Heiken-Ashi chart (HA) is a modified type of classic candlestick chart, which is based on recalculation of OHLC data. The resulting candlestick filters out some noise in an effort to better capture the trend and reversal points.
The following calculations are used to construct the HA chart:
The Heikin-Ashi technique is used by technical traders to identify a given trend more easily. Hollow white (or green) candles with no lower shadows are used to signal a strong uptrend, while filled black (or red) candles with no upper shadow are used to identify a strong downtrend. Reversal candlesticks using the Heikin-Ashi technique are similar to traditional candlestick reversal patterns; they have small bodies and long upper and lower shadows. There are no gaps on a Heikin-Ashi chart as the current candle is calculated using information from the previous candle.
Because the Heikin-Ashi technique smooths price information over two periods, it makes trends, price patterns, and reversal points easier to spot. Candles on a traditional candlestick chart frequently change from up to down, which can make them difficult to interpret. Heikin-Ashi charts typically have more consecutive colored candles, helping traders to identify past price movements
The Heikin-Ashi technique reduces noise in sideways and choppy markets to help traders avoid placing trades during these times. For example, instead of getting two false reversal candles before a trend commences, a trader who uses the Heikin-Ashi technique is likely only to receive the valid signal.
Heikin-Ashi charts are constructed based on averages over two periods. Renko Charts are created by only showing movements of a certain size. While a renko chart has a time axis, the boxes or bricks are not governed by time, only by movement. While a new HA candle will form every period, a renko chart will only produce a new brick/box when the price has moved a certain amount.
Since the Heikin-Ashi technique uses price information from two periods, a trade setup takes longer to develop. Usually, this is not an issue for swing traders who have time to let their trades play out. However, day traders who need to exploit quick price moves may find Heikin-Ashi charts are not responsive enough to be useful.
The averaged data also obscures important price information. Daily closing prices are considered important by many traders, yet the actual daily closing price is not seen on a Heikin-Ashi chart. The trader only sees the averaged HA closing value. In order to control risk, it is important the trader is aware of the actual price, and not just the HA averaged values.
Also, there are no price gaps. This is another important element in technical analysis which is missing from Heikin-Ashi charts. Many traders use gaps for analyzing price momentum, setting stip loss levels, or triggering entries.
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