The current article will help to learn more about Heiken Ashi by providing traders with useful information on what does it mean, how to use the Heiken Ashi for profitable trading, some Heiken Ashi trading strategy examples, examples of identifying uptrends and downtrends using Heiken Ashi, and other useful techniques!
What is Heiken Ashi?
Heiken Ashi comes from the Japanese language (as well as the candlesticks term) and the word ‘Heikin Ashi’ that means average bar. Basically, the Heiken Ashi technique modifies the price values that are being displayed on a chart of an instrument. Due to the fact that the Heiken Ashi is an add-on to Japanese candlesticks, it’s a good idea to remind that they consist of four pieces of price information:
The high of the candle represents the upper wick or shadow of the candlestick, while the low is the lower wick or shadow, and the body is the open and close of the candlestick.
Eventually, if the close is:
Below the open, the candle is red
Above the open, the candle is green
Every single candlestick gives information about the correspondence between the open and close prices. In simple terms: it allows seeing if the price ends up the period either lower or higher than when it was during the open. In professional trading terms, the red candlestick (when close is below the open), is bearish, i.e. there is downward pressure on the price.
The same idea is applied to the green candlesticks (close higher than the open price) that are considered bullish. This candle means upward pressure on the price.
The Heiken Ashi candles are helpful because they take into account not only current bullish and bearish prices but also the previous ones. The formula used to calculate the Heiken Ashi is:
Open = (Open of the previous bar + Close of the previous bar)/2
Close = (Open + High + Low + Close)/4
High = the maximum value from the High, Open, or Close of the current period
Low = the minimum value from the Low, Open, or Close of the current period
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.
Heiken Ashi chart patterns. Trendlines, wedges, triangles.
The basic principle behind this candlestick type is very helpful for drawing the basic charting figures like lines, triangles, and others. This is the result of the absence of the wicks that make the charts choppy and do not allow to clearly define if there exists a pattern.
Here is an example of trendlines that are drawn on the S&P500 chart and it is fairly easy to define the extremes of the candles that might be used for drawing it all correctly.
The trendlines on the following chart show that it is either possible to stick with the trend and to enter when the price comes back to the trendline or to wait for a reversal when the price breaks the trendline and to catch the new movement.
The example above shows a wedge (an example of a channel) and a triangle that are also easier to spot if Heiken Ashi is used. You can clearly see that the wedge or triangle is or going to be broken and enter the trade. It is especially useful for scalping strategies where time is very important and every trade decision has to be made very fast.
Why proper broker is important for Heiken Ashi?
As far as this is an approach based on price data (Open, High, Low, Close), the importance of the price feed is always underestimated. The broker should provide its customers with quality data without any connection breaks, quote delays, or other bad signs that may affect the quotes.
What is more important, some offshore brokers still tend to manipulate with quotes so it is vital to choose the proper company from our brokers reviews that are regulated, have licenses of trusted legislations, and will not perform any illegal activities with price feeds. We are not affiliated with any company and therefore mention all the details regardless of their positive or negative sense.