How To Trade with Heikin-Ashi
Candlesticks
Cory MitchellAug 06, 2014
Traders have an array of indicators to look to when it comes to identifying setups,
patterns, trends and reversals. These are all viewed on a price chart, which is arguably
the most important piece of information a trader can have. Heikin-Ashi (HA) is a
charting technique that is often overlooked, but offers valuable insights for those who
know how to put this derivative of Japanese candlesticks charts to good use.
What is Heikin-Ashi?
Heikin-Ashi candlesticks are an offshoot of Japanese candlesticks, a form of charting
developed in Japan by Munehisa Homma in the 1700s.
The purpose of HA charts is to filter noise and provide a clearer visual representation of
the trend. For new traders the trend is easier to see, and for experienced traders the HA
charts help keep them in trending trades and able to spot spot reversals, while still being
able to see traditional chart pattern setups.
How Does It look?
Heikin-Ashi price bars are averaged, so each one won’t reflect the exact open, highs,
lows and closes for that period like a normal candlestick would. HA candles are
calculated using the following formulas:
HA Close = (Open + High + Low + Close) / 4
HA High = Maximum of High, Open, or Close
Low = Minimum of Low, Open, or Close
Open = (Open of previous bar + Close of previous bar) / 2
Figure 1 shows an uptrend on a AAPL candlestick daily chart, while Figure 2 shows the
same chart in Heikin-Ashi. All charts created using [Link]
Figure 1. Daily Apple Candlestick Chart
There are several differences noticeable immediately on the Heikin-Ashi below relative
to the candlestick chart above.
See also How to Read Stock Charts
Figure 2. Daily Apple Heikin-Ashi Chart
The differences include:
● The Heikin-Ashi chart appears smoother, making the short-term trend easier to
see.
● There are no gaps on the Heikin-Ashi charts since the current price bar uses the
prior price bar in its calculation.
● Heikin-Ashi charts don’t reflect the most recent price; because of averaging, the
price on the right of the chart will be different than the last transaction price.
● Many traditional candlestick chart patterns aren’t as effective on the Heikin-Ashi
charts due to the averaging.
There are some similarities though:
● Both are highly visual.
● Some c andlestick patterns are still relevant, such as Dojis, which show indecision.
● Traditional chart patterns, such as head and shoulders and triangles, are tradable
on both types of charts.
● Big down bars with little or no upper shadow signify strong selling pressure.
● Big up bars with little or no lower shadow signify strong buying pressure.
How to Interpret Heikin-Ashi
Heikin-Ashi charts help traders view trends and spot potential reversals. Therefore, they
are most applicable to trend traders. The figures below show how to interpret bullish HA
candles and bearish HA candles in context of uptrends or downtrends.
The HA candles change dramatically in appearance when a strong trending move is
underway relative to pullbacks. Upward trending moves typically have long upward (in
this case, white) candles with very little or no lower shadows.
The shadows are the thin lines that extend out from either side of the fat part of the
candle – called the real body. These shadows represent the maximums and minimums of
the Low, Open, Close and High (see formula above). When a strong uptrend is underway,
and the buying is aggressive, the lower shadows (sticking out the bottom of the real
bodies) will not typically appear.
During pullbacks or weak trending moves there are interspersed down (red) bars, as well
as lots of bars with lower shadows. This doesn’t necessarily indicate a reversal, but it
does mean the trend is in a corrective phase or slowing.
Figure 3. Heikin-Ashi Bullish Candlestick Interpretation
The same concepts apply to downtrends, except strong down trending moves will be
composed of HA price bars with little or no upper shadows. The bars will also typically be
long and moving lower (red in this case).
If there are up bars (white) interspersed, or lots of bars with upper shadows, the trend is
either very weak or the price is in a corrective phase.
Figure 4. Heikin-Ashi Bearish Candlestick Interpretation
Typically during strong trending moves we see strong up bars with no lower shadows for
an uptrend, and strong down bars with no upper shadows for a downtrend.
Just because one up candle, or a couple of candles with upper shadows, appear during a
downtrend doesn’t mean the trend is reversing – it may just be pausing. The same is true
for uptrends.
See also Trend Trading 101
To spot reversals or trend continuations there needs to be a breakout, or a major shift in
price just like what is required with traditional charts.
Using what we know about strong trending moves and weak trending moves from
above, combine it with other technical analysis concepts, such as trendline breaks, to
spot reversals.
Figure 5. Combining Heikin-Ashi with Traditional Technical Analysis to Spot Reversals
How to Trade Heikin Ashi
Like using other types of charts, trading on Heikin-Ashi charts requires finding an entry, a
stop loss location to limit risk as well as a profitable exit point.
Since HA charts make it easier to spot trends and isolate pullbacks the charts are great
for trending trading.
Figure 6 shows a downtrend. The trending moves are easily separated from the
pullbacks due to the color changes. Due to the averaging, the pullbacks are also often
easy to mark with trendlines. When the price breaks back below the trendline, it indicates
the trend is continuing and a short trade can be initiated. A stop loss is placed just above
the recent high and profit can be taken when an up bar occurs, or at a pre-determined
profit target.
Figure 6. Active Trading with Heikin-Ashi
Getting in and out in this fashion isn’t for everyone. Longer-term traders can use one of
the entries, but then stay in the trade for as long as the trend persists. Using long-term
trendlines can aid in this regard. Stops are still utilized in a similar fashion when entering.
Figure 7. Longer-Term Trading with Heikin-Ashi
Chart patterns are also tradable. Figure 8 shows a triangle pattern which developed
following a strong move higher.
Figure 8. Heikin-Ashi Chart Pattern Trading
The Bottom Line
Heikin-Ashi charts appeal to traders because trends are easier to spot and the way the
bars are calculated creates a smoother appearance. Traditional forms of technical
analysis and chart patterns can still be used and traded with HA. Long up bars with no
lower shadows, or long down bars with no upper shadows signify strong up and down
trends respectively.
HA charts won’t show the current price on the y-axis due to averaging. Also, many
traditional candlesticks patterns will lose relevance due to the smoothing.
Trading on Heikin-Ashi charts is similar to trading on other charts. Focus on trading in the
direction of the overall trend. Use HA price bar characteristics to determine trend
strength, when the trend is slowing down and apply other technical analysis concepts
(such as trendlines) to isolate major price reversals. Apply stop loss orders to trades, and
use slowdowns in the trend as exit points, or wait for a major reversal if a longer-term
trader. Pre-determined profit targets can also be used.
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