The Heikin-Ashi technique is a charting method that is based on the classical candlestick graph, but is slightly modified to capture a greater amount of information. By using Heikin-Ashi charts, you can graphically represent trend data, which would otherwise take a trained eye and careful visual analysis to identify on more fundamental price graphs. Heikin-Ashi charts can produce buying and selling signals by way of various patterns.
In a classical candlestick graph, each day's price activity is represented by a candle that has a body and two wicks or thin sticks, one extending from the top and one from the bottom. The body's top end is the higher of the open or close prices, and the bottom end is the lower of the two. The top and bottom sticks' ends represent the high and low for the day, respectively. A Heikin-Ashi candle body's top, however, is the average of the open and close of the previous candle. The body's bottom is the average of the day's open, close, high and low prices. The top stick ends at the highest of the high, open and close price of the day; the bottom stick terminates at the lowest of the high, open and close price of the day.
Identifying Bullish Patterns
A typical bullish pattern on a Heikin-Ashi chart is made up of several successive candles that have little to no lower sticks, but long upper sticks. This is the result of each day's prices staying above those of the prior day, which points to continued buying day after day. The bodies of the candles will also be longer compared to the candles established by the same financial security while its prices were stagnant. When to buy such a financial instrument depends on various other factors, including how long uptrends have traditionally lasted and whether the present one will likely continue for a while longer based on historic precedents.
Spotting Bearish Patterns
Typical bearish formations are mirror images of the bullish ones. This time, the candles have little to no upper sticks but long lower sticks and also larger bodies than when prices were stagnant. While the same long bodies you saw in bullish patterns are again present, this time the bodies are staggered downward, with the top and bottom of each candle lower than that of the prior day's. This pattern doesn't need to be perfect; despite exceptions for a day or two over a longer time period, the basic message is still true.
A reversal occurs when an uptrend suddenly turns into a downtrend or vice versa. These reversals can provide excellent trading opportunities. On Heikin-Ashi charts, analysts look for Doji candles to identify reversals. A Doji candle has a very small body, but both a long upper stick as well as a long lower stick. The reversal becomes even more likely if the price action of the next day is in the opposite direction versus the theretofore prevailing action and thus provides preliminary confirmation of the reversal.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.