October 21, 2017

Heikin-Ashi Candlestick Charting

Depending on the charting package that you use, you may have been intrigued to see the name Heikin-Ashi as one of the options. Heikin-Ashi is Japanese for “average bar”, and the method of plotting is a way to smooth out the fluctuations that you typically see with normal candlestick charting. In use, you would need to see both charts as the Heikin-Ashi is not a substitute for a normal price chart, but simply provides a different window on the information.

The open-close-high-low prices are plotted in the same way as a regular candlestick chart, but they are calculated in a different way rather than simply being at the prices that were traded. For convenience, I’ll refer to them as the HAopen, HAclose, HAhigh, and HAlow.

The opening price HAopen is calculated from the previous day, and is the average of the previous day’s HAopen and HAclose. Basically a different description of where the price was reckoned to be by the market previously, and therefore leading into the present day.

The closing price HAclose is the average of the current bar’s OHLC, the actual trading prices for today. Once again, you can view this as a description of where the market thinks the price should be on this day, and therefore the settled closing price.

Having defined the HAopen and HAclose, the other two are easy. HAhigh is the highest of the actual high price, the HAopen and the HAclose. HAlow is the lowest of the actual low price, the HAopen and HAclose.

Incidentally, you can see that you need a Heikin-Ashi calculation of the previous day to even draw the charts properly. However, if you start with conventional values for the first day plotted, it will rapidly fall in line with the true HA values.

The result of this blending of prices is that the candles drawn are much more indicative of the trends. Here is a normal chart for BAE Systems –

Longer Term Trading with Candlesticks

You have probably heard that all of your technical analysis tools can be used on “any timescale”, and thought that this meant that your methods of trading analysis of daily charts could be applied to intraday, say 5 min. charts, if you became interested in day trading. While that is true, the “any timescale” comment also applies to longer periods, such as you should consider when investing. Here’s some more trading info on longer term trading with candlesticks.

I am classifying “investors” as people who are not terribly interested in staying on top of the comings and goings of the stock market, and prefer to lodge their money in financial instruments on a long-term basis. They turn a blind eye to the ups and downs of the market from day to day, focusing instead on long-term gains. This is in their overriding belief that over the course of time and over history the stock market will always come out on top. While the nature of the market has changed, which caused some to question whether this is still a worthwhile strategy, there are many who still stand by this policy. But it is a mistake to think that any investors should only consult fundamental analysis, looking for the underlying earnings and marketing results in order to direct their portfolio.

A more sound methodology is to use fundamental analysis in your initial selection, but to consult weekly candlestick charts for any early sign of weakness. By the time weakness becomes obvious in earnings reports, it is likely that you will have lost far more than if you simply applied your candlestick charting knowledge to the weekly price chart.

Long Term Trading with Candlesticks

Here is a weekly price chart of the Dow Jones Industrial Average. It serves to illustrate how candlestick patterns can still be found at this time scale. The arrows point to particular candlestick patterns that the charting software has located. For instance, “A” is the Hammer pattern, usually thought of as “hammering out the bottom” and reversing a downtrend. “B” is the Bullish Engulfing pattern, where a bullish white candlestick totally covers the real body of the previous bearish candle.

As you should expect, not all of the discovered patterns work, but it is clear that they are as effective in this context as in a daily chart. Before relying on them, you should consult other technical analysis including indicators, volume, support and resistance levels, etc. A candlestick pattern alone is simply an indication of the week’s trading, and while it is indicative of market sentiment it is no substitute for corroborating evidence.

If you decide to use candlesticks in your investment portfolio, you still have to take a longer-term view towards your money. For instance, the weekly candlestick chart will not give you an indication of a failing trend until the end of the week when you review it. Thus you might have a higher loss than if you had treated it as short-term trading, and checked for patterns each day. Nonetheless, the superior information which you can get from using candlesticks in your investing can still save you significant amounts compared with buy and hold tactics which are used by most small investors.

Candlestick Charting Is Much More Than Reversal Patterns

Bullish and bearish engulfing, morning and evening star patterns or the bullish and bearish kicker have become well known among traders everywhere as common candlestick reversal patterns. Yes there’s more but for the purpose of this article I wanted to use these examples to get the juices flowing just a bit knowing that they are some of the most popular patterns to trade. Reversal patterns have become synonymous with candlestick charting but if you’re using them as a tool for trend reversal recognition only you’re missing half of the benefit candlesticks give.

Trend trading is undoubtedly the safest method of active trading. We’ve all heard the old adage; the trend is your friend and it’s as true today as it was when it was first thought or said.  Candlestick reversal patterns, or for the purpose of this article, candlestick patterns can alert the trader to trend continuations with as much reliability as any method available. The best part is it is also one of the simplest methods available today! [Read more…]

Common Sense Candlestick Charting

Candlestick ChartingI’ve become pretty well known for pointing out what I believe is a lot of misinformation about candlestick charting over the years. Too many fly-by-night websites feature articles or even pages of information dedicated to trading with candlesticks without any regard to common sense. Many who write these articles make candlesticks seem like magic and act as if the stock price will simply “obey” candlestick reversal signals and rise or fall accordingly. Well, we all know there is no magic in the stock market and candlesticks are no different.

Candlesticks are a powerful trading system of used with a little common sense. As I teach the students of our course, candlesticks need to be applied with the rules of price action and used at price levels where price reversals or continuations are likely to happen. [Read more…]

Video – Candlestick Charting and Swing Trading

Candlestick Charting VideoIf you were to ask most buy-and-hold traders they would tell you the markets have done very little in the last few months and they probably have seen very little profit. With the ups and downs we’ve seen in the markets it may seem like there has been little profits to be made. A swing trader would tell you a completely different story. A swing trader lives by market volatility and the more volatile the better!

Candlestick charts are probably one of the best tools a swing trader can have in their arsenal. Coupled with our trading system, candlestick patterns allow the trader to enter a trade much earlier than traditional methods of swing trading. Watch as I demonstrate our methods of swing trading in the following video. [Read more…]

Price Action Trading With Candlesticks

Inverted HammerThere are many trading systems to confuse the trader these days and almost all of them have one thing in common…indicators! It seems that price action trading, which is what technical analysis is really all about has been all but forgotten. In my opinion, price action is not only the most effective method for analyzing trades but also a simple method to learn for traders at any level.

Price action trading is the study of price movement using nothing more than the stock chart and maybe some moving averages to show dynamic support and resistance levels. The best method of price action is the study of candlesticks which give simple and reliable signals when following the rules of price action theory. Candlesticks as well as the study of price action are actually easy ways to learn trade entry levels for both long and short trades. Candlestick Trading for Maximum Profits has been teaching both since 2007 and is the reason for our great success. [Read more…]

Candlestick Charting and the Novice Trader

Morning StarWhenever attempting any new undertaking, it is always best to start simply by using time proven methods.  For anyone considering online trading, there are no better recognized techniques than the art of mastering candlestick chart formations.

A Little Candlestick Charting History

Candlestick charts have been around for centuries and were first used by a rice trader by the name of Homma Munehisa.  The rationale behind candlestick charting is that there is an irrefutable connection between the supply and demand of any product which is reflected in the price. The theory behind candlesticks also holds that prices in any market are greatly influenced by the psychology and emotional attitudes of the market participants.  Fear and Greed are two of the psychological attitudes that cause prices to move in any direction and candlestick charting reveals these emotions like no other form of analysis can. [Read more…]

Why Trade With Candlesticks?

Japanese candlestick charts have been around for centuries and have become increasingly popular among stock traders. Some have heard of candlestick charting and really don’t understand the benefits candlestick analysis can provide. Others use candlesticks on their charts but don’t fully appreciate the power of the signals given by candlesticks. Candlesticks are the study of price action and its ability to gauge market psychology.

I believe today’s trader is so inundated with trading systems based on indicators that they forget (or maybe never knew) that the origin of Western Technical Analysis was also based on price action. Before the computer, technicians would plot daily price movements on graph paper with pencil until familiar patterns would form allowing them to also have a peek into the psychology of the market. In my opinion this is becoming lost by today’s market technicians.

Don’t get me wrong! I’m not against the use of indicators if they help the trader. But it’s important to remember that indicators are mostly numerical algorithms of price movement itself! Forgetting price action and price patterns, even when using Western analysis, is forgetting why price action analysis became so effective in the first place. [Read more…]

Video – Candlestick Charting Market Update 4/23/2011

Candlestick Charting VideoMarket volatility has been the theme during the past two weeks with surprise news announcements and prices moving up and down in a trading range as we approach market highs. I produced this video to demonstrate how the Candlestick Trading for Maximum Profits trading system has fared during the past two weeks and to highlight some of the trades our method of trading candlestick reversal patterns picked out for us. Yes, it’s been volatile but for a swing trader but that usually means the opportunity for profits as long as the trader is willing to keep watch! [Read more…]