Heikin Ashi Candlesticks Chart – Explained

Translated, the words Heikin Ashi mean “average bar” in Japanese. Created in the Japanese rice markets, Heikin Ashi has been around for more than two centuries.

Let’s find out more about how Heikin Ashi works.

What is a Heikin Ashi Chart?

Due to the great volatility of the markets, price fluctuations often create false signals that make us go in the opposite direction.

To reduce all the noise of market operations, the Heikin Ashi Candlestick Chart was developed. This chart is derived from the traditional Japanese candlestick chart that allows traders worldwide to identify trends easily.

Heikin Ashi candles are both a chart and an indicator. Instead of reflecting prices, these candles show the trader the price movement over time. In this way, it manages to eliminate the market noise showing only significant changes in trend.

In this sense, understanding that this is an indicator is important to avoid short trading practices such as scalping.

The Heikin Ashi is not suitable for scalping because, since it represents mostly important price changes, Heikin Ashi Charts cannot give information to the trader of the small changes that have occurred in the market.

Instead, the Heikin Ashi Candlesticks are a highly recommended indicator for longer-term traders like swing and position traders.

How to read the Heikin Ashi Chart?

The structure of a Heikin Ashi candle is related to the previous candle. In this way, it manages to provide us with general trend patterns.

Like traditional candles, Heikin Ashi candles have 4 points that define their construction. These points are the opening level, the closing level, the maximum, and the minimum.

Here’s how the calculation works:

Opening level

It's the average between the opening price and the closing price of the previous candle.

Closing level

It's the average between the four values that make up the previous candle, that is, the opening price level, the closing level, the maximum, and the minimum.

High

To define the candle's high level, we choose the highest value between the maximum, the opening price, and the previous candle's closing level.

Low

To define the Low of the candle, we choose the lowest value between the minimum, the opening level, and the closing level of the previous candle.

Difference from traditional Japanese candles

In addition to differing in the way the candle is structured, there are other differences that we must know.

While each candle is independent of the others in Japanese Candlesticks, the Heikin Ashi Candlesticks link each candle to the previous one. The opening level of each Traditional Japanese Candle begins at the level where the previous candle closed.

Heikin Ashi Candles, meanwhile, overlap. In fact, the opening level of each Heikin Ashi Candle is exactly in the middle of the previous candle's body. This fact becomes evident if we pay attention to the open level formula.

Traditional Japanese candles represent with some accuracy the price level of the pair. However, Heikin Ashi Candles work with price averages to signal not the price but rather the momentum and how strong is that momentum.

How to use Heikin Ashi?

All traders want to find the trend to make a profit. For this reason, many indicators and patterns are used with other types of charts.

But the Heikin Ashi Chart simplifies all this so that the reading of the trends is simple, and it is practically not necessary to look for any other pattern to understand where the trend is heading.

The basic aspects to watch out for to effectively use the Heikin Ashi candles are:

Candle size

If the candle's body is large, we face an upward or downward trend, as indicated by the colour.

Additionally, if the candle presents a prolonged shadow in the same direction as the trend, we can be more confident that we are facing a trend.

Colour

The colour indicates the direction of the trend. Red for a downtrend or green for an uptrend.  Although the colours depend on the broker and the configuration we choose.

Candle Doji

Suppose we see a Doji candle on our chart. In that case, we must be cautious because, like traditional Japanese candlestick charts, Doji candles indicate market indecision, so the trend can change, or the price could enter the consolidation stage.

Pros

Smoothness

Heikin Ashi Candlesticks create a smoother price flow without jumps or choppy movements.

Lower speed

Compared to traditional price charts, the Heikin Ashi Candlestick Chart slows down the market, thus eliminating most false signals.

Ease of interpretation

The chart facilitates the interpretation of the trend with the elements that make up the candles: size, direction, and colour.

Calm

The use of Heikin Ashi Candles gives the trader peace of mind because when using them, he can stay in a trend without feeling nervous.

Cons

Reversal

Due to the slowing down of the signals, Heikin Ashi does not allow us to realize that the trend is reversing as quickly as we would like. Lagging indicators dismiss useless signals but also give late signals to close a trade.

Not good for short period trading

When using short-duration strategies, this indicator is not useful precisely because of the disadvantage mentioned above. In addition, these strategies seek very low profits in short periods. Therefore, delayed Heikin Ashi signals can create losses that cannot be compensated.

To Heikin Ashi or not?

Heikin Ashi candlestick charts are a derivation of traditional Japanese candlestick charts intended to eliminate market noise and make trend reading easier.

These charts are more useful in longer trends, preferably with timeframes longer than 4-hour, and are not recommended for scalping.

The use of charts is greatly simplified because few aspects are taken into account when making decisions.

When the chart is used correctly, the percentage of successful operations increases considerably. However, as with all other trading tools, it is preferred to confirm the trend with other technical analysis tools like the RSI or stochastics.