: technical analysis and fundamental analysis.

Fundamental analysis focuses in spotting economical, social and political news & factors that may affect the price of a currency pair, a stock, an index etc. Analysts always try to find a fair price for a tradeable asset so they can investigate trading opportunities.

Technical analysis is a trading tool for spotting trading opportunities too but it is based on statistical analysis of charts and assets such as the price, the volume, the volatility etc. A basic technical analysis principle is that the market movements are not random and that somehow the past markets behaviour repeats itself in the future. Technical analysis has a series of tools such as technical indicators & oscillators, price action, patterns etc

Although fundamental analysis looks more simple and familiar, it has two very important disadvantages though:

  1. An individual trader learns the market news most likely much later than the big players
  2. An individual trader is not able to translate market news into trading action: it takes a lot of experience and knowledge in finance to do that.

 

Heiken Ashi – a powerful indicator

There are many technical analysis indicators and tools but most of them are based on open/close/high/low prices of the bars. What if we could transform the default and usual bars into other bars in a sense of avoiding noise, false signals or spikes?

Heiken Ashi is a very popular and powerful indicator that redraws the usual candlesticks by using open/close/high/low from current and previous bars. More specifically:

  1. Close is calculated as the average of open, close, high and low of the current bar: (Open(0)+Close(0)+High(0)+Low(0))/4
  2. Open is calculated as the average of Heiken Ashi open and Heiken Ashi close of the previous bar: (HA_Open(1)+HA_Close(1))/2
  3. High is the maximum of the high of the current bar, the current Heiken Ashi open and the current Heiken Ashi close: Max(High(0), HA_Open(0), HA_Close(0))
  4. Low is the minimum of the low of the current bar, the current Heiken Ashi open and the current Heiken Ashi close: Min(Low(0), HA_Open(0), HA_Close(0))

 

A chart with Heiken Ashi indicator applies looks like the following chart image

Heiken Ashi candlesticks are white when the Heiken Ashi Close is above the Heiken Ashi Open and red when the Heiken Ashi Close is below the Heiken Ashi Open.

The result is obvious: By using Heiken Ashi candlesticks instead of the default ones, we filter a lot of the noise. Also, by using Heiken Ashi we can spot the trend in a more accurate manner since a series of white Heiken Ashi candlesticks indicates and uptrend while a series of red Heiken Ashi candlesticks indicates a downtrend. By following the Heiken Ashi color allows us to remain with the trend without being influenced by the noise of small price fluctuations.

Also, the famous and popular Japanese Candlestick patterns can be applied in Heiken Ashi candlesticks and by filtering a portion of noise, in some cases it may perform even better.

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