The vast majority of traders have learned to trade with candlesticks, line charts, and bar charts. This is a standard trading setting that welcomes novice traders to make sure their familiarization with charts is as smooth as possible.
Heikin Ashi, which stands for “average bar” in the Japanese language, is a technique for reading charts based on candlesticks. It is seen as a more advanced version of the basic candlestick chart., as it displays the same information as the normal candlestick charts, but with a reduced amount of noise.
In this article, we will explain how to use Heikin Ashi to improve your trading.
Heikin Ashi in Forex Trading
Heikin Ashi works to smooth out the price movements on a chart by showing values on the chart using averages to build what does look very similar to the candlestick, but with reduced noise. As such, it works to eliminate the choppiness out of charts and simply help the trader understand whether or not the market is in a bullish or bearish trend.
Therefore, this trading technique is practically used to make charts more readable. Traders will want to use it to analyze trending Forex pairs, get more information about whether a particular pair is trading in a trend or ranging, etc.
Heikin Ashi charting – an illustration (MetaTrader 4)
Heikin Ashi is based on a formula that makes the market more composed as it helps it settle down and ignore the excess noise. Unlike the classic candlestick open-high-low-close (OHLC) charts, Heikin Ashi uses the following formula to calculate the shape of a candle:
- Open of candle = (open of previous bar + close of previous bar) / 2
- Close of candle = (open + high + low + close) / 4
- High of candle = the maximum value from the high, open, or even close of the current period
- Low of candle = the lowest value from the low, open, or close of the current period
Heikin Ashi is used in the same way as a traditional candlestick chart. It can be applied on any timeframe as the formula needs standard input to calculate the shape of a candle. As can be seen in the example above, the standard MT4 setting is designed to show bullish candles in white color and bearish in red.
The main difference between the classic candlestick chart and Heikin Ashi lines is coloring and its meaning. While the classic chart shows bullish and bearish candles based on their open/close price, the Heikin Ashi formula makes candles’ shapes different.
Classic candlestick chart – an illustration (MetaTrader 4)
For instance, Heikin Ashi will paint candles in white (bullish) while in an uptrend. This is despite the lower closing price that would paint these candles as bearish in the classic charting system. The result is that the chart looks as it is moving up or down all the time, hence the choppiness is eliminated.
As you can see from comparing these two charts, trending parts of the chart look almost identical. However, the classic candlestick chart has candlesticks that are bullish despite the price action trading lower. This is the “noise” we are talking about, which is eliminated with the Heikin Ashi technique.
Due to a tendency of Heikin Ashi to paint the candles in red during a downtrend and white during an uptrend, the signals it produces are also closely associated with colors. These are the five primary signals that Heikin Ashi is generating:
- The general appearance of white (bullish) candles signals an uptrend.
- The general appearance of red (bearish) candles signals a downtrend.
- White candles without shadows that extend lower signal a strong uptrend.
- Doji candles – small or no body with upper and lower shadows – signal that a trend may change its direction.
- Red candles with no upper wicks show a strong downtrend.
These signals help traders to better understand the current state of the market. For instance, you may be looking at clues of when the current trend will change to close your position and maximize profits. In this case, the appearance of doji candles may help you exit position before the trend changes.
Conversely, some traders will look to stay in a trade as long as the candles are not changing their color, meaning that the overall trend is intact. One of the key characteristics of Heikin Ashi candles is that the trend reversal signals described above can help the trader get out of the winning position before it’s too late.
How to use Heikin Ashi Charts
The Heikin Ashi candlesticks enable you to trade patterns like any other charting system. Let’s now see how to spot profitable opportunities with the Heikin Ashi trading system. As a first step, apply the Heikin Ashi technique on the MetaTrader 4 platform. You do this by clicking Insert -> Indicators -> Custom -> and then selecting ‘Heikin Ashi’ from the drop-down menu.
This way, you will get a Heikin Ashi chart. You’re now ready to search for profitable trading opportunities.
Using Heikin Ashi charts on MetaTrader 4
One of the more popular Heikin Ashi trading strategies is based on capitalizing on trend reversals. As noted earlier, this technique tends to extend trends and eliminate the choppiness and noise from charts.
As a first step, wait for a strong uptrend/downtrend to end. In this particular case, we see GBP/USD trading in a downtrend on the H4 chart. At the bottom of a chart, the price action changed its trend as the buyers staged a relief rally. Pay attention to the first white (bullish) candle that has a long wick that extends higher.
This is a signal that the bulls have grown in the game after a period that was dominated by the selling side. Hence, the shadow that extends higher is a signal that the market is likely to reverse as the downtrend is ending. The second bullish candle can generate the confirmation that the trend reversal is likely to happen.
Trading Heiken Ashi charts
Once we have identified a trading opportunity, we move to define the trading setup. In this particular case, the entry point (the yellow horizontal line) is located at the place where the second bullish candle closed.
This way, we have the first bullish candle with a long wick, followed by a second confirmation bullish candle. Interestingly, the second bullish candle also has a long wick that shoots higher.
Trading Heikin Ashi charts on MetaTrader 4
The red horizontal line signals where the stop loss is located. It is below the lowest swing low, allowing some space for a retest of the recent lows. On the other side of the market, we are using the former horizontal support (the green horizontal line) as a level where we plan to collect our profits.
As former support, this level is likely to act now as resistance (which is exactly what happens at a later stage). Therefore, our trading setup is as follows:
- Entry: $1.5700
- Stop-loss: $1.5660
- Take profit: $1.5800
A few days later, the price action hits our profit-taking level. We earned 100 pips by risking 40 pips, therefore making our risk:reward ratio 1:2.5.
Combining Heikin Ashi Charts with Other Indicators
As any technical indicator, Heikin Ashi is best used in conjunction with other technical tools. Traders that use Heikin Ashi charting tools tend to use Fibonacci levels, moving averages, pivot points, Ichimoku cloud, the Relative Strength Index, the MACD, etc.
For example, traders may want to use Fibonacci extension lines to identify where the price action may stop after breaking a support/resistance line. As Heikin Ashi is seen as a “trending” charting tool, the combination of these two may help us determine the point where the price action may reverse its course.
As noted above, Heikin Ashi is especially helpful because it doesn’t adjust the price, but rather the way the price is illustrated in terms of open and close. As a trader, you want to look for shaved or wickless candles facing the trend. For this reason, traders tend to combine Heikin Ashi charts with the Ichimoku cloud.
Combination of Heikin Ashi and the Ichimoku cloud – MetaTrader 4
One possible way of reaping the benefits of these two is to look for an upwards trend when the price is above the Ichimoku cloud. This way, the Heikin-Ashi candles without lower wicks will display a very strong upwards trend.
This chart is best used after you’ve used Ichimoku to recognize a clear entry. With Heikin Ashi, a large body and one wick that follows the trend’s direction indicates the strength of that trend, as opposed to traditional candlesticks.
On the other hand, if the wicks on both sides of the candle display a choppy trend, that’s an indicator that the trend is slowing down as the price is surpassing the average price of the previous candle.
Ultimately, it’s important to mention that Ichimoku serves to filter out the noise made by the cloud, providing us with a foundation for developing a bias with the trend. Employing the Heikin-Ashi will clear out the noise from candle to candle, making it easier to focus on the average rate of a price, eliminating the need to worry about each and every candle.
By using Heikin Ashi in conjunction with Ichimoku, the Heikin Ashi candlesticks will help extend the time you stay in the trend after you’ve used Ichimoku to identify the entry points.
Strengths and Weaknesses
First of all, it’s important to mention that the way Heikin Ashi candlesticks represent the open and close prices results in a price-smoothing effect on the chart. This is one of its key advantages and can be a big help for trend-following investors, because Heikin Ashi charts even out the price action and market noise, which is highly noticeable in Japanese candles.
Another advantage of Heikin Ashi charts is that during sharp uptrends and downtrends, the close in Heikin Ashi candles often has no shadows given that the closing price is computed as the average of the open, high, low, and close.
This can prove useful in the process of evaluating the strength of the underlying movement, compared to Japanese candlesticks that display upper or lower shadows in the same situation.
While the price-smoothing effect is its key advantage, it also leads to the key disadvantage of Heikin Ashi charts. This is because the smoothing effect makes common candlestick patterns very hard to identify or sometimes completely invisible. While it may be important for some investors, the ability to identify major trend patterns is of the utmost importance to other traders.
Here are the key takeaways that you should always remember about Heikin Ashi charts:
- Heikin Ashi, which stands for “average bar” in the Japanese language, is a technique used for reading charts based on candlesticks. It is seen as a more advanced version of the basic candlestick chart.
- Heikin Ashi is used in the same way as a traditional candlestick chart. It can be applied on any timeframe as formula needs standard input to calculate the shape of a candle.
- Its biggest advantage is that it tends to extend trends and eliminate the choppiness and noise from charts.
- However, the smoothing effect can make common candlestick patterns very hard to identify, and sometimes completely invisible.
- As any technical indicator, Heikin Ashi is best used in conjunction with other technical tools.
Frequently Asked Questions
Heikin Ashi vs Candles: which one is better, what are the differences?
The most important distinction between those two lies in the calculation of opening and closing prices. Heikin Ashi candles are predicated on OHLC (open-high-low-close), as opposed to Japanese candles which are open at the middle of the last candle, and their closing price is computed as the average of the open, high, low, and close prices in that particular session.
Also, Heikin Ashi candlesticks, which are illustrated by upper and lower shadows, represent normal highs and lows recorded during the session.
Another difference between Heikin Ashi and classic candlestick charts lies in the directional moves. As far as the former is concerned, the Heikin Ashi charts are smoothed out as opposed to the latter.
Bear in mind that on traditional charts, candles tend to change colors from green to red, often making it hard to read them. In contrast, candles on Heikin Aishi show colored candles in a consecutive manner, making it much easier to detect previous price moves.
Hence, there’s no real answer to which one is better. It genuinely depends on what kind of trader you are and also on your personal trading style.
Heikin Ashi vs Renko: which one is better, what are the differences?
The key distinction between Heikin Ashi and Renko charts is that the former are created based on averages in two periods. Conversely, Renko charts are constructed by only displaying movements of a specific scale.
While a Renko chart features a time axis, the boxes and bricks are controlled only by movements. Additionally, while a Heikin Ashi candlestick will take shape in every period, a Renko chart creates a new brick or box only when the price advances in a specific direction.