AAPL HEIKIN ASHI CANDLESTICK CHARTING

TRENDS ARE YOUR FRIEND

The ‘Trend is your friend’ adage has been used often; however, many newbie investors and traders struggle to identify trends. Successful traders, who learn to identify trends early, often benefit from the folly of less experienced investors and traders. Technical traders attempt to level the playing field by the use of indicators, such as MACD (moving average convergence divergence) and Stochastics, hoping to make it easier to identify changes in a trend.  (See previous post on Moving Averages).  In recent times, candlesticks have become very popular as a type of chart style, as they look ‘nicer’ than a bar or line chart. However, a little known secret is that candlestick patterns can signal changes in a trend much quicker than most other indicators. Learning to read a candlestick chart well can help traders recognize changes in trends earlier than others only using traditional indicators; combining candlestick charting with traditional indicators can put the odds of success in one’s favor.

AAPL – Candlestick Chart

The chart below is a traditional candlestick chart of AAPL with the familiar traditional indicators – including moving averages, MACD and stochastics.  The chart depicts three moving averages – the 20 (green) EMA (exponential moving average), and 50 (blue) and 200 (red) day SMAs (simple moving averages) overlaid on a candlestick chart of the daily stock prices.  Above the chart is the 14, 3 stochastics, and below the chart is the 12, 26, 9 MACD. Charts below courtesy of StockCharts.com

AAPL candlestick chart

AAPL – Traditional Candlestick chart

AAPL – Heikin Ashi Chart

The candlestick chart below is a modified candlestick chart of AAPL, where the familiar candlestick figures are generated using data from both the previous and current time period.  The indicators depicted are the same as the prior chart  – the 20 (green), 50 (blue) and 200 (red) day MAs, the 14, 3 stochastics, and the 12, 26, 9 MACD.

AAPL - Heikin Ashi Chart

AAPL – Heikin Ashi Chart

TREND IS YOUR FRIEND – CHOOSING YOUR ENTRY

In essence, traders who use indicators look for the action of price with relation to their moving average of choice, and for crossovers of short-term lines over long-term lines on their favorite indicators.  Combining candlestick charting with moving averages, MACD or stochastics helps fine tune one’s entry and exit signals.

BUY signals (green lines on charts) are generated when the short-term line crosses above a long-term line on either MACD or stochastics and is accompanied by a bullish candle.  As can be noted, a bullish candle pattern accompanied by stochastics cross-over from below 20 gives an earlier entry signal than use of a MACD cross-over or moving average cross-over alone.

HEIKIN ASHI candle patterns make it easier to identify the change in the trend when compared to traditional candlestick charts – compare the two charts above. Learn more about Heikin Ashi charts in the Chart School.

TREND IS YOUR FRIEND – CHOOSING YOUR EXIT

Deciding when to exit is often more difficult for most traders as the emotion of GREED usually prompts one to stay in the trade longer than is advisable.  Candlestick patterns have the added benefit of identifying exits earlier than other indicators.  However, a previously mentioned tactic that works very nicely is the use of a GTC order to close a portion of the trade when a certain target is reached, whether it is a percentage gain or technical target (see ‘The Power of the GTC order’ for a real example).

Of course, option traders have other tactics that they can use to lock in profits, such as the use of a put or a rolling put, converting a rolling put position into a collar, converting a collar into a butterfly, etc (See ‘Winning Trading Strategies’).

Happy Trading!

JonLuc

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