Heikin Ashi Chart (or Heiken-Ashi), derived from Japanese terms meaning ‘average pace’ and ‘bar’, is a type of candlestick chart utilized in financial trading to filter out market noise and better identify trends.
Heikin Ashi charts are basically candlestick charts only, which were created by Munehisa Homma in 1700, even though they may not be exactly the same as the candlestick figure. The chart uses different values as opposed to the values used in the other one.
Heikin Ashi Chart in a nutshell
- Heikin Ashi Chart filters market noise, aiding trend identification in financial trading.
- Calculation of Heikin Ashi values involves specific formulas for open, close, high, and low prices.
- Heikin Ashi charts lack certain signals found in traditional candlestick charts, like daily closing prices.
- It’s useful for binary options trading, providing insights into market sentiment and momentum.
What does the Heikin Ashi Chart show?
The Heikin Ashi chart shows the standard figure of the candlestick, but the values are different as it uses a modified formula created through two-period averages. The chart is smoother than the other chart types, so it makes it easier for traders to single out the trends and their reversals, along with lessening the gap and price data.
The only problem with this effect is that price data may get lost as it gets averaged, which could be risky as well for the traders.
What’s the Heikin Ashi formula?
Unlike traditional candlestick charts, Heikin Ashi charts use modified formulas to calculate each candle’s open, close, high, and low prices:
How to calculate the Heikin Ashi value?
To calculate the Heikin Ashi value, use the first period’s prices to establish the initial HA candle, then apply the Heikin Ashi formula for each subsequent period.
Here’s how:
- Use the first period to form a Heikin Ashi candle by using the formula and putting the values where they need to, such as HA open price, HA close price, etc.
- After the first HA is calculated, you can compute the HA candles according to the formula.
- Now, you can calculate another close by using the high, low, open, and close from the same period.
- Now consecutively draw new calculations of the Heikin Ashi to see the constant fluctuations in the market trends in price movements.
What does the Heikin Ashi value denote?
The Heikin Ashi value denotes a smoothed representation of market trends, helping traders identify trends by minimizing noise in price movements. The Heikin Ashi technique resembles the traditional candlestick’s reversal patterns as they have small bodies and low shadows with long upper shadows. You won’t find a gap in the Heikin Ashi chart since the information used for the current candlestick is from the previous candlestick.
The technique is also responsible for removing the false signals of trading in the markets to allow the traders to place trades in good markets instead of dice places. So, instead of getting two or three signals, traders using the Heikin Ashi technique would receive only the valid signal.
The only downside of this chart is that they do not have price gaps, which are necessary for analyzing the momentum of price or setting up a stop-loss level or even triggering the entries. Also, the traders only see the values established by the technique instead of the actual price, which could lead to a risky deal. Moreover, this technique uses trading information from two periods which may or may not be beneficial for the new trade, which is definitely a factor that could set back the trade.
It’s important to note that Heikin Ashi candles do not display certain signals present in traditional candlestick charts, such as daily closing prices or price gaps.
Can You Use Heikin Ashi Charts with Binary Options?
Yes, you can indeed use Heikin Ashi charts with binary options trading. By smoothing out price fluctuations and highlighting trend direction, Heikin Ashi charts offer valuable insights into market sentiment and momentum, which are crucial factors in binary options trading.
Bearish and Bullish Signals
In a downtrend scenario, several consecutive red Heikin Ashi candlesticks without upper wicks signal a downward trend, suggesting favorable conditions for opening a down or lower trade. Conversely, in an uptrend, consecutive green candlesticks without lower wicks denote a strong upward trend, prompting consideration for opening an up or higher trade.
