Have you ever wondered, “What is heikin ashi”? You’re in good company; I had no idea until I started trading. I found out a few reasons why one would opt to use a Heikin Ashi candle indicator. So buckle up and pay attention; this might be your next go-to chart setting.
Table of Contents
How Do You Use Heiken Ashi Candles?
- Here’s a breakdown of Heiken Ashi candles:
- It’s a Japanese trading indicator.
- Heiken Ashi means “average bar” in Japanese.
- The heikin ashi (HA) chart is visually similar to a candlestick chart.
- It uses colors to tell how the price moves – red (down) and green (up).
- But, it differs in one key area: what it charts.
- Unlike a traditional candlestick that offers open and close prices for a specific period.
- HA charts don’t do this.
- Heiken Ashi charts the average price moves.
- This results in a chart with a smoother appearance.
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Confirming a Trend
We all know the importance of confirming a trend before we enter, and that’s where a Heikin Ashi chart comes in handy. Many day traders use the HA charts as a technical indicator to spot market trends and confirm trend direction.
On the same token, swing traders and investors use the Heikin Ashi chart for the same thing. We see the Heikin Ashi for the candles staying red during a downtrend and green during an uptrend.
Alternatively, standard candlesticks alternate in color even if the price trends in one direction. This indicator will prove useful to know when to stay in a trade or get out when the trend pauses or reverses.
How Is Heikin Ashi Calculated?
- Here’s how Heikin Ashi is calculated:
- Open: HAO = (Open of previous bar + Close of previous bar) / 2
- Close: HAC = (Open + High + Low + Close) / 4
- High: HAH = Highest of High, Open, or Close
- Low” HAL = Lowest of Low, Open, or Close
In a regular candlestick chart, we have a series of open-high-low-close
(OHLC) candles over a specific period (1 minute, 5 minutes, 15 minutes, etc.).However, the HA technique uses a modified version of the COHL formula by calculating average values for each price bar on the Heinkin Ashi chart.
The result is a smoothing in price action and a visual chart that provides much more info than a simple candlestick chart. One downside is that you don’t know the exact price at which a period is opened or closed.
This can be a problem when day trading since knowing the exact price, especially when trading off a chart, is essential. But for longer-term traders, this is less of an issue since exact price action isn’t a big deal due to the nature of the trades.
It’s also important to note that since the Heikin-Ashi is calculating an average, the current price of the candle may not be accurate. In other words, the market’s trading price may differ from what the candle tells us.
Luckily, this problem was solved quite easily. Many charting platforms have two prices on the y-axis: one for the Heiken Ashi calculation and another for the current price.
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Trading Strategy
Now that I’ve sold you the Heikin-Ashi candles, knowing how to use them is essential. What I like most is that you can apply them to any market.
You also don’t have to worry about doing the math; any good charting platform has them built in. It is 2020, after all, and people don’t want to waste time doing calculations they don’t need to.
Overall, I would say there are five main signals you can use to identify trends and buying opportunities:
Signal: Hollow or Green Candles with no lower shadow
What They Indicate: A strong uptrend
What You Should Do: Nothing. Yet. Wait until you hit your profit target.
Signal: Hollow or green candles
What They Indicate: An uptrend
What You Should Do: Add to your long position and exit your short positions
Signal: Candles with a small body surrounded by upper and lower shadows
What They Indicate: A trend change
What You Should Do: Consider buying/selling; a reversal is likely coming.
Signal: Filled or red candles
What They Indicate: A downtrend
What You Should Do: Consider adding to your short position and exiting your long positions.
Signal: Filled or red candles with no higher shadows
What They Indicate: A strong downtrend
What You Should Do: Hold your short position until there’s a trend reversal.
Heiken Ashi Example
Notice how using 15 minute candles and patterns develop awesome buy and sell signals.
Are Heikin Ashi Candles Reliable?
Heikin Ashi candles aren’t 100% reliable, so you need technical analysis to confirm any moves you see happening or potentially happening. It’s important to learn how to map out support and resistance levels and also be able to draw trend lines so you’ll get a better idea of when to enter and exit a trade.
Not having the exact price of a stock makes me nervous. But that’s not a problem since many platforms will add the real-time price.
Despite the lack of an exact price, the positives of the Heikin Ashi far outweigh the negatives. The main advantage of the Heikin Ashi chart is that they are much “smoother” looking.
A smoother look makes it easier to identify the trending direction. Meanwhile, with traditional candlesticks, the trends are frequently interrupted by false signals and breakouts.
Furthermore, Heikin Ashi Charts are color-coded, like candlestick charts. And while candlestick charts (could) flip-flop constantly from green to red bar to green, Heikin Ashi charts tend to have longer stretches of green and red bars.
Once again, this provides more clear highlighting and confirmation of current trends. Check out our trading service for more information.
Final Thoughts
It doesn’t fit short-term and scalping strategies because it lacks an exact price. Also, the smoothing effect may make the most popular candlestick patterns unbeatable.
The benefit of the Heikin Ashi candle chart is its visual simplicity. Like other charts, Heikin Ashi systems can be used to find patterns like triangles and wedges or different trade setups. This is going to help you form a complete trading system.
It’s essential to remember that entry and exit points may vary slightly since the price is smoothed. Nonetheless, test your strategies on Heiken Ashi candle charts to see if they work.
