Heikin-Ashi, as the Modified Version of the Regular Candlestick, a Strong Tool to Filter out the Markets Noise
On forex or stock market, we can make or lose money when the price goes up and down.
We have to become able to understand what party, bulls or bears, have taken the market&8217;s control.
Then we can make money by following the dominant party.
Different traders do this using different methods.
But for most traders, technical analysis of the price chart, is the easiest way.
So they spend a lot of time to learn the technical analysis.
In fact, technical analysis was invented and introduced by Japanese traders by the invention of the candlesticks.
Those who are familiar with the candlestick charts, know that it is the best and fastest way to understand the condition of the markets and the psychological situation of the buyers and sellers.
Japanese traders didn&8217;t stop improving their technical analysis methods and tools.
They worked a lot and tried to make the technical analysis and the price direction prediction easier and faster.
As a result, Heikin-Ashi chart that came after the candlestick chart is one of the several different achievements of the Japanese traders.
Heikin-Ashi charts are easier than candlesticks to understand and trade.
In this article, I am explaining about the Heikin-Ashi signals and analysis.
I will compare them to the candlesticks.
Then will I talk about our opinion about Heikin-Ashi charts and the way that you can use them in your trades.
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So What Is a Heikin-Ashi Chart and How Does It Look Like?
Heikin-Ashi charts look like the candlestick charts.
But the method of the calculation and plotting of the candlesticks on the Heikin-Ashi chart is different from the regular candlestick chart.
If you use the MetaTrader platform or MT4, you can download the free Heikin-Ashi and Smoothed Heikin-Ashi templates HERE to install them on your MT4 platform.
In candlestick charts, each candlestick shows four different prices:
(it is recommended to learn the candlesticks here before you go ahead and read this article).
On the candlestick charts, each candlestick is independent and has no relationship with the previous or next candlesticks.
But Heikin-Ashi candlesticks are different and each candlestick is calculated and plotted using some information from the previous candlestick:
1. Open price:
The open price in a Heikin-Ashi candlestick, is the average of the open and close price of the previous candlestick.
2. Close price:
The close price in a Heikin-Ashi candlestick, is the average of the open, close, high and low prices.
3. High price:
The high price in a Heikin-Ashi candlestick, is chosen from one of the high, open and close price of which has the highest value.
4. Low price:
The low price in a Heikin-Ashi candlestick is chosen from one of the low, open and close price of which has the lowest value.
So candlesticks of a Heikin-Ashi chart are related to each other, because the open price of each candlestick should be calculated using the previous one candlestick&8217;s close and open prices.
Also the high and low prices of each candlestick is impacted by the previous candlestick.
So a Heikin-Ashi chart is slower than a candlestick chart and its signals are delayed.
They work somehow like a moving average.
What Are the Advantages and Disadvantages of the Heikin-Ashi Delay?
Such a delay eliminates a lot of noise and creates a much smoother charts.
It makes the Heikin-Ashi charts a good indicator for the noisy and choppy markets.
It prevents the traders from being deceived by many of the false reversal signals and trade setups.
Let&8217;s see how a Heikin-Ashi chart looks like and compare it to a regular candlestick chart:
The above chart has two parts.
The upper part is the Heikin-Ashi chart and the lower part is the regular candlestick chart.
Numbers 1 and 2 in the candlestick chart, show a sell signal.
Now, compare these signals with the Heikin-Ashi candlesticks number 1 and 2.
As you can see, the Heikin-Ashi candlesticks don&8217;t show any sell signal yet and they both look green (bullish).
The regular candlestick 2 is bearish and has formed a small Dark Cloud Cover which is a reversal signal.
It is just the Heikin-Ashi candlestick number 3 that shows a signal.
So, Heikin-Ashi candlesticks are about one or two candlesticks delayed.
If you wanted to trade using the above chart and with the regular candlestick chart&8217;s signals, you could go short when candlestick number 3 broke below the low price of the candlestick number 2.
However, if you wanted to trade only using the Heikin-Ashi chart, maybe you would have to wait for the candlestick number 4 to form.
Maybe even you would never enter because the signal didn&8217;t look that strong.
On the other part of the above chart, the regular candlesticks number 5, 6, 7, and 8 made another good reversal sell signal or short trade setup.
You could go short when the regular candlestick number 9 broke the low price of the candlestick number 8.
But to go short according to the Heikin-Ashi chart, you would have to wait for the Heikin-Ashi candlestick number 9 to form completely, and probably the next one to break below the low price of the candlestick number 9.
So the Heikin-Ashi charts are delayed and the regular candlestick charts are much faster.
Why Should You Use a Heikin-Ashi Chart Then?
According to the above explanations, because of the Heikin-Ashi charts delays, they eliminate a lot of noise and have less number of false signals.
Therefore, they prevent you from trading against the market.
On the other hand, Heikin-Ashi candlesticks are easier to read, because unlike the regular candlesticks, they don&8217;t have too many different patterns.
Different Kinds of Heikin-Ashi Candlesticks
1. Bullish Candlesticks:
When the market is Bullish, Heikin-Ashi candlesticks have big bodies and long upper shadows, but no lower shadow.
Look at the big uptrend in the below chart.
As you see, almost all of the candlesticks have big bodies, long upper shadows and no lower shadow:
2. Bearish Candlesticks:
When the market is Bearish, Heikin-Ashi candlesticks have big bodies and long lower shadows, but no upper shadow.
Look at the big downtrend in the below chart.
As you see, almost all of the candlesticks have big bodies, long lower shadows and no upper shadow:
3. Reversal Candlesticks:
Reversal candlesticks in the Heikin-Ashi charts look like regular Doji candlesticks.
They have no or very small bodies but long upper and lower shadows.
Look at the reversal candlesticks in the below chart:
How to Use the Heikin-Ashi Charts to Trades
Some traders, specially Japanese traders, only use Heikin-Ashi charts to trade.
It is a good idea specially for those who are not patient and disciplined enough.
Those who lose because of entering too early and exiting too late can also use this candlestick chart.
It helps you follow the trending markets, because it keeps you waiting for a longer time
Then it lets you get in when you are at the beginning of a strong trend.
You can have both of the regular candlestick and Heikin-Ashi charts on your trading platform and add a 14, 7, 3 Stochastic.
Buy when both of the Stochastic fast and slow lines go up from the oversold area, and at the same time both the regular candlestick and Heikin-Ashi charts show reversal signals.
Sell when both of the Stochastic fast and slow lines go down from the overbought area and at the same time both the candlestick and Heikin-Ashi charts show reversal signals.
First try the above strategy on the back data and see how it looks.
Then try it on a demo account and make sure you can make profit with it consistently.
Two more trade setups:
Another good short trade setup:
A good long trade setup:
You can demo trade and see how it works.
Heikin-Ashi and MACD
MACD is a lagging indicator.
All the indicators are lagging, but MACD is even more lagging.
Combination of MACD and Heikin-Ashi and confirming the Heikin-Ashi trade setups by MACD, helps you filter out many of the false trade setups and take the best and the strongest ones.
MACD is great in following the trends.
This is the biggest feature of Heikin-Ashi too, however, MACD is a good complement of this feature.
Read this article to see how you can use a slower settings of MACD which is 24, 52, and use the MACD bars to follow the trends, and locate the reversals through MACD divergence and convergence: How to Use MACD Indicator?
The last tip here is that there is no Holy Grail trading strategy.
All the trading strategies are able to locate some buying and selling opportunities, and Heikin-Ashi is not an exception.
It is you who has to master the trading strategies and use them efficiently, otherwise they can&8217;t do anything but making you lose money.