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Heikin Ashi Charts for Trading : Top 3 Ways to Use Heikin Ashi

Heikin ashi chart trading has its own distinct advantages. Have you ever considered how Heikin ashi can help you as a trader?

Heikin ashi can help you in a variety of ways, including reducing market noise and focusing on what is important, increasing your win rate, and riding long trends, which increases your overall gain percentage.


Table of Contents


I guarantee that after reading this blog, your heikin ashi trading technique will improve and you will be able to take advantage of heikin ashi charts like never before.

So let’s learn everything there is to know about the heikin ashi chart and how you can trade with it.

What Is Heikin Ashi?

In Japan, ‘Heikin’ or ‘Heiken’ means “average,” whereas ‘Ashi’ means “pace” or “bar.” So Heikin Ashi stands for ‘average price bar’ or ‘average price pace’. Munehisa Homma invented this method in the 18th century.

Heiken Ashi, like the line chart, bar chart, and candlestick chart, uses a distinctive approach to illustrate price activity.

Heikin Ashi  chart
Heikin Ashi Candlestick Pattern

Trading With Heikin Ashi Chart

Heikin ashi trading chart is a type of technical analysis tool that helps traders filter out market noise by averaging out the price fluctuations of a normal candlestick chart.

💡The color of the Heikin Ashi bars shows the direction of the price movement.

The primary objective of the Heikin Ashi chart is to show the current market trend by providing a smooth chart, which makes it easier to see trends and reversals, while also disguising gaps and some price data.

Heikin Ashi Charts
Heikin Ashi Chart

Heikin Ashi Chart Vs. Candlestick Chart

Heiken Ashi, like classic candlesticks, shows four separate price levels. Instead of the Open, High, Low, and Close, Heikin Ashi derives its value from the current price and the previous close. This is what gives Heikin Ashi charts their fluidity.

In the given example, the same asset was used to compare both the Heikin Ashi and Candlestick charts.

Japanese candlestick chart candles regularly shift from green to red, making them difficult to grasp.

Heikin Ashi chart bars, on the other hand, display successive colored candles, making it easier for traders to notice price moves.

Candlestick Chart and Heikin Ashi Chart
Candlestick Chart and Heikin Ashi Chart

Another difference between Heikin Ashi and Japanese Candlestick charts is the manner in which the price is shown in terms of Open and Close.

If you look at the Heikin Ashi chart, you’ll discover that Heikin Ashi candlesticks begin at the middle of the previous candlestick, rather than at the level where the prior candlestick closed.

Heikin Ashi Candlesticks Opening Price
Heikin Ashi Candlesticks Opening Price

How to read Heikin Ashi Candlesticks

Each Heikin Ashi candle has Open, High, Low, and Close prices, which may be read as follows:

✔️The top of the upper wick represents the candle’s highest value.

✔️The bottom of the lower wick represents the candle’s lowest value.

✔️And the body represents the difference between the session’s open and close prices.

✔️A green candle forms when the closing value is higher than the opening value.

✔️A red candle forms when the closing value is lower than the opening value.

Anatomy of Heikin Ashi Candlesticks
Anatomy of Heikin Ashi Candlesticks

Heikin Ashi Calculation

The Heikin Ashi formula is a way of calculating each candle on the chart.

Its formula is made up of four parts:

The Heiken Ashi Open is the average of the preceding candle.

Heikin Ashi Open = (Previous candle’s open price + Previous candle’s close price) / 2

The Heiken Ashi Close represents the current candle’s average value.

Heikin Ashi Close = (Open + High + Low + Close) / 4

The High of Heiken Ashi is the current period’s high.

High = The most recent high price, open price, or closing price

The Heiken Ashi Low is the current period’s low.

Low = The current low price, the open price, or the closing price.

Here is a table containing the Heikin Ashi formula data:

PriceCandlestickFormula
OpenPrior candle(Open + Close) / 2
HighPresent CandleHighest level
LowPresent CandleLowest level
ClosePresent Candle(Open + High + Low + Close) / 4
Heikin Ashi Candlestick Calculation

How to Use Heikin Ashi Chart

Basically, Heikin Ashi charts filter out market noise. Heikin Ashi charts are used by traders to determine trend direction and trend reversal.

Similar to ordinary candlesticks, the stronger the trend is on a Heikin Ashi chart, the smaller the shadow.

A strong trend is indicated by candles with no shadows and large bodies. Candles with long shadows and small bodies suggest a trend weakening or a trend reversal.

Heikin Ashi charts can be used for three main purposes:

1️⃣Identify Trend Direction –

The presence of repeated candlesticks may be used to determine the direction of a trend.

A green candle on this chart indicates an up-trending market. On the other hand, a red candle indicates a downward market trend.

Trend Direction - Heikin Ashi
Trend Direction – Heikin Ashi

2️⃣Identify Trend Strength –

Trend Strength may be determined by studying the candlestick shadows.

These candlesticks do not cast a shadow in the trend’s opposite direction.

The absence of shadows indicates a strong trend.

You can see on the chart that there is no lower wick for green candles, indicating a strong up trend.

Most red candles do not have higher wicks, indicating a strong downtrend.

Trend Strength - Heikin Ashi
Trend Strength – Heikin Ashi

3️⃣Identify Trend Reversals –

A trend reversal signal on the Heikin Ashi chart assists a trader in recognizing the market’s reversal point and the beginning of a new trend.

As seen in the chart below, candlestick patterns with small bodies can assist a trader to predict a market pause or a reversal sign.

Trend Reversal - Heikin Ashi
Trend Reversal – Heikin Ashi

Heikin Ashi Chart Trading

Heikin Ashi charts make it simple for traders to spot the onset of new trends and the reversal of established trends. There are five methods to use Heikin Ashi charts in trading:

  1. Green candles indicate an Uptrend

When Heikin Ashi candles turn from red to green, it indicates a reversal.

For short entry traders, an exit signal is generated.

For long-entry traders, a buying opportunity signal is generated.

Green Bodies - Heikin Ashi Chart
Green Bodies – Heikin Ashi Chart
  1. Red candles indicate a Downtrend

A bearish reversal is shown when Heikin Ashi’s candles turned to red.

An exit signal is generated for buyers.

A short selling opportunity signal is generated for sellers.

Red bodies - Heikin Ashi Chart
Red bodies – Heikin Ashi Chart
  1. Green Candles with no lower wick signal a strong Uptrend

A strong uptrend exists as long as there are successive green candles with no lower wick, until the Heikin Ashi candle changes color, from green to red.

Shaved Bottom - Heikin Ashi Chart
Shaved Bottom – Heikin Ashi Chart
  1. Red Candles with no upper wick signal a strong Downtrend

A strong downtrend persists as long as upper shadows and little bodies do not form.

Shaved Top - Heikin Ashi Chart
Shaved Top – Heikin Ashi Chart
  1. Small-bodied candles signify Trend Reversal or Pause

The formation of small bodies with long wicks alerts a trader to the uncertainty of a current trend. In that circumstance, it is up to the trader’s expertise to decide whether the uncertainty will cause a trend halt or reversal.

Small Bodies - Heikin Ashi Chart
Small Bodies – Heikin Ashi Chart

The Benefits and Limitations of Heikin Ashi

  1. Benefits:
  • One of the primary benefits of using Heikin Ashi charts is that they minimize unwanted false signals and provide ‘smoothness’ on the chart, making it easier to discern the trending direction.
  • Heikin Ashi charts use color-coded candles to depict the trend’s direction.
  • The bars will be green as long as the price continues rising.
  • The bars will be red as long as the price is falling
  • Although Heikin Ashi charts may be used in any timeframe, they are more trustworthy on larger timeframes.
  1. Limitations
  • Since Heikin Ashi mainly uses averages, as a result, it does not display the actual open and close prices for a specific time period.
  • Heikin Ashi is not very useful in sideways markets.
  • Heikin Ashi may not be suitable for scalping or high frequency very short-term trading.

Now that you are familiar with heikin ashi, I want you to explore the heikin ashi charts in different time frames and see how they fit into your system. After a thorough back testing schedule, you will undoubtedly enjoy giving heikin ashi a try and may even use them for your trading regime.

Remember that while heikin ashi may work alone for a while, it is best used in conjunction with price action to achieve the best results. You should know when to use heikin ashi and when to avoid it, and this will all come with practice.

Conclusion

  • Heikin Ashi charts are used by traders because they reduce market noise and allow them to analyze trends quite precisely.
  • Candlesticks with no shadow or wick on one end are also referred to as “shaved candles.”
  • To increase the advantages of trading within the trend using the Heikin Ashi approach, it is recommended to utilize a trailing stop.
  • Heikin Ashi will kick your Ashi in a sideways or choppy market.
  • Because the Heikin Ashi chart does not show the real open and close prices, some traders choose to use it as an INDICATOR, rather than a price chart.


Author is Senior Technical Analyst
At Bulls Arena Trading
info@bullsarenatrading
New Delhi
India

Bulls Arena Trading

Author

  • Yash Nagarkoti

    Yash brings extensive trading knowledge and expertise in technical analysis. Specializing in short-term to medium-term trading, his research spans the Forex market to global stock markets. Since 2016, Yash has been a member of the bulls arena trading Technical Analysis Research Team.

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