Heiken-Ashi: Candlesticks With a Twist

Key Concepts

• Candlestick Charts: Visual representation of price movements over a specific period, showing open, high, low, and close prices.
• Hikenashi Charts: A modified candlestick chart that averages price data to create smoother trends and reduce noise.
• Trend Following: A trading strategy that aims to profit from sustained price movements.
• Momentum Trading: A strategy that seeks to capitalize on the speed and direction of price changes.
• Swing Trading: A strategy that aims to capture short- to medium-term gains in a stock.
• Reversal Patterns: Chart formations that indicate a potential change in the direction of a price trend.
• Continuation Patterns: Chart formations that suggest a trend is likely to continue.
• Open, High, Low, Close (OHLC): The four key price points used to construct a candlestick.
• Body (or Stick): The colored portion of a candlestick, representing the difference between the open and close prices.
• Shadows (or Wicks): The lines extending from the body of a candlestick, indicating the high and low prices for the period.
• Gaps: A discontinuity in price movement between the close of one period and the open of the next.
• Doji: A candlestick pattern characterized by a very small body and long upper and lower shadows, indicating indecision.

Market Rebellion Trading Education

Market Rebellion offers comprehensive trading education designed to equip traders with the knowledge and strategies used by professionals. Bill Johnson, Head of Options Education, highlights that their curriculum goes beyond basic options theory to teach practical application of trading strategies and adaptability to market shifts. The education aims to build confidence, enhance knowledge, and develop mastery of practical market success skills.

Upcoming Webinar: 10 Most Expensive Mistakes in Trading

A special webinar is scheduled for next Thursday, November 20th, at 4:00 PM Eastern Time. This session will focus on the "10 Most Expensive Mistakes" traders make. The hosts acknowledge that there are many such mistakes, often tied for first place, and that traders can get caught up in their own "noise" and fail to see the bigger picture. The webinar is presented as a valuable opportunity to learn from these common pitfalls.

Hikenashi Candlesticks with a Twist

The main topic of the discussion is Hikenashi candlesticks, presented as a tool to help identify trends and potential reversals, particularly for trend-following, momentum, and swing traders. The hosts explain that Hikenashi charts are an averaging method that smooths out traditional candlestick charts, making trends more apparent and reducing the visual noise of frequent red and green candles.

Understanding Traditional Candlesticks

Before diving into Hikenashi, the presenters provide a foundational explanation of traditional Japanese candlestick charts, which originated in the 18th century with Japanese rice traders.

• Formation: A candlestick represents the open, high, low, and close (OHLC) prices for a given period.
  • Body: The colored portion between the open and close.
    • Green Candle: Close is higher than the open, indicating an "up" day.
    • Red Candle: Close is lower than the open, indicating a "down" day.
  • Shadows (Wicks): Lines extending from the body.
    • Upper Shadow: Extends from the top of the body to the high of the period.
    • Lower Shadow: Extends from the bottom of the body to the low of the period.
• Color Interpretation: The color of a candlestick (red or green) only reflects the relationship between the current day's open and close. It does not necessarily indicate whether the price closed higher or lower than the previous day's close. This can lead to confusion, as a stock might be down overall but have a green candlestick if it opened lower than it closed.
• Western Bar Charts: The presenters contrast candlesticks with Western bar charts, which use hash marks to denote open and close. They find candlesticks to be more visually intuitive and easier to read, especially when color-coded.

The Hikenashi Modification

Hikenashi charts are a modification of traditional candlesticks, with the Japanese term translating to "average bar."

• Calculation:
  • Hikenashi Open: The average of the previous day's Hikenashi open and close. For the very first candle, it's the average of the previous candle's open and close. This averaging method eliminates gaps.
  • Hikenashi Close: The average of the current day's true open, high, low, and close prices.
  • Hikenashi High: The actual high price of the period.
  • Hikenashi Low: The actual low price of the period.
• Purpose: The averaging process smooths out price action, making trends more visible and reducing the impact of short-term fluctuations. This is particularly beneficial for trend-following strategies.
• Key Characteristics:
  • No Gaps: Due to the averaging of the open and close, Hikenashi charts do not exhibit gaps between candles.
  • Smoother Trends: Long streaks of green or red candles are more common, clearly indicating the prevailing trend.
  • Reduced Noise: The smoothing effect helps traders avoid being shaken out of trades by minor price retracements that might appear as red candles in a strong uptrend on a traditional chart.

Reading Hikenashi Charts for Trends and Reversals

The presenters detail how to interpret Hikenashi candles to identify trends and potential reversals:

• Strong Uptrend:
  • Candles: Predominantly green.
  • Shadows: Little to no lower shadows, indicating strong buying pressure. Upper shadows may be present.
• Strong Downtrend:
  • Candles: Predominantly red.
  • Shadows: Little to no upper shadows, indicating strong selling pressure. Lower shadows may be present.
• Indecision and Potential Reversals:
  • Candles: Small bodies.
  • Shadows: Significant upper and lower shadows.
  • Doji Patterns: Perfect Doji candles (very small body, long upper and lower shadows) are strong indicators of indecision and potential reversals.
  • Transition: A shift from long candles with one-sided shadows to smaller bodies with both upper and lower shadows signals a potential change in trend.

Practical Application and Demonstration

The presenters demonstrate how to switch to Hikenashi charts on trading platforms like Tastytrade and Thinkorswim, emphasizing the ease of this transition (often a single click). They compare traditional candlestick charts with Hikenashi charts for the same stock (e.g., Microsoft), highlighting how trends become more apparent and gaps disappear on the Hikenashi chart.

Key Arguments and Perspectives

• Knowledge is Power: The core argument is that a solid foundation of market education is crucial for trading success, and lack of knowledge can be very costly.
• Hikenashi for Trend Identification: Hikenashi charts are presented as a superior tool for identifying and staying with trends compared to traditional candlesticks, especially for traders who might be easily discouraged by short-term pullbacks.
• Hikenashi as a Tool, Not a Sole Indicator: While powerful, Hikenashi is presented as "just another tool" to be used in conjunction with other analysis methods. It helps train the eye to see trends and potential reversals more clearly.
• Avoiding Common Mistakes: The upcoming webinar on "10 Most Expensive Mistakes" underscores the importance of understanding and avoiding common trading errors that can lead to significant losses.

Notable Quotes

• "In trading, knowledge is power and lack of knowledge in what you're doing can be costly. Very costly." - Bill Johnson
• "So, you need a solid foundation of quality market education." - Bill Johnson
• "The 10 most expensive mistakes." - Stu
• "How do you spot a reversal on a hikenashi chart?" - Bill Johnson (posing a key question)
• "It's an averaging method using traditional candlesticks. And what it does, it produces smoother charts for again trend following, momentum, things like that." - Bill Johnson (explaining Hikenashi)
• "So, the open and the close are a mathematical formula. They're not the real open and close." - Bill Johnson (clarifying Hikenashi calculation)
• "It's a great tool to help you train your eye to see the lines before they happen." - Bill Johnson (on Hikenashi's benefit)
• "It's just another tool. So it's something you should at least entertain." - Bill Johnson (on the utility of Hikenashi)

Conclusion

The video emphasizes the critical role of education in trading and introduces Hikenashi candlesticks as a valuable tool for traders, particularly those focused on trend following and momentum strategies. By smoothing out price action and eliminating gaps, Hikenashi charts provide a clearer view of trends, helping traders to stay in profitable trades longer and avoid being whipsawed out by minor fluctuations. The presenters encourage viewers to explore Hikenashi charts on their trading platforms and to attend their upcoming webinar on common trading mistakes.