Big experiment (part 8). Heikin Ashi and the conclusion

16 באוק׳ 2018

BTCUSD
Dear friends,
This is the final part of the educational block, devoted to my big experiment of comparison of unusual price charts, identifying their advantages and disadvantages.
The last chart described was Heikin Ashi candlesticks. In the last educational post, I found out that the indicator is often late; I also divided all possible Heikin Ashi candlesticks into three groups.

As I already noted in the last training article, the first and the second candlestick types send many false signals (see the zones in red circles in the chart above). The third type indicates changes more accurately, however, it is extremely seldom at the beginning of the price movement; so, if you enter a trade according to this signal, you will be rather late and may miss a lot of profit, or you might even face losses.
To filter off sideways trends in the Heikin Ashi candlestick chart, you need to apply trend indicators and charts. It may sound a little strange, as the Heikin Ashi, itself, is suggested to be a trend indicator.

First, let’s study the technical analysis tools, applied to the Heikin Ashi candlesticks. MACD is a trend indicator; however, it is clear that its signals lag far behind the price and, in fact, it sends a buy or a sell signal too late.
When you switch to a shorter timeframe, the lag is getting less; however, in in the zone of sideways trend, there are more false signals.

That is, the problem of random signals of sideways movements is still not solved. There will be still many random signals when trading flat.

To be fair, I must note that moving averages won’t provide the needed result as well. First, moving averages themselves are a lagging indicator; second, they also send a lot of false signals in trading flat; and applying a lagging indicator to the lagging Heikin Ashi chart is a double lag. Therefore, to solve this problem, you need to utilize other price charts together with the Heikin Ashi candlesticks.

First, let’s analyze the marked period in the charts of Renko, Kagi, Line Break and Tic-Tac-Toe.
As you see, the studied zone in these charts looks much shorter than that in the Heikin Ashi chart. It is because there you can remove the market noise from the chart, that is, in these charts, you should ideally see only the trend moves.
In practice, it is not that simple of course. The matter is that none of the charts does it in way I’d like. Each chart has certain sensitivity to the price changes. But, unfortunately, this sensitivity is often static and can’t be adjusted to the market situation, so, when the volatility is low, it wouldn’t indicate any changes, as the whole market movement may not reach the needed value. First of all, it is about the Line Break chart, where the price change unit is always constant; that is why it sends too many random signals in the sideways trend.
The same problem is with the Range chart that doesn’t take time into consideration , but also has a set unit of the price change, which doesn’t consider the market real situation.
The other three chart types – Renko, Kagi and the Tic-Tac-Toe are more convenient with this respect and apply a dynamic variable as the price change unit; it is set by the ATR index (Average True Range). This ability lets the indicators adjust to the market changes; however, it also has some drawbacks. The matter is the whole history in the chart is constantly changing due to variable ATR index; it doesn’t change the displayed market situation fundamentally, but the signals, sent before, can disappear, making it more difficult to analyze the trading history of an instrument accurately.
In addition, each of these price charts has unique properties that can be applied to trading.

First, look at the Renko chart in the top part of the window (you can learn more about it in my first post, devoted to this experiment). I marked the sell and buy signals with arrows. I’d like to emphasize that the arrow is not at the first box, but at the second one, as the signal itself is sent only after the box is complete and the next one emerges.
As it is clear from the Heikin Ashi chart, the buy signals, like the sell ones, mostly come with a long lag. If you followed such signals, you would obviously lose. Therefore, you should be extremely careful when using Renko to filter off the sideways signals.

A more interesting situation is painted by Kagi (see a more detailed description in article Big Experiment (part 3). Kagi chart).
The key levels to buy and sell are marked with the lines of shoulders and waist there. If the chart has completed the waist and goes up, there is a buy signal. If there is the shoulder and the price goes down, it is a sell signal. The projection of these signals in the Heikin Ashi chart can be used to prove the candlesticks of type one and two to trade inside the channel.

The last chart to study here is the Tic-Tac-Toe chart that indicates the trend moves the best of all. In the studied range, there are no clear buy or sell signals; however, the Tic-Tac-Toe chart clearly shows the entire consolidation process, which in general looks like a symmetric triangle. The pattern breakout from above has proved the sell signal, giving an opportunity to stop the loss at the right time.
Summary
Eventually, the experiment results suggest that each of the nonstandard price is lagging behind the actual market price. The degree of lagging is directly related to the indicator sensitivity.
Each of the studied charts spots trends quite well, but the most interesting, in my opinion, are the Kagi chart and the Tic-Tac-Toe.
Kagi helps you identify the key levels and mark the signals of the trend reversal. The Tic-Tac-Toe is good for the global analysis and indicates the technical analysis patterns that are not clear at the first sight.
Taking into account that all the charts are lagging, applying moving averages to them send even later signals, compared to the general market trends. This fact suggests that there is no point in using additional indicators, based on nonstandard charts.
The best results in the tests have been performed by the combination of the common trading systems in the Japanese Candlestick charts and the charts of Kagi and Tic-Tac-Toe. You can also apply Heikin Ashi as a confirming signal.
All the signals must be checked in the shorter timeframes.
An example of a good combination of different charts is shown in the picture below.

There is a combination of charts, consisting of three windows, to analyze different timeframes. In the left window, there is a common Japanese candlestick chart of the 4-hour timeframe, supplemented with a number of indicators – it is the trading strategy, providing signals to enter and exit trades. In the central chart, there are the support/resistance levels, indicated by the Kagi chart. In the given example, the ticker has touched the support levels and is rebounding.
By means of the Tic-Tac-Toe chart in the BTCUSD 4H timeframe, you can easily identify the global patterns, having the strongest influence at the moment. Finally, there is a complete picture, showing the merging global pattern of the symmetric triangle. It is clear that the BTCUSD ticker has closely approached the support zone and suggests the growth potential as high as 6670 USD. In the Japanese candlestick chart, there is a buy signal that is proved by both the Kagi chart and the Tic-Tac-Toe. In addition, there is a clear risk zone, indicated by the triangle bottom leg and the support levels in the Kagi; this suggests the place to put stop losses.
That is just an example of how these charts can be applied, rather than a standard scheme. I think it is possible to find a better use of these charts and to fulfill their potential by 100%. But you must always remember that none of the described charts indicates the price extremes – highs and lows; and so, to put stop losses and profit targets you still need to consult the common Japanese candlestick chart.
This concludes my big experiment with unusual price charts on BTCUSD example. I really hope that you find this information interesting and helpful.
I wish you good luck and good profits!
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