Have you ever wondered, “What is heikin ashi”? Well, you’re in good company; I had no idea either until I started trading. What I found out is there are a few reasons why one would opt to use a Heikin Ashi candles indicator. So buckle up and pay attention, this just might be your next go-to chart setting.
- Here’s a breakdown on 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.
- Uses colors to tell what way the price is moving – red (down) and green (up).
- But, it differs in one key area: what it charts.
- Unlike a traditional candlestick that gives you the open and close prices for a specific period.
- HA charts don’t do this.
- Heiken Ashi charts the average price moves.
- This actually results in a chart with a smoother appearance.
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 both 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 end up seeing 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 is trending in one direction. Needless to say, to know when to stay in a trade or get out when the trend pauses or reverses, this indicator will prove useful.
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 end result is a smoothing in price action and a visual chart that provides us with a lot more info than a simple candlestick chart. One downside of this is that you don’t know the exact price at which a given time period opened or closed.
Obviously when day trading, this can be a problem, since knowing the exact price, especially when you’re 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 on the candle may not be accurate. In other words, the trading price on the market may be different from what the candle is telling us.
Luckily this problem 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.
Putting the Heiken Ashi Strategy to Use
Now that I’ve sold you on the Heikin-Ashi candles, it’s essential to know how to use them. In fact, 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 build 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 likely is coming.
Signal: Filled or red candles
What They Indicate: A downtrend
What You Should Do: Consider adding to your short position and exit 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.
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 that 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.
I must admit, not having the exact price of a stock makes me nervous. But, that’s not really a problem since many platforms will add the real-time price as well.
Despite the lack of an exact price, the positives of the Heikin Ashi far outweigh the negatives. In my opinion, 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. Whereas with traditional candlesticks, the trends are frequently interrupted by false signals and breakouts.
Furthermore, Heikin Ashi Charts are colour-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.
The Downside of the Heikin Ashi Candle System
Obviously, because of the lack of an exact price, alone, it doesn’t fit short term and scalping strategies. Also, due to the smoothing effect, the most popular candlestick patterns may be invincible.
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The benefit of the Heikin Ashi candle chart is its visual simplicity. Similar to other types of charts, Heikin Ashi systems can be used for finding chart patterns like triangles and wedges, or different trade setups. This is going to help you form a complete trading system.
It’s essential to keep in mind that entry and exit points may vary slightly since the price is smoothed. Nonetheless, test your strategies first on Heiken Ashi candle charts to see if they work.