Heiken-Ashi continued
平均足
Is Heiken-Ashi the greatest thing since the birth of technical analysis?
Heiken-Ashi charts are appealing to look at. Most traders who see them for the first time actually prefer them over ordinary candlestick charts.
By making the market look more orderly than it really is, HA charts make us believe that we are gaining deep insight into what the market is really doing.
With Heiken-Ashi in our toolbox, do we have a powerful tool in our hands, or are we being fooled?
One acknowledged expert is silent on the subject of Heiken-Ashi
In 1987, Steve Nison – already an expert in western technical analysis – learned about Japanese candlestick charting for the first time. Over the next four years, he became the leading expert, outside Japan, in this traditional Japanese way of analyzing markets; and in 1991 he published his now-famous book Japanese Candlestick Charting Techniques. If you haven’t read that book, you really should.
The Nison book covers everything that Steve Nison learned about candlestick charting over four years of intense study. It could be argued that the book contains everything known about candlestick charting, period – including how it dovetails with western charting techniques and western technical indicators.
Nison delves into the history of rice trading in Japan from the late 1500’s to the mid-1700’s – when the world’s first futures market developed, and when technical analysis was born. He discusses at length the career of Munehisa Homma, a wealthy 18th-century rice farmer and trader, whose trading methods evolved into the candlestick charting techniques we use today.
In a very short article on Heiken-Ashi charting, INVESTOPEDIA credits Munehisa Homma with the development of the Heiken-Ashi charting method. If that is accurate, then Steve Nison certainly knew about it when he researched and wrote his book. Yet, nowhere in his book does Steve Nison mention Heiken-Ashi charting – not in the 288 pages of text, not in the Glossary, and not in the Index. One has to wonder why. I have my theory.
Steve Nison believes that everything technical that can be known about the market at any given time, over any given time period, is recorded in the classic Japanese candlestick charts. It’s my theory that Steve Nison believes that Heiken-Ashi presents a distorted view of that market, and therefore adds nothing of value to a trader’s understanding of the market, or his ability to analyze the market.
It is certainly true that Heiken-Ashi charts distort the shape (and the color) of the normal Japanese candlestick charts from which they are derived. In the “smoothing” process, which makes Heiken-Ashi charts look pretty, market “noise” is eliminated. But, that noise is market detail, and that detail is then lost.
If Steve Nison has deliberately ignored Heiken-Ashi, considering it unnecessary for a complete and accurate view of the market, I can’t quarrel with his opinion.
There are many traders, some quite experienced, who hold the opposite opinion
Japanese candlestick charts are pure price charts, equivalent in every way to western bar-charts.
Heiken-Ashi charts, on the other hand, are not. Heiken-Ashi charts are indicators, not price charts.
Most authors and internet video-presenters treat HA charts as indicators, and some are straightforward in calling them indicators.
The one article I have seen which refers to a Heiken-Ashi chart as “a better candlestick chart” is misleading, in my opinion. Heiken-Ashi charts do not represent tricked-out substitutes for candlestick charts. Rather, as indicators, they represent tools, to be used side-by-side with standard Japanese candlestick charts.
Writers and teachers who present Heiken-Ashi typically combine it with other indicators, such as moving averages, stochastics, RSI, and MACD. Their work is easy to find on the internet, with a google search, or a Youtube search. It’s way beyond the scope of this series of posts to analyze all the methodologies possible with Heiken-Ashi, with or without the use of other indicators. It is left to you to consider those methodologies, and to choose the ones – if any – that suit your trading style.
In the hands of an experienced technical trader, Heiken-Ashi charts are good tools for aiding and confirming the analysis done on standard price charts – most importantly, for pointing to trend continuations and trend changes that otherwise might be missed, or misinterpreted, on standard charts.
Heiken-Ashi smoothed
In recent years, the idea of smoothing Heiken-Ashi charts has gained a bit of a following. This EUR/USD smoothed Heiken-Ashi chart from several years ago is a good example of the effect.
The objective in smoothing an already-smoothed representation of the true market seems to be to turn the original candlestick chart into a moving average of itself (and, in the process, to banish the last of the red candles from up-moves, and the last of the green candles from down-moves).
The moving-average cross-over scheme depicted in the chart, above, illustrates how the smoothed HA chart, together with a couple of moving averages, can signal entries and exits.
It must always be remembered that those lovely HA entry and exit points might look very different on a true price chart – which is why the hypnotically-beautiful Heiken-Ashi charts must always be used in conjunction with classic Japanese candlestick charts.