The term ‘Heikin ashi’ translates from Japanese as 'average bar,' but its impact on trading can be anything but 'average'. It is a type of price chart derived from the standard candlestick chart and is known for its unique ability to filter out the noise of day-to-day price fluctuations.
This characteristic has made it a popular tool for trend traders who seek a clear picture of the market's overall direction to make informed trading decisions.
What is the Heikin ashi (HA) chart?
The Heikin ashi (HA) chart is a type of candlestick chart that originated from Japan and is widely used in technical analysis to identify market trends more easily. Unlike traditional candlestick charts, the HA chart uses averaged price data from the current and previous periods to create a unique candlestick.
Each Heikin ashi candlestick represents four pieces of information:
The opening price, closing price, the high and the low for that specific period.
However, the calculation of these values differs from standard candlestick charts.
What is the Heikin ashi formula?
The Heikin ashi formula is indeed a bit different from the traditional candlestick chart. The calculations used to determine the open, close, high, and low points of the Heikin ashi (HA) candlesticks are as follows:
- Open: The opening price of each HA candlestick is the average of the opening and closing prices of the previous candlestick. Mathematically, it is represented as: Open = (Open(previous bar) + Close(previous bar)) / 2
- Close: The closing price is calculated by averaging the open, high, low, and close prices of the current period. This is represented as:Close = (Open(current bar) + High(current bar) + Low(current bar) + Close(current bar)) / 4
- High: The highest value of the HA candlestick is determined by taking the maximum value from the current period's high, open, and close prices.High = Maximum [High(current bar), Open(current bar), Close(current bar)]
- Low: The lowest value of the HA candlestick is determined by taking the minimum value from the current period's low, open, and close prices.Low = Minimum [Low(current bar), Open(current bar), Close(current bar)]
This averaging technique results in a smoother chart that filters out "noise" and minor fluctuations, making it easier for traders to identify and follow market trends.
How to read Heikin ashi candlesticks
Reading Heikin ashi (HA) candlesticks involves understanding their colour, body, and wick. Here's a brief overview:
- Colour: The colour of the HA candlestick indicates the trend direction. A green or white candle suggests that the asset is in an uptrend, meaning the closing price is higher than the opening price. Conversely, a red or black candle indicates a downtrend, where the closing price is lower than the opening price.
- Body: The body of the candlestick represents the range between the opening and closing prices. A larger body signifies a strong trend, while a smaller body (or a doji candle) can signal uncertainty or a potential trend reversal.
- Wick (or shadow): The upper and lower wicks represent the highest and lowest prices during the period, respectively. In a strong uptrend, HA candles often have no lower wick, and in a strong downtrend, they frequently have no upper wick. The absence of a wick on one side can suggest the continuation of a trend.
How to trade using the Heikin ashi chart
Trading with Heikin ashi (HA) charts involves analysing the colour, body, and wick of the HA candlesticks to identify potential trends and reversals. Here's a step-by-step guide on how to trade using HA charts:
- Identify the trend: A series of green or white HA candles indicates an uptrend, while a series of red or black HA candles suggests a downtrend. The absence of a lower wick in an uptrend or an upper wick in a downtrend could signify a strong trend.
- Spot potential reversals: When a green candle is followed by a red one or vice versa, it could indicate a potential trend reversal. Similarly, a doji (a candle where the open and close are nearly equal) might signal uncertainty or a possible trend change.
- Use other technical indicators: To confirm your analysis, use other technical indicators like moving averages, the relative strength index (RSI), etc. These could help you gauge the strength and direction of the market momentum.
- Practice with a demo account: Before you start trading with real money, consider practising with a demo account. This allows you to test your trading strategies in a risk-free environment.
- Open a live trading account: Once you're comfortable with your trading strategy, you can open a live trading account to start trading.
- Manage your risks: Always set stop-loss and take-profit levels to manage your risks effectively. Remember, no method is 100% accurate, so it's crucial to have a risk management plan in place.
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Summary
While Heikin ashi can be powerful on its own, combining it with other charting techniques and indicators like RSI and MACD could amplify its effectiveness. The confluence of several indicators that support the same trade direction could offer stronger confirmation. Don’t also forget about proper risk management while trading.
FAQs
1. Is Heikin ashi effective for all types of trading, including day trading?
Heikin ashi is renowned for its ability to reduce short-term noise and is therefore well-suited to day trading. However, it may need to be combined with other tools if markets are not trending strongly.
2. What platforms offer Heikin ashi charts?
Many trading platforms support Heikin ashi, including popular ones like MetaTrader and TradingView.
3. Can Heikin ashi be used for all types of assets?
Absolutely. Stocks, Forex, commodities, and cryptocurrencies are all suitable for Heikin ashi analysis, as long as there is enough volume and liquidity.
4. Are there any specific indicators that work best in conjunction with Heikin ashi?
Momentum indicators like the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI) could complement Heikin ashi analysis by confirming the strength of the trend.
