Heiken Ashi – How to use?
One of the most important points in trading is spotting overall market trends, especially when swing trading or investing. However, various noisy movements that are a result of volatility, harden the possibility of correct spotting a trend. To make it easier, traders have implemented several ways that eliminate these negative factors. One of them is a smoothing technique and the Heiken Ashi is one of the best smoothing approaches.
Averaging helps to smooth out short-term price fluctuations. To get a clearer picture of the difference between these two candlestick calculation approaches, let’s define which of them help to get a brighter picture of seeing a bullish or a bearish trend:
This is the standard candlestick chart that is available in every single trading terminal. You may notice the very choppy sideways movement with constantly changing bearish and bullish candles. It is pretty hard to define which side to choose if it is required to enter a trade on this asset.
This is a chart for the same period, though the Heiken Ashi candlesticks are applied. There is a clear difference that it is way easier to define the real trend without choppy movements and inconsistent price behavior.
For example, it is clear from the Heiken Ashi chart that the London session started from the move up and continued till the start of the New York session where it changed to opposite downwards movement till the end of the day. While on the standard chart it was an unclear movement almost from the beginning of the day.
The case is similar for the next day when a downward movement occurred. The normal candlestick chart shows many strong bullish candles with pin bars that might be a sign of an uptrend though the Heiken Ashi shows that there is clearly a move down because 80% of the candles are red.
In general, a trader that is using Heiken Ashi charts is looking for two signals:
- A green (bullish) candle without a lower shadow, which is a downtrend signal
- A red (bearish) candle without an upper shadow, which is an uptrend signal
Especially, if used with the Supertrend indicator, it might turn out into a very powerful tool that allows defining a trend almost perfectly with a high probability.
Heiken Ashi trend reversals
The current technique is helpful not only to define the trends but the reversals also. There might be several approaches to how it could be done but the most common one is to monitor the change of colors with a combination of the Heiken Ashi candles without wicks.
As seen on the chart the patterns in the blue rectangles clearly show that the trend has changed after the color turned around to the opposite (green to red in the first case and vice versa in the second). And afterward, the candlesticks started to go in opposite directions without forming wicks in the direction of the previous trend.
This could be a clear sign of trend reversal and might be used either solely or with some confirmation of the indicators that also enhance the chances to be on the right side of the trade.
Please also notice the orange rectangle on the chart that shows a green candlestick without a wick only after several candles after the color change. It means that the reversal is not that strong if the new direction candles are small and all of them contain wicks (shadows) in the previous directions. That is why the new upwards movement did not last long and therefore the trend changed back to down.