Most traders prefer to use candlestick charts for their analysis. It is possible to use multiple timeframes and add various studies to identify support and resistance, overbought/oversold, retracements, moving averages, trends and much more.
Candles provide a variety of patterns of one, two and three bar/candle formations such as Doji, inside-bars, Hammers, shooting stars, spinning tops and many more. The key is not to focus so much on candles or any other chart, so that you actually miss what is happening in the markets!
Timeframes are extremely important and are generally correlated to the length of time the trader anticipates holding the trade for. An investor will use weekly or daily charts and traders anything from 240-minutes down to 30-minutes. Some traders, usually scalpers, will use shorter timeframes, even into single digits, or some will use them when looking to exit a trade.
During my courses, when I cover technical analysis, I recommend to the traders I train or mentor that if their preference is candlesticks, to consider including Heikin Ashi in their analysis too. More so for exiting positions as the structure of the candles provides a clearer insight into when the current trend has ended.
Heikin Ashi has a smoothing effect as each new candle begins at the midpoint of the previous candle’s open/close, making the colouring of the candles more consistent and flowing, thereby making it easier to identify a change in sentiment (as demonstrated in the comparison below). The candlestick chart (at the top) has a mixture of red and green candles during the trends whereas the Heikin Ashi (below the candlestick) shows a more consistent colouring allowing the trader to have the confidence to stay in the trade longer.
A change in colour of one or two candles should not be considered a definite change of sentiment, however; I usually find three or four reasonable size candles are fairly accurate. It should be noted that in trading, nothing works 100% of the time, so do not expect this to be perfect, but rather as a rough guide of what could be happening in the market. As with the majority of indicators and charts, they are lagging behind the market!
Due to the fact Heikin Ashi always takes that midpoint of the previous candle, it will not provide any gaps as seen when comparing the two charts around mid-September.
Armchair Trader readers can currently enjoy a discount on Chris Tubby’s trading courses using the discount code ARMCHAIR5% when booking. More details on Chris’ courses can be found at www.masterc.co.uk