- The Heikin-Ashi chart helps traders filter out market noise.
- Rather than using the open, high, low, and close like standard candlestick charts, this technique uses a modified formula based on two-period averages.
- Traders use the Heikin Ashi technique traders to easily detect a particular trend.
- Hollow white (or green) candles lacking lower shadows indicate a strong uptrend.
- Filled black (or red) candles lacking upper shadow confirm a strong downtrend.
What is the Heikin Ashi chart?
The Heikin-Ashi technique filters out market noise. The Heikin-Ashi chart, developed by Munehisa Homma in the 1700s, share some characteristics with standard candlestick charts but are different based on the values used to create each candlestick.
Rather than using the open, high, low, and close like standard candlestick charts, this technique uses a modified formula based on two-period averages. Some traders want more confirmation of trend direction, and Heikin Ashi charts are often used. They help highlight and clarify the current trend.
Sometimes, investors use Heikin Ashi charts on their own, particularly by swing traders or investors. Day traders use Heikin Ashi charts more as an indicator due to the benefits they have.
Traders can use Heikin-Ashi charts to determine when to stay in trades while a trend persists. But they leave when the trend reverses or pauses. Traders make most profits when markets are trending, so it is important to correctly predict trends.
Heikin Ashi is a trading chart that originated in Japan – it means “average bar” in Japanese. It resembles candlestick in that the color of the candlestick represents the price direction.
The major variation between candlestick charts and Heikin Ashi (HA) charts is that in HA charts, the average price moves, making it smoother. The average of the HA price bars fail to show the exact open and close prices for a specific period.
How to read it?
The ease of reading a trend is one of the major advantages of using Heikin Ashi chart. With Heikin Ashi, you can confidently distinguish good trends from unsustainable price action.
Bullish Heikin Ashi
When you look at it at first, the bullish Heikin Ashi resembles a normal Japanese candlestick trend. But you’ll see that the trend forms primarily by bullish candles and has no lower candles. When price shoots up, the price action makes little or no lower shadows.
Bearish Heikin Ashi
The bearish Heikin Ashi trend has the same roles as the bullish trend but in the opposite direction. This means that it is mainly made up of bearish candlewicks. Additionally, a good bearish trend on the graph has very little or no upper candlestick shadows.
What does it tell traders?
Traders use the Heikin Ashi technique traders to easily detect a particular trend. Hollow white (or green) candles lacking lower shadows indicate a strong uptrend. Filled black (or red) candles lacking upper shadow confirm a strong downtrend.
Reversal candlesticks that use the Heikin Ashi technique resemble traditional candlestick reversals. They have small bodies and long upper and lower shadows. The Heikin Ashi chart has no gaps, as traders calculate the current candlestick by using data from the previous candlestick.
Since the Heikin Ashi technique smooths price information over two periods, it produces trends and reversal points easier to detect. Candlesticks on a traditional chart mostly change from up to down. This can make them hard to interpret.
Heikin Ashi charts typically have more consecutive colored candles. This helps traders easily identify past price movements.
The Heikin Ashi technique lowers false trading signals in sideways and choppy markets to help traders avoid placing trades during these periods. For instance, rather than getting two false reversal candles before a trend begins, the Heikin Ashi gives valid signals.
If you aim to have longer and persistent trends, then using a Heikin Ashi chart will help you with that. One of the main functions of this type of charting style is to detect trends.
Advantages of using it
The Heikin Ashi trading style emphasizes persistent trends. Traders leave small consolidations and corrections behind and cannot appear on the chart. When the direction changes on a Heikin Ashi graph, the price will likely begin a new move. This assists investors in distinguishing between the potential beginning and the end of a currency pair trend.
Since it filters chart noise, traders will be able to view the naked trend. A good trade management tool to pursue in a trending market is to use a trailing stop. Due to this, a lot of traders join the smoothing benefits of the Heikin Ashi chart with a trailing stop indicator. This gives them the most of out a trending market condition.
First, test your strategies to see if they work well on Heikin Ashi charts before using them when real money is on the line.
Heikin Ashi charts smooth price activity by calculating average values. It calculates its own open (HAO), high (HAH), low (HAL), and close (HAC) by using the actual open (O), high (H), low (L), and close (C) of the time frame.
HAO: (Open of the previous bar + Close of the previous bar)/2
HAC: (Open + High + Low + Close)/4
HAH: Highest of High, Open, or Close
HAL: Lowest of Low, Open, or Close
A mathematical formula applies when calculating every price bar on a Heikin Ashi chart. Due to this, you don’t know the real price at which a given period opened or closed. This can be a problem for day traders, since knowing the exact price, particularly when you’re trading off a chart, is vital.
For longer-term traders, this is not a big problem since the open and close of a price bar is not important in trades that last for a long time.
Limitations of using it
Since the Heikin Ashi chart makes use of price information from two periods, a trade setup takes longer to form. Usually, this is not a problem for swing traders. However, day traders who need to exploit quick price moves may find Heikin Ashi charts not responsive enough for their trading strategies.
The averaged data also hides vital price information. Daily closing prices seem significant to many traders, yet the actual daily closing price is not seen on a Heikin Ashi chart. The trader only views the averaged closing value. To control risk, traders must know about the actual price, and not just the HA averaged values.
Also, these charts lack price gaps. This is another vital constituent of technical analysis that is missing from Heikin Ashi charts. A lot of traders make use of gaps to analyze price momentum, set stop-loss levels, or trigger entries.
The Difference between Heikin Ashi and Renko charts
- Heikin Ashi charts form based on averages over two periods. On the other hand, Renko charts come up by only showing movements of a particular size.
- Even though a Renko chart has a time axis, the boxes are not governed by time, but by movement.
- While a new HA candlestick will form every time, a Renko chart will only make a new box when the price has moved a particular amount.
The benefits of using Heikin Ashi
The main benefit of this simple method is a better visual perspective of the present status of the trend or consolidation. Also, traders can anticipate the strength of the next bar.
As with any other charting method, the Heikin Ashi is not dependable, and therefore, traders should use them with other technical tools. Your trading should also include risk and capital control techniques.
One chart type isn’t necessarily better than another. But some traders like Heikin Ashi charts because they assist in isolating the trend better and are not as choppy to look at. Other traders like the additional detail and perfect pricing of standard candlestick or bar charts.