Heikin-Ashi, which means “average bar” in Japanese, is a unique candlestick charting method that visually depicts market trends and helps gauge market strength and direction.
It’s like using a filter to make the ups and downs in the market look smoother. This helps us see the overall direction of prices more easily.
Table of Contents
- What Is Heikin-Ashi?
- Heikin-Ashi Calculation
- How To Use Heikin-Ashi Charts?
- Pros and Cons of Heikin-Ashi Charts
- Effective Way of Trading With Heikin-Ashi
- Trading Tips For Using Heikin-Ashi Charts-
- KEY TAKEAWAYS
- Frequently Asked Questions –
What Is Heikin-Ashi?
“Heikin-Ashi is a special type of candlestick charting technique that smoothens price fluctuations, presenting a clearer visualization of market trends by averaging the open, high, low, and close prices. It helps traders easily identify the direction and strength of trends while filtering out market noise.”
When observing the NIFTY 50 index using Heikin-Ashi charts within the same timeframe and period, you’ll notice a smoother representation that offers a clearer insight into the market’s direction and likely future movements.
In our analysis of the Nifty 50 index, observe the gaps visible in the traditional Japanese candlestick chart, which are notably absent in the Heikin-Ashi chart.
Heikin-Ashi charts, being derived from average prices as I previously explained, do not illustrate gaps in the same manner as traditional candlestick charts.
So, get ready to discover several key aspects of Heikin-Ashi candles in this blog. Keep your notes nearby because this read will be both helpful and insightful.
“Enter and stay on the right side of the trend — or when in doubt, stay out — with this Japanese charting technique.”
The Heikin-Ashi candles calculations are based on the previous candlestick’s values and specific formulas for open, close, high, and low prices.
Calculate Heikin-Ashi Close (HA-Close)
HA-Close = (Open + High + Low + Close) / 4
For The Current Bar (Highlighted in circle) –
High = 19693.19
Low = 19671.62
Close = 19676.95
Open = 19676.83
Therefore Heikin-Ashi Close = (19693.19+19671.62+19676.95+19676.83) / 4
Calculate Heikin-Ashi Open (HA-Open):
HA-Open (previous candle) + HA-Close (previous candle) / 2
In Our Example
HA-Open (previous candle) = 19640.84
HA-Close (previous candle) = 19664.36
Therefore For Next Heikin-Ashi Candle
Heikin-Ashi Open (HA-Open) = (19664.36 + 19640.84) / 2
Calculate Heikin-Ashi High (HA-High):
=max(19693.19, 19652.60, 19679.64)
Calculate Heikin-Ashi Low (HA-Low):
= min( 19652.60, 19652.60, 19679.64 )
Now Plotting the candlestick using above values will give you the current Heikin-Ashi candle-
How To Use Heikin-Ashi Charts?
The primary purpose of Heikin-Ashi charts is to effectively reduce market noise, offering traders a clearer view of the current market structure. While various methods serve this purpose, Heikin-Ashi stands out for its simplicity and effectiveness in providing a smoother representation of price action, aiding traders in better understanding the prevailing market conditions and trends.
Heikin-Ashi Charts can be used for –
- Identifying Trends
- Gauging Strength of Trends
- Identifying Trend reversals
- Marking Strong Support & Resistance levels
Below Table will help you understand how to read and understand price action by using Heikin-Ashi Charts-
|Scenario||Candle Size||Candle Color||Candle Wicks/ Shadow||Meaning||Reliability||Trading Action|
|Case 1||Small||Green||Small lower shadow||Weak Uptrend||Medium||Confirm with other price action Method to Buy|
|Case 2||Small||Red||Small upper shadow||Weak Downtrend||Medium||Confirm with other price action method to sell|
|Case 3||Big||Green||No Lower Shadow||Strong Uptrend||High||Buy|
|Case 4||Big||Red||No Upper Shadow||Strong Downtrend||High||Sell|
|Case 5||Small||Any||Both Upper and Lower Shadows||Consolidation||High||Wait for breakout in direction of major trend|
|Case 6||Small||Any||Doji candle||Trend Change||Low||Further price action analysis is needed|
Pros and Cons of Heikin-Ashi Charts
Utilizing Heikin-Ashi as the best candlestick charting tool for trend trading is debatable.
However, it serves as a valuable supporting instrument for longer-term trading strategies and offers a convenient means for swift trend analysis.
Here, I’ll outline the major pros and cons of Heikin-Ashi charts for better clarity.
- Swift and easy trend identification.
- Helpful in assessing the strength of market trends.
- Provides a clear view of price action.
- Enhanced identification of support and resistance zones due to smoother price action.
- When combined with other indicators, Heikin-Ashi charts can be instrumental in establishing meaningful stop loss placements, particularly in swing trading strategies.
- Heikin-Ashi might be slower at showing changes in trends compared to regular candlesticks. That makes it not as handy for short-term trading, like day trading or scalping.
- Some small details about how prices move might not show up as clearly in Heikin-Ashi charts. This could make it a bit harder to analyze things precisely.
- Using only Heikin-Ashi charts might not give you the full story about price movements, so it’s better to use them together with other charts or indicators before making trades.
- Heikin-Ashi charts don’t show gaps in the data, so you might miss some important info about how the market opens.
Effective Way of Trading With Heikin-Ashi
One effective way to trade using Heikin-Ashi is by integrating it as a tool or indicator within a broader strategy that involves price action and technical analysis.
Moreover, some traders find it beneficial to cross-reference the fundamentals of a stock and create a comprehensive chart blueprint, considering factors like moving averages, RSI, and volume. They then use Heiken-Ashi patterns, as discussed earlier, for final confirmation of a trend’s direction and strength.
One Example of my own charting analysis which i used recently to identify a trend reversal in NIFTY 50 ( APRIL 2023) is shown below –
I applied this method to take a long position in NIFTY MAY FUT, which I believe serves as an excellent example to illustrate one way of utilizing Heikin-Ashi.
- Initially, the NIFTY index trended downwards. Using traditional Japanese candlesticks (which I typically prefer), I spotted a trendline breakout on April 5, 2023. NIFTY captured my attention after this breakout.
- I patiently awaited either a retest or a strong bullish candle to confirm the breakout’s validity and avoid a false signal.
- The retest didn’t occur as expected. Ordinarily, the trendline boundary becomes the initial support for prices to ascend. However, in this instance, it resulted in a minor swing low, a situation I’ve encountered before (experience counts!).
- Here’s where Heikin-Ashi analysis entered the picture. I compared Heikin-Ashi and traditional candlesticks on the same chart, a feature provided by most trading terminals, including TradingView.
- When employing Heikin-Ashi, I rely on the EMA crossover (set at 25,50) to validate the Heikin-Ashi price movement with a golden cross for long entries. The entry was triggered on April 27, highlighting the importance of patience.
- However, I execute the entry only when Heikin-Ashi candle patterns align with either Case 1 (Weak Uptrend) or Case 3 (Strong Uptrend).
- While I generally prefer entering during a Strong Uptrend, in this scenario, positive price action supporting the uptrend was a crucial factor influencing my decision to enter.
- Subsequently, after observing a sequence of Heikin-Ashi candles with small green bodies and no lower wicks on the chart, I initiated my NIFTY MAY FUT entry on May 4, 2023.
- For exit and stop-loss strategies, I rely on a Heikin-Ashi candle closing below the long-term EMA (50 days in this case), which occurred on October 4, 2023. As a note, Nifty Futures expire on the last Thursday of each month, hence my practice of closing the position at month-end and re-entering the following month, as long as the signal remains valid.
As the market turned in my favor, this strategy brought in profitable returns, emphasizing the significance of price action aligning with Heikin-Ashi patterns in bolstering trade confidence.
Numerous other indicators complement Heikin-Ashi charts, and personally, I favor using EMA (Exponential Moving Average) for improved risk-reward assessment and to minimize false signals.
Nonetheless, I highly advise conducting backtesting before integrating Heikin-Ashi with indicators. Not all indicators function uniformly across various markets.
Some may prove effective in certain instruments like forex but may yield different results or fail in other markets such as commodities.
It’s essential to thoroughly assess and validate the effectiveness of your chosen indicators with Heikin-Ashi through rigorous backtesting before relying on them for trading decisions.
Trading Tips For Using Heikin-Ashi Charts-
Finally i would like to include my trading experience and tips for my valuable audiences, while these come from my own trades some of these tips are being used by many traders and investors alike –
- Use Heikin-Ashi candles in conjunction with other indicators of technical nature as well as traditional candlestick designs to get greater confirmation prior to making trade decisions.
- Wait for confirmation that is strong. If it’s a trendline breakout or specific candle patterns on charts of Heikin-Ashi patience is the key. Do not rush into trading with no clear confirmations.
- Avoid relying on Heikin-Ashi for short-term trading signals. I typically avoid using them for intraday trading and never for scalping. Remember, the longer the time frame, the more effective Heikin-Ashi becomes for trend identification. Hence, consider using Heikin-Ashi charts for swing trading and achieving long-term objectives instead.
- Use Heikin-Ashi along with other instruments or charts, such as Moving averages RSI and support/resistance levels. The convergence of indicators usually can provide stronger signals for trading.
- Always incorporate robust risk management strategies. Utilize stop-loss orders that are based on Heiken-Ashi patterns, or other indicators that help ensure your capital is protected.
- Heikin-Ashi offers a visual and less subjective way to showcase both trending and consolidation phases in the market.
- Candlestick colors signal the trend’s nature—green/white bodies indicate an ascending trend, while red/black bodies signify a downtrend.
- The candlestick body size denotes trend strength; longer bodies indicate robust trends.
- Lower shadows in an uptrend and upper shadows in a downtrend signal potential weakening, except in specific scenarios where trends might defy these indications.
- Consolidation periods are marked by smaller green/ white and red/black bodies with longer upper and lower shadows, indicating market indecision.
- Candlesticks with small bodies and long shadows( especially doji candles) may hint at an upcoming trend change, though exceptions exist.
- Simple indicators like EMA (Exponential Moving Average) can complement Heikin-Ashi for confirming trends or reversals when the visual aspect alone is insufficient.
- Heikin-Ashi alone is not foolproof and should be combined with other price action patterns and technical indicators for a more comprehensive analysis.
- Incorporate risk and capital control strategies alongside your trading approach, as prudent risk management is imperative regardless of the charting method used.
- Heikin-Ashi tends to be less reliable when used on smaller time frames. It’s advisable to steer clear of employing it for intraday and scalping trading strategies.
Frequently Asked Questions –
Q1: Is Heikin-Ashi reliable?
Answer1: Heikin-Ashi is reliable for trend identification but might lack precision for precise entries. It's best used in conjunction with price action analysis and indicators.
Q2: What is the best time frame for Heikin-Ashi?
Answer2 : Longer timeframes (like daily or weekly) are more suitable for Heikin-Ashi, offering clearer trend signals compared to shorter timeframes.
Q3: Is Heikin-Ashi good for swing trading?
Answer3 : Yes, Heikin-Ashi is popular for swing trading due to its ability to identify trends effectively on longer timeframes.
Q4: Which indicator works best with Heikin-Ashi?
Answer4 : Moving averages, MACD, and RSI are commonly used alongside Heikin-Ashi for trend confirmation and entry/exit signals.
Q5: How to use Heikin-Ashi charts?
Answer5 : Use Heiken-Ashi to identify trends and confirm reversals. Combine it with other indicators for better confirmation before making trading decisions.
Q6: Is Heikin-Ashi lagging?
Answer6 : Yes, Heikin-Ashi might lag behind actual price movements due to its averaging nature, making it better for trend identification rather than precise entry points.
Q7: Should I use Heiken-Ashi or candlestick?
Answer7: It depends on your trading style. Heikin-Ashi is smoother and aids in trend identification, while traditional candlesticks provide more precise entry/exit points. Consider using both for comprehensive analysis.