Heikin Ashi: What Is It & How Does It Work?

Heikin Ashi (HA) chart is an efficient method that helps investors to understand and foresee the price trend of various securities. HA is a technical analysis tool and its chart is formed through the calculation of the average price moves. It filters the market’s noise of price fluctuation and presents a smoother appearance of price directions.

HA techniques are more popular among day traders that tend to use the chart as a way to foresee price movements. It helps them to adapt their trading techniques to the market trend and make profitable investment decisions. In this article, we will provide a complete guide on how to trade using the Heikin Ashi as well as how to read and interpret the HA chart.

What is the Heikin Ashi (HA) chart?

The Heikin Ashi technique was firstly introduced by Munehisa Homma in the 1700s. It is based on the Japanese candlestick method and uses candles to express the way that a security’s price is heading. The name “Heikin Ashi” is translated as the “average bar ” where each candle represents the average price direction including the data values of the prior bar.

HA is a combination of a chart type and a technical indicator. It depends on traders’ strategy and which way it will be used. One of the most important reasons HA charts are popular amongst investors is that they are more readable and easy to understand. As a result, the candlesticks provide a more sufficient indication of when the trend gets weaker or stronger. Essentially, the HA technique indicates trend reversals and can be used by investors to spot chart patterns or trade setups.

Heikin-Ashi vs. Renko Charts

Even though Heikin- Ashi is a type of Japanese candlestick chart, it is way different from the Renko chart. In the HA, each constructed candle includes the open, high, close, and low (OHCL) price of a security. Consequently, the HA chart uses the average of the data from both prior and current sessions to form each new candle and does not include the exact OHCL values of the asset. Below is an example how the Heikin-Ashi chart:

Renko charts are also used to give a more clear and smooth representation of price movements but it is based on a different formula. Instead of candles, the chart is created by bricks or boxes whose size can either be of a certain value or based on the average true range.

For example, a trader can choose to use a ten-minute Renko chart and a box size of 1$. At the closing of the ten-minute chart, if the price has increased by a dollar or more, a new brick will be formed. It should be underlined that each Renko box has a 45- degree drop or rise. Below is an example of the Renko chart:

Investors use both Renko and Heikin-Ashi charts as a simple way to foresee future market trends. However, these graphs significantly differ from each other. Heikin- Ashi candles are formed by an average of two periods while the Renko bricks represent price alterations based on a certain size. Moreover, in contrast to the Renko chart which is influenced only by certain price alterations the HA chart represents every period.

How To Calculate Heikin Ashi

The Heikin- Ashi formula seems sophisticated but not that challenging to implement. It is based on the following equations that include the current OHCL price values as well as the current and prior Heikin-Ashi values:

In the above-mentioned mathematical formulas the initials HA represent the Heikin-Ashi, the number (-1) refers to the prior period, and zero (0) to the current period.

How to Read Heikin Ashi candlesticks

The Heikin- Ashi technique is an efficient tool for helping investors to forecast potential bullish or bearish trends as well as the beginning of a strong trend. Therefore, by using it investors could adjust their trading strategies and receive higher potential returns. To have a better understanding of the market’s behavior by reading the HA chart, traders need to be well informed about all its details.
Each candle has a specific width and color depending on the market’s trend.

1. Hollow or Green Candles represent an uptrend.In this case, the opening value is smaller than the closing value and is placed on the top of the body. When the candle doesn’t have a lower “shadow” it indicates a strong uptrend.
2. Red Candles represent a downtrend. In this case, the closing value is lower than the opening value and is located at the bottom of the body. When there is no higher “shadow” on the candle, a strong downtrend is likely to occur.
3. When a candle has a small body and an upper and lower shadow, there is a possibility of a trend change.

Moreover, when traders read a HA candlestick chart they need to know which characteristics each part embodies. Thus, they should also focus on the candle’s body.

• The highest value is located on the top of the candle.
• The lowest value is the bottom of the lower wick.
• The main body of the candle stands for the difference between the session’s opening and closing price.

What Are The Advantages of Using The Heikin Ashi?

Most traders choose the Heikin-Ashi technique so that they could reap its various benefits. Below is a list of the most important characteristics of HA :

• Reliable. The HA is very popular on trading platforms due to its high reliability. It uses historical data and provides precise results.
• Time Tolerance. Any timeframe is suitable for the HA technique. However, the bigger the period the better the results.
• Isolating Market noise. One of the most important characteristics of Heikin Ashi is the ability to filter out the market noise. This way it provides investors a smoother and more transparent aspect of when to enter or exit the market. Essentially, HA is an indicator of an assets price trend.
• The HA can be combined with various indicators. Due to its adaptivity, it can cooperate with other indicators to provide more precise and strong signals to the market.
• Last but not least, the HA chart is considered to be one of the most readable technical indicators. Traders can easier understand and interpret the data from the candlesticks which makes it easier for them to spot market trends and price movements.

What Are The Limitations of Using the Heikin Ashi?

The high reliability and efficiency of the HA technique have led to the widespread use of its charts. However, as with all technical tools it has its pros and cons. Here is a list of the Heikin-Ashi’s limitations:

• Each candle on the HA chart represents an average price and doesn’t provide actual close and open prices. As a result, it doesn’t include all price information.
• Heikin Ashi is based on historical data. Some of those pieces of information may be rather old which can lead to a time lag.
• Absence of price gaps. Most investors make use of significant investment characteristics such as price momentum or stop-loss order. Since HA lacks price gaps the smoother spread of candlesticks makes it not easier to understand the market trends.

It should be underlined that the limitations above can be balanced if the HA is combined with other technical indicators such as moving average and relative strength index (RSI).

Heikin Ashi Candlesticks Example

Traders use the Heikin Ashi chart to analyze the market trend and to make profitable investment decisions. The following candlestick is an example of a HA chart.

The long red candles indicate that the closing price of the asset is below both the day’s opening price and the previously closed value. This is a characteristic of a strong selling day. The lack of higher “shadows” indicates that a strong downtrend is more likely to occur. Essentially, a long red candle is a significant indicator of an upcoming strong bearish trend.

Conversely, the long green candles are indicators of a strong bullish market trend. If the candles are not followed by lower “shadows” then a significant uptrend is more likely to follow. Thus, traders may want to add to their long position and exit short to achieve a better profit.

Investors monitor the market trend through the Heikin Ashi candlestick chart. It is very important to analyze the existence of the upper or lower “shadows” or wicks. Moreover, the size of the candle’s body shows if there is high volatility or the possibility of potential market change.

Heikin-Ashi Indicator Signals

Investors use the Heikin-Ashi strategy as a tool to spot market signals and indicate changes in price trends and movements. There are two main categories of HA signals. Below follows a brief explanation of each of them.

Trend Strength

This type of Heikin Ashi signal indicates the trend’s strength. Some details such as the consolidation points as well as small possible price corrections can not be reflected through the chart due to its smoothing effect. An investor should remain in the trend if there is a strong rise.

Below follows a list of various types of Heikin-Ashi trends.

• Bullish Trend. When on the HA chart exist following long green candles with no lower wick.
• Bearish Trend. This type of trend is indicated by long- red with no upper wick candles.
• Triangles. They are divided into three categories: ascending, descending, and symmetrical triangles. When the HA indicator is placed over the upper limit of the symmetrical or ascending triangle the existing uptrend will continue. A consecutive fall of the candles below the descending’s triangle bottom line indicates an increasingly bearish trend.

Trend Reversal

The role of trend reversals is very important since they define the time that a trader should exit a trend and enter another. This way investors can avoid losses and continue gaining profit.

• Doji Candlestick: In the Haikin- Ashi candlestick chart, Doji is represented by a small-bodied candle with a long shadow.
• Wedges. Another type of trend reversal is rising and falling Wedges. They are similar to triangles and require different investment strategies. When it comes to a rising wedge, investors need to monitor when the candlestick falls under the indicator’s bottom line. Consequently, in a downtrend traders need to stay alert when the price will go over the upper line. In that case, a falling wedge occurs.

Heikin Ashi Strategies

Heiken Ashi moving average strategy

The trading system with the HA candlestick chart allows investors to identify trend signals. Thus, they can take proper investment decisions depending on the market’s direction. The HA candlestick chart is formed by candles of different colors, sizes, and directions. A bullish trend is represented with green candles and a bearish one with red. The combination of HA and moving average can assist investors to filter the buy and sell signals more accurately.

The example above presents a combination of HA and Simple Moving Average (SMA). When HA is over 50 SMA and the latter is angled forward, this is considered to be a buy signal. Moreover, HA should be above and separated from the 12 periods of SMA.
The chart also allows investors to know when it is necessary to exit the market. It is commonly referred to as an exit point when the HA closes below a shorter SMA. Additionally, when the HA candles turn from green to red investors need to exit the trade.

Using the Heikin Ashi in swing trading

The HA technique is popular amongst investors that follow a long-term strategy. However, day traders that follow a short-term trading plan use more precise representations of HA charts. Thus, swing traders are commonly based on hourly, four-hour, or daily charts. That way investors can monitor the connection between the HA candlesticks and the SMA and define if an asset is volatile or not.

In the example above traders can identify the potential entry and exit points. As it is presented through the combination of the HA chart and the swing indicator, large losses can be avoided from rough downtrends as well as investors can earn high profits from sudden uptrends.

Conclusion

The Heikin-Ashi candlestick chart is an efficient trading method that helps investors to understand where an asset is heading. Due to its sophisticated calculating methods, it filters the market noise and represents a smoother view of the price trends. Traders need always to remember that Heikin Ashi candles represent the average of the open, close, high, and low prices and not each of them individually. Last but not least, the HA technique can give even higher reliability when it is combined with other technical indicators.