Other Charting Techniques

1. Heikin Ashi Charts

The term "Heikin Ashi" translates to the average pace of prices ("Heiken" means average, "Ashi" means pace). This technique is a visual tool designed to help traders identify trending periods by smoothing out price noise.

Key Characteristics of Heikin Ashi:

  • It is an averaging technique that removes noise for trend clarity.
  • It uses data from the previous period (open/close) and the current period (open/high/low/close) to create an average candlestick.
  • These candles clearly highlight trending phases and minimize price gaps seen in standard Japanese charts.

Heikin Ashi Calculation (Four Primary Components):

  1. Heikin Ashi Open: The average of the prior Heikin Ashi candlestick open and close.
  2. Heikin Ashi Close: The average of the open, high, low, and close for the current period.
  3. Heikin Ashi High: The maximum of three data points: the current period's high, the current Heikin Ashi candlestick open, or the current Heikin Ashi candlestick close.
  4. Heikin Ashi Low: The minimum of three data points: the current period's low, the current Heikin Ashi candlestick open, or the current Heikin Ashi candlestick close.

2. Equivolume Charts

Developed by Richard W. Armes Jr., Equivolume charts incorporate volume into each time period plot. They replace traditional candlesticks with boxes (squares or rectangles).

Components and Interpretation:

  • An Equivolume box includes:
    • The price high (the higher boundary).
    • The price low (the lower boundary).
  • Box Color: Black when the close is above the previous close, and red when the close is below the previous close.
  • Box Width (Volume):
    • Thin boxes indicate low volume.
    • Wider boxes indicate relatively higher volume.
  • Benefit: Classic patterns are visible, and the integrated volume makes verifying reversals, continuations, and breakouts easier. Wide boxes showing increased volume at breakout levels act as confirmation.

3. Point and Figure Charts

Point and Figure is the oldest Western charting technique, historically requiring only a pencil and graph paper. It filters out insignificant price movements and removes the time aspect from analysis.

Structure and Rules:

  • They consist of price boxes representing a fixed price move (e.g., 10 points).
  • Rising columns are marked with X's.
  • Descending columns are marked with O's.
  • A new X or O is only drawn if the price moves by the fixed box size or more. Movements less than this size are ignored.

Advantages:

  • Filters out noise and insignificant movements.
  • Removes the time aspect from analysis.
  • Makes Support and Resistance levels easier to identify.
  • Provides automatic and subjective trend lines.

4. Renko Charts

Similar to Point and Figure charts, Renko charts ignore time and focus solely on price changes. They use "bricks" (also called blocks or boxes) of a fixed value to filter smaller price movements.

Rules and Appearance:

  • If the brick value is set (e.g., 10 points), a move of that size or more is required to draw a new brick. Smaller movements are ignored.
  • Bricks move up or down in 45-degree lines, with only one brick per vertical column.
  • Renko charts clearly outline trends, supports, and resistances.

Detailed Summary

This text describes four alternative charting techniques used in financial analysis to help traders better identify trends and filter out market noise: Heikin Ashi Charts, which average prices to smooth trends; Equivolume Charts, which integrate trading volume directly into the width of price boxes; Point and Figure Charts, an older method that uses X's and O's to focus on fixed price movements while ignoring time; and Renko Charts, which utilize fixed-value "bricks" to emphasize price changes and clarify trends, support, and resistance levels, also ignoring the time dimension.

Key Takeaways

  • Heikin Ashi Charts: Translate to "average pace of prices," designed to smooth out price noise and clearly highlight trending phases using an averaging calculation based on current and prior period data.
  • Equivolume Charts: Developed by Richard W. Armes Jr., these charts replace candlesticks with boxes where the width represents trading volume (wider means higher volume).
  • The integrated volume in Equivolume charts aids in verifying reversals, continuations, and breakouts.
  • Point and Figure Charts: The oldest Western charting technique; they use X's (rising columns) and O's (descending columns) based on fixed price box movements, filtering out insignificant noise and removing the time element.
  • Point and Figure charts simplify the identification of Support and Resistance levels.
  • Renko Charts: Similar to Point and Figure, Renko charts focus exclusively on price changes using fixed-value "bricks" and ignore time, moving up or down in 45-degree lines.
  • Renko charts are effective for clearly outlining trends, supports, and resistances.