Last week I did an analysis of the ETHUSD pair using an uncommon chart type called Renko. Today I will be using a more common type of chart called Heiken-Ashi. Before we start to look at the BTCUSD’s price action over the weekend and into this Monday morning, let’s do a quick a review of how Heiken-Ashi candlesticks are similar but different to tradition Japanese candlesticks. I am planning on using a few more different styles of charting through the next few daily analysis because there are many things that you can see easily or from a different viewpoint by using other types of charts.
How Heiken Ashi is different from regular candlesticks
Traditional Japanese candlesticks are a fairly straight forwards calculation in how they are represented/painted on a chart, they have an open, high, low and close. Heiken-Ashi is a little different in how it is calculated. Without going to the actual formula (which surprisingly can vary from platform to platform), essentially the close of a Heiken-Ashi candlestick is the open+high+low+close divided by 4. The open is the open of the previous bar + the close of the previous bar divided by 2. And the high and low are the highest and lowest price for the candlestick.
For visual folks (like me) it’s easier to see how they compare to one another. The images below will show you traditional Japanese candlesticks and then the same time period using heiken ashi.
Traditional Japanese Candlesticks 4-hour chart
Heiken-Ashi Candlesticks 4-hour chart
Benefits and some warning about using Heiken-Ashi
You can probably tell right away that Heiken-Ashi looks a little smoother or cleaner. A common phrase used to describe it is that it filters out the noise. However, many a new trader has made the big mistake of using Heiken-Ashi as an entry and exit tool. Your author here early in his trading career made this mistake. It is very dangerous to do this. Heiken-Ashi always opens a new candlestick in the direct middle of the previous candlestick. You will often notice that the price level on the Heiken-Ashi, is not represented to what the actual price is. A great many new trader will look at Heiken-Ashi and think it is a ‘holy grail’ because of how easy it looks to trade. Heiken-Ashi serves this one great purpose: it lets you identify a trend. The best way to use Heiken-Ashi is the same way you would use a moving average. In fact, the safest way to think of Heiken-Ashi is as a moving average.
One other quick note and warning about Heiken-Ashi. There are a great many ‘strategies’ and ‘systems’ that say they use Heiken-Ashi for entry and exit. AVOID THEM. There is an old saying: “There are no such things as a failed backtest in Wall Street.” The same applies to Heiken-Ashi, “There are no such things as a failed Heiken-Ashi backtest.”. Many new traders have used Heiken-ashi to backtest a strategy and felt blown away by the positive results and supposed positive expectancy. Those backtests are not true representations of any actual trading situation.
- This represents the weekend low (Friday, 1800 CST) for the pair. We can see that it has steadily moved up and without much difficulty. A very typical piece of price action was seen whereas price got closer to this important harmonic level (the blue horizontal line) price crept up higher and higher and coiled tighter until it ultimately blew through that level, this also represented the highest amount of volume of the weekend and over the last 3 trading days. This level has held throughout the weekend too, so this can be considered to be very bullish.
- We do have some divergence on the price chart and the oscillator. The divergence is an example of regular bearish divergence. However, we are in a definite trending market so the divergence may not amount to anything. There certainly has not been any responsive selling at these levels. We also have a rising wedge/triangle. The path to least resistance is to the upside.
- The most right vertical blue line represents the end and beginning of a new Gann time cycle. We should expect some significant volume and price action at this level. The most probable and natural price behavior at these kind of levels is very obvious culmination or reversals. We do have some bearish bias based soley on time: A new moon and the end of a major time cycle.
- If price reaches this region, with the convergence of time and price, a trader can safely take whatever direction price moves if it is on powerful volume.
As always though, BTCUSD is a very powerful and bullish trending instrument. So be very careful shorting without strong confirmation to do so!