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inFoRmATion on THe AuTHoR

Hi, I’m Cornelius Luca, Global Chief Technical Analyst and product manager for Eikon Charting.

I have been a technical analysis aficionado and an FX trader for over 20 years. I spread the charting word around the world either as a speaker at various events, or in classes at the New York University (NYU) and the New York Institute of Finance (NYIF).

I have authored many articles and four books on technical analysis and FX:

‘’ Trading in the Global Currencies Markets’’, 3rd edition, Prentice Hall

‘’ Technical Analysis Applications’’, McGraw Hill

‘’ Technical Analysis in the Global Currency Markets’’, Prentice Hall

“ Introduction to Technical Analysis”, Euromoney Institute

Join me on the Global markets Forum on the Messenger on Tuesdays 9-10 EST.

Charts Newsletter 15th EDITION – JUNE 2014

THIS MONTH’S STORYFiltering Trends with Heikin-Ashi candlesticks

AuTHoR: CoRneliuS luCA, eikon CHARTinG PRoduCT mAnAGeR Tel: +1 646 223 4660

Technicians have created various methods in their quest for trends and their subsequent reversals. Many are familiar with point-and-figure charts and some are using Renko and Three-line break analysis. However, a newer technique is Heikin-Ashi (average pace in Japanese), implementing a filtering method based on candlesticks.

Figure 1. The Heikin-Ashi candlesticks versus standard candlesticks on crude oil futures (CLc1).

Heikin-ASHi 101Notice the distinctive look of the Heikin-Ashi candlesticks relative to the standard candlesticks in Figure 1. In the span of approximately 1 ½ months, oil futures experienced essentially only three directions when using Heikin-Ashi candlesticks, but expected daily choppy trading with standard candlesticks. The smooth look of the former is possible because of the average pace of prices. For good order, I colored bullish candles orange and bearish candles white. Feel free to use standard green and red, red and green, or any other combination that best suits your values and sense of aesthetics.

FormulaeHeikin-Ashi Open(T) = (Open(T-1) + Close(T-1))/2

Heikin-Ashi High (T) = Max (High(T), Open(T), or Close(T))

Heikin-Ashi Low(T) = Min (Low(T), Open(T), or Close(T))

Heikin-Ashi Close(T) = (Open(T) + High(T) + Low(T) + Close(T))/4

Where T = current period

T-1 = previous period

Heikin-ASHi CAndleSTiCkS VS. STAndARd CAndleSTiCkSNo gaps Heikin-Ashi candlesticks cannot display price gaps as the open for the current period is the average of the previous open and close prices. This characteristic affects most exchange-based assets. For instance, Apple (AAPL.O) gapped up approximately $43 on April 24 following stellar earnings and stock splitting. The mammoth gap was easy to spot in regular candlesticks, but was non-existent on Heikin-Ashi candlesticks, as the open price for April 24 was only the average of the April 23’s Heikin-Ashi candlestick’s high and low.

Figure 2. Heikin-Ashi candlesticks cannot display price gaps, as this Apple chart shows.

Heikin-ASHi CAndleSTiCkS CHARACTeRiSTiCSThe lack of lower shadows in an uptrend suggests a strong up move or uptrend, while the absence of upper shadows in a decline generally implies a sustained down move or downtrend. Let’s analyze the S&P 500 (.SPX) weekly chart in Figure 3. In this historical uptrend you can see sustained stretches of bullish Heikin-Ashi candlesticks without lower shadows (see yellow arrows), just as you might expect. For good order, there are also several instances of declining candlesticks lacking upper shadows (green arrows); this is the exception to the rule. The standard candlesticks display a much choppier view of the uptrend. Alternating bullish and bearish candlesticks suggest sideways markets; therefore traders should consider pausing their activity.

Figure 3. In this historical uptrend there are sustained stretches of bullish Heikin-Ashi candlesticks without lower shadows, adding confidence in the market confidence.

However, the presence of shadows does not preclude up trends or down trends. In Figure 4 you can see a sustained downtrend of the yield of the 10-year German bund (DE10YT=RR) since January 2014, but most of the weekly Heikin-Ashi candlesticks display upper shadows.

Figure 4. Shadows do not preclude trends. In the sustained downtrend of the yield of the 10-year German bund, most of the weekly Heikin-Ashi candlesticks display upper shadows.

CHARTS NEWSLETTER FOR THOMSON REUTERS EIKON, 15th EDITION – JUNE 2014 2

TAke AwAy1. Selecting Chart from the multitude of

Apps in Eikon 4 is really easy.

2. Change colors and parameters at will.

3. Select Heikin-Ashi candlesticks, click on Analysis, select Insert Analysis.

Then choose Heikin Ashi Candlestick.

I recommend using a 21-period exponential moving average to filter out market noise. Watch the application of the 21-week exponential moving average on the S&P 500 chart in Figure 5.

Figure 5. A 21-period exponential moving average helps to filter out market noise.

In standard candlesticks, a bullish candle forms when the market closes above the open. In Heikin-Ashi candlesticks, a bullish candle also forms when the market exceeds the open, which occurs when the close exceeds the midpoint of the previous candle. This makes sense, since the close is the average of the four key prices: open, high, low, and close. The opposite is true for a bearish candlestick.

Some candlestick formations will not be displayedHeikin-Ashi candlesticks are unable to display some trend reversal, continuation, or “wait-and-see” patterns consisting of more than one candlestick. So, you will not find three-river evening stars, tasuki gaps, or stars for instance, as these patterns typically contain gaps. But you can still find one-day reversals, such as doji, hammers and hangmen.

ClASSiC CHART PATTeRnSClassic chart formations are visible in Heikin-Ashi candlesticks. In the example in Figure 6, euro/sterling cross (EURGBP=) displays both a trend reversal pattern – a double top – and a trend continuation formation – bearish flag.

Figure 6. Classic chart formations are visible on Heikin-Ashi candlesticks.

Heikin-ASHi CAndleSTiCkS – A PlAy FoR All Time HoRizonS While daily and weekly Heikin-Ashi candlesticks enhance the clarity of trends, few traders actually use such long horizon charts in their activity. Fortunately, this method also plays well in short term – assuming that traders accept smoothing of their short-term charts and the lack of gaps.

Figure 7 displays Heikin-Ashi candlesticks on a five-minute interval at play around the release of the key US economic reports: the non-farm payrolls. Notice the clear directional changes and the limited number of choppy areas.

Figure 7. Heikin-Ashi candlesticks also work on intraday charts, such as the 5-minute chart.

CHARTS NEWSLETTER FOR THOMSON REUTERS EIKON, 15th EDITION – JUNE 2014 3

TAke AwAy (continued)4. To change the time interval, you

can also just click the PageUp key to increase the interval and the PageDown key to decrease the interval.

5. Split mode by Interval. Traders need to see all the big picture of their market, along with other key intervals. Just right click in the chart and select Split by interval. Once done, you can Disable.

6. Split mode by Instrument. You can also split the chart based on various instruments in your quote list. You may select 2X2, for 4 charts. but also test the larger selection of up to 36 charts. You can also customize the number of intervals you want to see for a single market. It’s easy.

Heikin-ASHi CAndleSTiCkS And FiBonACCi ReTRACemenT leVelS I find Heikin-Ashi candlesticks quite useful in relation to the Fibonacci retracement levels. For instance, the number of failed moves through the retracements as denoted by the shadows, will increase confidence in the strength of these levels and suggests that only a close above or below them should warrant new positions. Euro/dollar has been fluctuating without much direction between May 23 and June 6, with an aggressive spike on June 5. However, euro/dollar remains stuck overall between the 76.4% and 61.8% Fibonacci retracement levels at 1.3597 and 1.3672 respectively, and only a close above either of these two levels would sanction new positions. See Figure 8.

Figure 8. Heikin-Ashi candlesticks are quite useful in relation to the Fibonacci retracement levels in filtering opening new and closing existing positions.

ConCluSionHeikin-Ashi candlesticks provide a new filtering tool, which helps traders with holding or reversing positions. While some classic candlestick patterns will be unavailable because of smoothing, the enhanced ability to identify both continuation and reversal, and classic chart patterns, is quite attractive.

Good luck!

neXT STePS

Please call Cornelius Luca at +1 646.223.4660

Or email cornelius.luca@thomsonreuters.com

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