Heikin Ashi candlesticks are a unique charting method which get attached to your standard price chart on your trading terminal.
The chart will resemble a typical Japanese Candlestick chart, however there are nuances that make reading the Heikin Ashi candles a bit different than the traditional candlestick chart. Below you will see what a Heikin Ashi chart looks like: An untrained eye might not even recognize that this is not a standard Japanese Candlestick chart.
As you can see, each Heikin Ashi candle has a body, and an upper and lower candlewick shadow — the same as with the Japanese Candlesticks. However, if you take a closer look you will notice that each of the Heikin Ashi bars start from the middle of the bar before it, and not from the level where the previous candle has closed. This is a major distinguishing factor between the two charting styles.
Each Heikin Ashi candle has an open, close, high and low. Therefore, there are four segments of the Heikin Ashi formula: The opening level of the Heikin Ashi candle equals the midpoint of the previous candle. If you refer to the chart example above, it is clear that every new candle starts from the middle of the previous one. The close of each Heikin Ashi bar equals to the average level between the four parameters — open, close, high, and low: The highest point of a Heikin Ashi candle takes the actual high of the period.
This could be the highest shadow, the open, or the close. The lowest point of a Heikin Ashi candle takes the actual low of the period. This could be the lowest shadow, the open, or the close.
The general idea behind the Heikin Ashi bars is that they smooth the price action. As a result, much of the noise shown in traditional Japanese Candlesticks is eliminated with Heikin Ashi charting. On the left side you see a chart composed of Japanese Candles.
On the right side we have a chart made up of Heiken Ashi candles. Referring to the colored circles on the chart you see the main differences between the two charts. Notice that the Heiken Ashi chart isolates some of the noisy price action. As a result, some Forex traders prefer to use the Heiken Ashi candles in order to isolate the noise on the chart, which can provide for a clearer analysis of the price action.
If your goal is to catch longer and persistent trends, then using a Heikin Ashi chart will help you toward that end. Trend detection is one of the main functions of this type of charting style. The Heikin Ashi trading style puts an emphasis on persistent trends.
Small corrections and consolidations are left behind and they are barely visible on the chart. You will notice that when the direction changes on a Heikin Ashi graph, the price most likely starts a new move. This helps to distinguish between the potential beginning and the end of a currency pair trend.
Since chart noise is filtered, you basically see the naked trend. Using a trailing stop is a good trade management tool to pursue in a trending market. As a result, many traders combine the smoothing benefits of the Heikin Ashi chart with a trailing stop indicator to get the most of out a trending market condition. Another way to use a Heiken Ashi graph is to look for chart patterns and apply price action rules.
In most cases this works the same way as with traditional Japanese candlesticks. But you will find that Heiken Ashi chart pattern breakouts are sometimes more reliable than traditional candlestick charts. As we have pointed out, the ease of trend identification is one of the major benefits of using a Heikin Ashi chart.
With a Heikin Ashi chart you can confidently distinguish strong trends from unsustainable price action. At first glance, the bullish Heikin Ashi trend looks like a normal Japanese candlestick trend. However, you will notice that the Heikin Ashi trend is built primarily by bullish candles and is absent of lower candlewicks.
When the price is shooting up, the price action creates very little to no lower shadows. Below you will see a strong bullish trend on a Heikin Ashi chart: See the strong bullish trend that is marked in blue. Notice that there are only a few lower candlewicks on the way up. This means that this bullish trend is very strong. The bearish Heikin Ashi trend has the same functions as the bullish one but in the opposite direction. This means that it is built mainly by bearish candles. Also, a strong bearish trend on the Heikin Ashi graph has very little to no upper candle shadows.
This time we have noted a bearish trend on a Heiken Ashi chart. The decrease is marked with blue on the image above. See that the bearish price action has no upper candle wicks. This indicates that the declining momentum is very strong. Now we will discuss three patterns which are commonly found on a Heiken Ashi chart. The first pattern we will start with is the Doji reversal candlestick. The Doji candle appears when the price closes at the same level where it opened.
As such, the candle has no body and it essentially looks like a dash. The Doji, when it appears after a directional move, has a reversal potential and indicates that the price action is stalling and might be poised to start a counter trend move. Above you see a Heikin Ashi chart, which shows three price swings — bearish, bullish and bearish again.
The first starts the bearish price swing down. At the end of this price swing, we see a Doji candle. The direction reverses afterwards. Then comes another Doji candle pattern at the top of the bullish move. The price action reverses again to start a fresh bearish move. Triangle patterns are commonly found on the Heikin Ashi chart as well.
The important point here is to follow the direction that the price action breaks through. If the Heikin Ashi price action breaks the upper level of the pattern, this signals that the increase will likely be extended. If the price action breaks the lower level of the triangle, then we anticipate the price to start a new bearish move. On the chart above, you can see an Expanding Triangle pattern blue.
Then the price action breaks the lower level of the triangle and completes the minimum target of the pattern, based on the measured move calculation. The other pattern that is often found on the Heikin Ashi chart is the Wedge pattern. There are two types of Wedge patterns — Rising Wedge and Falling wedge. It is important to mention that the Rising Wedge has bearish potential. Contrary to this, the Falling Wedge has a bullish potential. In the chart above, we have a Rising Wedge chart pattern.
The price breaks the lower level of the Wedge to start a fresh bearish move. The minimum target gets reached within a couple of bearish price swings. One way to display a Heikin Ashi chart is by using a MetaTrader 4 chart terminal. The MT4 platform has the smoothed Heiken Ashi indicator built in. Then the indicator will replace your original price chart.
In some cases, the default MT4 colors of the Heikin Ashi candles are red for bearish and white for bullish. If this happens, simply open the settings of the Heikin Ashi add-on and change the color for the bullish candles to green, or whatever other color you prefer.
Heiken Ashi charting is very powerful when combined with price action analysis. Look for the emergence of new trends, or for the reversal of already existing ones. Look for support and resistance levels and important swing points, and keep in mind that these could act as future turning points on the chart. Chart and candle patterns should always be considered for the opening and the closing of trades.
Always use a stop loss order conformed to a level prior to your entry point. You can always replace the regular stop with a trailing stop order as price moves in your favor. Hold your trades until the price action clues you in to a potential trend reversal. Also if the Heiken Ashi price action creates a relatively large candle which is opposite to your trade, you might want to exit the position.
As we said, most of the noise is filtered on the Heikin Ashi charts. Thus, a big opposing candle is likely to indicate a shift in sentiment. You see a bearish trend at the beginning of the chart. Suddenly, a Doji candle appears and the price action reverses. You have a buying opportunity when the price reverses after the Doji candle.
The stop loss of your trade should be located below the lowest point created at the time of the reversal. The optimal place of the stop is shown with the red horizontal line at the bottom of the chart. A Doji candle after the down move on the Heikin Ashi chart implies that the price action is likely to reverse or at least stall the downtrend.
A big bullish impulse appears afterwards. Then the price reverses. Notice that the reversal resembles a bullish Flag pattern.More...