Talking Points:
- Do Japanese Candlesticks need to be confirmed?
- How To Use HA to confirm candlesticks?
- HA Confirmation Example
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Do Japanese Candlesticks need to be Confirmed?
Candlesticks are popular because they provide more information than traditional charting methods like line and bar; however, they can also provide false signals or noise that needs to be confirmed. Even with their visual cues, the message can be misinterpreted so that what you deem as a reversal may be short-term profit taking before the trend resumes. Therefore, it can helpful to have a form of confirmation with the modified candlestick, Heikin-Ashi.
Presented by FXCM’s Marketscope Charts
The chart above shows four times where weekly EURJPY candles showed a bearish signal. Any trader who sold based on these signals would have sold at a bottom when they thought a potential top was in play. If this could be confirmed, and that confirmation failed, then traders might have been saved from the anguish & equity loss from a false signal or noise.
How To Use HA to confirm candlesticks?
Heikin-Ashi can be used to confirm signals from Japanese Candlesticks. Heikin-Ashi only has three real formations, which are doji’s, bullish candle & bearish candles. The qualification for a bullish and bearish candle is similar in that there is no wick countertrend. This means that a bullish candle will not have a lower wick and a bearish candle will not have an upper wick.
Learn Forex: Reversal Signals Does Not Always Reverse
Presented by FXCM’s Marketscope Charts
There are two things to look for when confirming Japanese Candlesticks with Heikin-Ashi. As always, you want to look for prior support to hold in an uptrend or resistance to hold in a downtrend. This is a key price action methodology to look for swing highs and swing lows to hold. Second, you want to use Heikin-Ashi to see if momentum is building against the trade you’re in or prior trend.
The example above uses AUDCHF. You’ll notice first and foremost that the prior
sing-lows continue to hold. Second, you’ll notice that the Heikin-Ashi chart, the bottom of the two, shows little momentum to the downside with small Heikin-Ashi bodies.
HA Confirmation Example - EURUSD
We recently saw a 200+ pip drop on EURUSD when ECB President Draghi shocked markets by both cutting rates and introducing asset purchases in a form of monetary easing. Ahead of this announcement, some traders were looking for a bounce higher however; Heikin-Ashi gave no such indication on the EURUSD daily chart.
Learn Forex: Heikin-Ashi Keeps the Focus Appropriately Lower
Presented by FXCM’s Marketscope Charts
Throughout this 1000 pip downtrend since early May, traders have been looking for a reversal. Visually, Heikin-Ashi shows you when a reversal is more likely by breaking prior swing highs or lows against the prior trend with confirmatory bullish or bearish candles. Therefore, Heikin-Ashi can be used simply by only looking for breaks of levels with a few key Heikin-Ashi candle formations.
Happy Trading!
---Written by Tyler Yell, Trading Instructor
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