Last week I introduced the MACD indicator. This week I will present a different way of displaying stock charts that works well with the MACD to help in forecasting future stock behavior.
Most profits and losses are generated when markets are trending. Market “noise” is simply all of the price data that distorts the picture of the underlying trend. This includes mostly small corrections and intraday volatility. Noise removal is one of the most important aspects of active trading. By employing noise-removal techniques, traders can avoid false signals and get a clearer picture of an overall trend.
The Heikin Ashi technique (“average bar” in Japanese) is one of many techniques used to remove noise and improve the isolation of trends to predict future prices.
Heikin Ashi charts are a type of candlestick chart that shares many characteristics with standard candlestick charts, but differs because of the values used to create each bar. I will not bore you with the formulas used to calculate the candlestick components (close, open, high, low). The Heikin Ashi formula factors in the current bar with an average of past bars in order to create a smoother trend. This process creates smoother price patterns that are much easier to read.
Daily Heikin Ashi charts are used to display “pay-day cycles” that display the daily trends, without the “noise.”
Take a look at the difference between the standard candlestick and the Heikin Ashi charts of TSLA stock for the past 5 months. First let’s take a look at the standard candlestick chart.
Now let’s take a look at the Heikin Ashi chart.
Notice that in the latter chart the Jan.-Feb. and the May downtrends are more clearly visible, as well as the Feb-March huge uptrend gain.
In my trading I combine pay-day-cycles with the MACD. I make sure that the pay-day-cycle has turned positive (colored green in the chart above), and then I wait for the MACD to cross to the bulls to initiate a probing bullish trade.
Taking a look at today’s situation, this may be the first day of a green Heikin Ashi bar after 12 red bars. I also notice that the MACD is starting to flatten. We may be starting to form a bottom, and this could be the beginning of a potential reversal in the downtrend in TSLA stock, so I will be watching closely for an entry point when both indicators turn positive. Notice that in general the pay-day-cycle turns positive before the MACD does.
Heikin Ashi charts are now provided by most trading platforms: Wallst.io (select Chart Type – Pay Day Cycle), TD Ameritrade’s Thinkorswim (select Style – Chart Type – Heikin Ashi, Daily), OptionHouse (select Style: Heikin Ashi, Range: 6 Months, Frequency: 1 Day).
Also StockCharts.com offers free Heikin Ashi charts (enter TSLA, Chart Attributes, Type Heikin-Ashi, Update).
One interesting pattern that formed at the closed today is a “Doji”: a Doji candlestick looks like a cross, inverted cross or plus sign, and forms where a security’s open and close of the day are virtually equal. This often can be the precursor of a reversal. Secondly, the recent 50-day MA (Moving Average) move above the 200-day MA occurred a couple of weeks ago (see the chart above), again another usual precursor of a forthcoming bullish trend. And lastly, TSLA has support at the 206 level, from last November 2015. All of these are reasons to be bullish on TSLA, especially for short-term swing traders.
Is $TSLA going to reverse and move back up or will it start to compress, i.e. go sideways like it did in April? What do you guys think?