The Heikin Ashi chart is a method for seeing price action with greater clarity and less “noise.” Because its calculation is based on the average price pace. As a result, the potential to notice market movements clearly and eventually better estimate future prices is provided.
The Heikin Ashi is dependable in that it enables traders to better translate trends on candlestick charts. And assist you in locating effective entry chances by displaying potential reversals or breakouts. When using the Heikin Ashi in trading, users can critically examine the strong market volatility and convert it into important information. This is also because it objectively defines and highlights the situation of the market and gives a strong foundation for establishing an investment commitment.
With trend-following being such an important component of trading and one of the best ways to generate consistent profits, it’s no wonder that there are numerous methods for determining whether momentum is driving a market. One of these involves the Heiken Ashi chart.
Munehisa Homma invented the Heikin-Ashi trade technique in the 1700s. The technique is similar to typical candlestick charts used in trading, but it differs in how the candlestick values are computed. In Japan, Heikin means “average” or “balance,” and Ashi means “bar” or “foot,” therefore Heikin-Ashi means “average bar,” reflecting the trading approach, which employs the security’s average price.
The key distinction between a typical candlestick chart and a Heikin-Ashi chart is that the latter employs a modified formula based on two period moving averages rather than open, high, low, and close values. As a result, the approach produces a smoother chart, making it easier to identify trends and reversals. Gaps and some price data are also covered by the Heikin-Ashi charts.
How to Make a Heikin-Ashi Chart
The Heikin Ashi formula used to calculate the average values for each candle is as follows:
- Candle open: (previous bar open + previous bar close) / 2
- Candle close: (open + high + low + close) / 4
- Candle high: the maximum value from the current period’s high, open, or even close.
- Candle low: the lowest value from the current period’s low, open, or close.
Here is a step-by-step instruction to calculating the heikin-ashi chart:
- Using the formulas, produce the first Heikin-Ashi (HA) candle in one period. For example, to calculate the first HA close price, utilize the high, low, open, and close. To make the first HA open, use the open and close formula. The period’s high will be the first HA high, while the period’s low will be the first HA low.
- After calculating the first HA, you can proceed to compute the HA candles using the formulas.
- Use the open, high, low, and close values from that time to compute the following close.
- Use the preceding open and prior close to compute the next open.
- Choose the maximum of the current period’s high or the current period’s HA open or close to compute the next high.
- Choose the maximum of the current period’s low or the current period’s HA open or close to compute the next low.
- Remember that the HA open and close are not the same as the period’s open and close for steps 5 and 6. In steps three and four, the HA open and close were calculated.
Understanding Heikin Ashi’s Purpose
While Heikin Ashi is effective for detecting trends, it must be utilized in combination with other aspects to fully realize its potential. These factors include the price action (Heikin Ashi Patterns) and the behavior of each candle within the larger context.
It turns out that Heikin Ashi candles do not provide an advantage on their own. As a result, they must be evaluated in the context of the overall market trend. Nonetheless, here are additional details to help you completely grasp the notion.
To begin, a Heikin Ashi candle has a body and an upper shadow, with or without a lower shadow (wick). A green Heikin Ashi with no lower wick indicates a strong rise. Assume, however, that a lower wick begins to appear. In that circumstances, the rising momentum will most likely slow. And it is conceivable to predict a price reversal or at least a price correction in any asset.
A Heikin Ashi candle with a red body and no higher wick, on the other hand, indicates a significant downturn. Nonetheless, like in the prior case, if an upper wick appears, the downward momentum is likely to be lessening. As a result, a corrective movement or reversal could occur soon.
What if there is a cluster of red candles?
If this occurs, it indicates a downtrend, whereas a group of green candles indicates an uptrend. See the sample below on the 30-minute time frame for Bitcoin versus the US dollar, which shows both scenarios.
The size of the Heikin Ashi wick can indicate potential momentum shifts. In general, little Heikin Ashi wicks followed by wide-ranging wicks indicate that purchasing (selling) pressure is increasing.
As a crypto trader, you should search for a potential trend reversal in this instance. We can see how the size of the bottom wicks began to shift in the sample below. Notice how the wick on Heikin Ashi candlestick A is substantially larger than the wicks on the previous Heikin Ashi candlesticks. This will alert you to the possibility of a later reversal.
Chart Patterns in Heikin Ashi Chart
You must comprehend the patterns before using Heikin Ashi, as we’ll demonstrate in a step-by-step tutorial. The trader’s odds can be improved by combining trends with patterns shown by price action. As a result, some of the most credible “patterns” are displayed below.
Doji
Here is a guide to unraveling the mystery of what a Doji candle is before you become puzzled.
A Doji formation often occurs when the price closes at the same price as the “Open Price” or very nearly there. The Heikin Ashi Doji primarily signifies a failure to continue in the trend’s direction. Therefore, it is likely that the previous movement will reverse when this formation emerges.
As a result, it is critical to trade this reversal pattern in tandem with the overall market trend. The Doji is identified in the BTCUSD 30-minute time frame shown below.
Triangle Patterns
Several kinds of triangles show a pause in the main trend and may develop into a continuation or reversal. Of course, the length of the entry is largely dependent on where the pattern forms within the general trend.
In most cases, the triangle’s structure converges on a central point. While the break out indicates where the momentum is likely to continue.
In the example above, a triangle formation is shown on the daily chart of BTCUSD; notice how, after breaking the upper limit (black arrow), the price resumed its rise marked by consecutive green Heikin Ashi candles.
Wedges
Wedge formations, which can be rising or falling, are another popular price pattern. The first has a bearish connotation since it reflects a lack of follow-through to the upside, implying that a corrective or reversal movement is imminent—for example, BTCUSD 1h chart.
Meanwhile, the falling wedge has a bullish connotation and has a better probability of succeeding if the underlying trend is strong to the upside. Consider the following example:
What Makes Heikin Ashi Candles Unique From Regular Candlesticks?
At first appearance, the Heikin Ashi candles and normal candles appear to be the same. However, upon closer inspection, the Heikin Ashi chart shows smooth price activity with more stable trends than standard candlestick charts.
In purely numerical terms, standard candlestick charts show the opening, high, low, and closing price. The hourly candle A’s opening, high, low, and closing prices in the Russell 2000 stock index price chart below are 2235.8, 2238.4, 2220.3, and 2224.7.
When the same price chart is used to report prices using Heiken Ashi methodology, the new opening, high, low, and closing prices are = 2229.4, 2238.4, 2220.3, and 2229.8. Also, notice the color change from red to green, which indicates that the same time interval is recorded as an upward price rise on a Heiken Ashi chart.
In the example below, a Bitcoin chart versus the US dollar (BTCUSD) in a 10-minute time frame shows how the price presents blocks of successive red candles on the Heikin Ashi chart. Meanwhile, the classic chart has more variation in its candles, which are sometimes red and sometimes green.
In practice, the smooth behavior of the Heikin Ashi Candles allows traders to better gauge the market. Because when an asset is moving, the movement is represented by blocks of green or red candles, indicating an uptrend or a downturn, respectively. To put it simply, it makes it easier to determine whether or not a market is trending.
Above all, using this knowledge and some price action patterns (Heikin Patterns), the trader can create a trading strategy for entering the market.
How to Use Heiken Ashi to Spot Trends?
The two charts have evident parallels; after all, they are based on the same raw data; yet, the Heiken Ashi candles have used a formula that results in slight changes. As a result, the Heiken Ashi candle form provides varied insights about market movement.
- Bullish Heiken Ashi candlesticks have no or extremely little wicks on the downside. This suggests a strong upward trend and attractive purchasing opportunities.
- Candlesticks with a short body and long upper and lower wicks indicate the possibility of a reversal.
- Bearish Heiken Ashi candlesticks have no or extremely little wicks on the upside. This suggests a significant downturn with attractive selling opportunities.
- Small Heiken Ashi candlesticks of the same color indicate a consistent trend.
- Color shift is essential. If the candle sequence changes from one hue to another, the trend is likely to reverse.
How Does Heikin Ashi Work in Forex Trading?
The forex market example below demonstrates the efficiency of Heiken Ashi candles in detecting a trend reversal. These shifts in momentum, of course, signal the beginning of a new trend and may be clearly spotted on an hourly basis in the GBPUSD’ Cable’ market.
The first reversal candle closes lower than the previous candle and changes color from green to red. This indicator of upward to downward momentum is trustworthy, and the size of this candle and the next one suggests the move has solid support. The next candles in the series are of varied sizes, but they are all the same color, red, suggesting that it is time to sell short.
Trading GBPUSD – Hourly Candles – Trend Reversals Using Heiken Ashi Candles
Extra momentum is required to break through the 1hr 20, 50, and 100 Simple Moving Averages, but smaller candles follow, and the trend appears to be stalling. This indicates that short positions entered near Reversal Candle 1 may need to be exited.
The doji candle, with its small body and moderately long wicks to the upside and downside, is a classic Heiken Ashi indicator of a trend reversal. A green candle swiftly followed by a red candle suggests that it is time to finish out short positions and move to go long.
Trading GBPUSD – Hourly Candles – Dojis Using Heiken Ashi Candles
The upward movement following Reversal Candle 2 is initially highlighted by smaller candles, indicating that buying demand is not as strong as selling activity following Reversal Candle 1.
Trading GBPUSD – Hourly Candles – Trend Reversals Using Heiken Ashi Candles
This suggests that the trend may not be as long-lasting, and sure enough, a period of sideways trade marked by a mix of red and green candles follows. The green doji candle at Reversal Candle 3 indicates that it may be time to exit long holdings and return to short ones. The subsequent downward trend is highlighted by a long series of red candles, providing an opportunity to profit on short GBPUSD holdings.
Effective risk management might have been used in the preceding scenario without reducing returns. The following are some standard parameters that would have worked in the GBPUSD case study and should be practiced using a Demo account.
Markets that are trending upward:
- Set your protective Stop Loss below the trough of the first bullish candle.
- Profit should be taken at a close below a prior bullish candle.
Markets that are falling:
- Set your safe Stop Loss above the high of the first bearish candle.
- Profit should be taken at a close above a bearish candle.
How Does Heikin Ashi Work in Crypto Trading?
Essentially, it is critical to select a market with sufficient volatility and liquidity to allow trades to be executed. This, of course, works brilliantly on the Forex market.
As the traditional market matures, the margin for profit becomes more constrained. As a result, many traders are shifting their focus to cryptocurrency. The cryptocurrency industry is one of the most intriguing markets today. Despite the market’s volatility and liquidity, as well as multiple brokers offering appealing investment vehicles to engage in it, there are numerous ways to benefit from it.
So, here’s how you can find some decent trading opportunities:
Determining the Bullishness or Bearishness of Chart
It is critical to identify market momentum in order to conduct trades in favor of that momentum. In other words, use a trend-following strategy.
The multiple time frame analysis comes in handy here since it helps us pinpoint that momentum. On the 12-hour chart of BTCUSD, we can see a green candlestick breaking out of a triangular pattern. Furthermore, we can detect two places that can serve as resistance levels (Blue lines).
A Step-by-Step Guide to Trading with Heikin Ashi
Check out this helpful step-by-step guide to getting started with Heikin Ashi strategies:
- Using a higher time frame chart, determine the momentum. Price action patterns such as triangles and wedges can be used to locate breakout opportunities and play a possible continuation.
- Draw the major levels of support and resistance that could impact price movement.
- Look for Heikin Ashi buy and sell signals in lower time frames where the trade direction favors higher time frame momentum.
- To control the risk of the transaction, have a predetermined level where you can place your stop-loss order.
Heikin Ashi Chart Analysis Example
First, identify the momentum on the higher time frame; for this example, we can use the previous image as a reference, where they break out of the triangle in the 12-hour chart of the BTCUSD, which offers us information about the direction of the momentum/trend (big fat green candle).
After identifying the momentum, the idea is to check for a continuation of the 12-hour green Heikin Ashi candle, so we zoom into the 2-hour chart to look for confirmation. Any continuation pattern, such as a wedge or a triangle, can be used to frame those continuations.
For this example, we have two possible entries once the triangles break out; the entries are the black dots, and the red lines are the stop-loss orders that we use to anchor our risk.
It is also critical to emphasize the two “resistance” levels. Remember that if they don’t hold as resistance, they could fuel our long position because they are the pivot areas where the short sellers’ stop-loss orders are most likely to be.
One approach for the trailing halt is to trail based on the higher time frame’s momentum. In this scenario, the exit point is when the candle closes below the prior one (green dot).
Using Heiken Ashi Together With Moving Average Trading Strategy
By informing traders when the price is shifting direction, the Heikin Ashi generates its own trade signals. It accomplishes this by switching from red to green or green to red. Green candles indicate buying pressure (a bullish trend), whilst red candles indicate selling pressure (a bearish trend). Using a moving average indicator to filter these signals can help to ensure that trades are only taken in the main trend direction.
A 50-period simple moving average (SMA) is added to the following silver daily chart, along with a 12-period SMA. As you can see, there are some smooth trends but also some choppy periods which are ignored by the simple moving average line.
During trending periods, few basic criteria could have helped collect profits:
- Only buy when the HA has turned green in the previous few candles, the HA is above the 50-SMA (with room between the HA and the SMA), and the SMA is oriented upward.
- With separation, Heikin Ashi must also be above the 12-period SMA.
- When the HA changes from green to red, exit the trade.
- Another option is to exit when the HA closes below a shorter SMA, such as the 12-period SMA.
- Only sell when the HA has turned red in the previous few candles, the HA is below the SMA (with space between), and the SMA is tilted down.
- With separation, Heikin Ashi must also be below the 12-period SMA.
- Exit transactions when the HA changes from red to green.
- Another option is to exit when the HA closes above a shorter SMA, such as the 12-period SMA.
Using Heiken Ashi Together Stochastic Indicator Trading Strategy
Over a two-day period, a lengthy green Heikin-Ashi candlestick indicates significant purchasing pressure. Small Heikin-Ashi candlesticks or those with lengthy upper and lower shadows indicate hesitation during the last two days. The most effective approach to trade is to use stochastic and Heikin-Ashi. To construct a trading strategy, the Stochastic Indicator and Heikin-Ashi are utilized in tandem. The key points are covered below.
Buy Signal
Entry:
• Stochastic(14/3/3): Stochastic should be greater than 50.
• Stochastic(50/3/3): Stochastic should be greater than 50.
• Heikin-Ashi candlestick: The Heikin-Ashi candlestick should be green with no bottom shadow.
• SMA(20): The candle should close above the 20 SMA.
Exit:
• There are other strategies to book profit and exit, such as stochastic near 85, red candle, or prices below 20 DMA. The most intriguing part of Heikin-Ashi trading is the trailing stop loss to the previous candle’s low.
Sell Signal
Entry:
• Stochastic(14/3/3): Stochastic should be less than 50.
• Stochastic(50/3/3): Stochastic should be less than 50.
• Heikin-Ashi: A red candlestick with no upper shadow is a Heikin-Ashi candlestick.
• SMA(20): the candle close should be lower than the 20 SMA.
Exit
• There are other strategies to book profits and exit, such as stochastic near 15, green candle, or prices over 20 DMA. The most intriguing part of Heikin-Ashi trading is the trailing stop loss to the previous candle’s high.
Using Heikin Ashi Together With EMA Trading Strategy
Heikin Ashi alerts traders anytime there is a change in the price direction. The hue and direction of the transition are changed, either from red to green or from green to red. The red candles represent selling pressure or a bearish trend, and the green candles represent purchasing pressure or a bullish trend. When combined with the EMA, this creates a very dependable and accurate signal for predicting future price changes in the market.
When the price trades above the moving average, it signifies an uptrend, which suggests that as long as the trader continues to execute transactions above the EMA, it will be nothing but higher prices. If the price trades below the moving average, it indicates a decline. Lower prices can be expected as long as traders trade below the EMA.
The trader then adds 50-period and 20-period Exponential Moving Average lines to the chart and waits for the price to trade above both EMAs. Trades can be completed if the bullish trend is confirmed.
There are some simple rules for this technique that traders can employ to assist them benefit during a trending market:
Buying should be done only when the HA has turned from red to green in the last few candles and is above the EMA lines. Then, when HA switches from green to red, quit the trade.
In a decline, consider the following scenario:
Only sell if the HA has turned from green to red in the last few candles and is below the EMAs. You can exit the trade whenever HA switches from red to green.
Swing Trading With the Heikin Ashi
Heikin Ashi charts are applicable to any timeframe. The calculation is applied to the time frame of choice. Swing traders often examine hourly, four-hour, and daily charts. The above-mentioned technique could be applied to stocks, currencies, commodities, or stock indexes. Consider another example, this time with an hourly chart of a stock index. When trading a volatile asset, traders should search for separation between the Heikin Ashi candles and the SMAs. If the asset is less volatile, such as a stock index, separation becomes less essential because it occurs less frequently.
The graph above depicts probable entry sites. Not all made a large profit, and others made tiny loses. There were also other significant profit trades that used the HA turning color or crossing and closing on the other side of the shorter SMA to exit.
Using Heikin Ashi to Scalp
Scalping is a short-term trading method in which the trader enters and exits trades quickly, often many times per day. Scalping in forex is the most prominent application of this approach. While Heikin Ashi charts can be utilized on any timeframe, scalping with them can be difficult because the HA charts do not indicate the precise asset price at this time. The HA charts are generated using a formula. Every cent, pip, or tick matters in fast-paced deals, so knowing the correct price is critical.
Reversal patterns in Heiken Ashi
When the Heikin Ashi chart changes from red to green or green to red, a short-term trend reversal pattern occurs. Larger reversal patterns may be more consistent. Head and shoulders, rounded bottoms, and triple and double tops and bottoms are all Heikin Ashi reversal chart patterns.
When a reversal pattern appears, it can be traded in the same way that a candlestick variation can. You may also use a moving average exit, such as the one discussed previously, and exit when the price crosses a moving average (such as the 50-period) in the opposite direction as the transaction. On a four-hour USD/CAD chart, there is a head and shoulders reversal.
When the price breaks below the head and shoulders reversal pattern, a short entry is made. The trade is stopped when the price crosses the 50-period SMA or reaches the profit target for a head and shoulders pattern. For a target near 1.33, the projected target is the height of the pattern (about 1.37 — 1.35) deducted from the breakout point (near 1.35).
The Benefits of Heiken Ashi Trading Strategies
- Because of the strategy’s popularity, good brokers include the software tools as standard. It’s simply a matter of choosing a chart type.
- With so many people employing the approach, there is a good probability that you will be trading with the herd rather than against it.
- The candlestick formula makes trend direction and reversal easier to notice, and because there are less of them, they are more trustworthy.
- Similarly, methods employing the Heiken Ashi technique are less likely to exhibit false breakouts.
- Bullish and bearish Heiken Ashi candles alternate less frequently than regular candlestick charts. This means that signals are more distinct.
- Riding trends is an excellent method to increase your profits.
- Data demonstrates that retail traders have a blind spot when it comes to trends and frequently trade against them. Heiken Ashi systems, for example, assist to counteract this and instill trading discipline.
- It is compatible with other tactics.
- It is feasible to create automated techniques that employ Heiken Ashi signals.
The Drawbacks of Heiken Ashi Trading Strategies
- It can take some time to develop the ability to recognize trend patterns. They do not appear as frequently as standard candlestick charts due to the smoothing effect of averaging out the price data.
- Technical indicators, in general, have limitations because they are lagging indications dependent on recent price behavior. Heiken Ashi is not immune to the common issues that cause technical indicators to fail.
- Trading only on technical indicators raises the danger of price fluctuation owing to fundamental factors. It is also critical to stay up with market news events.
- Every period of market momentum ends. This technique cannot address that fundamental market fact, and trade management is required to assure optimal exit points.
Conclusion
Heiken Ashi candles improve chart readability and trend analysis. Developing trend-spotting skills is essential for effective trading, and this method assists traders in going with the flow rather than against it. It cannot be guaranteed that future price movements will continue in the same way, but this strategy tips the scales in the right direction.
The methodology is just a different way of displaying price data on charts, and the outcome is an opportunity to gain a comprehensive understanding of the market. It can be used in transactions that need precise entry and exit points, and the tools to implement the procedures are readily available.