Heikin-Ashi trading strategy: How to trade with Heikin-Ashi candles

What are Heikin-Ashi candlesticks?

Candlesticks are one of the oldest forms of technical chart indicators that traders can use in their analysis of asset prices. A candlestick chart is used to visualise price movements and identify patterns, with each candle representing a trading session.

Heikin-Ashi, meaning average (‘heikin’ or ‘heiken’) and bar (‘ashi’) in Japanese, is a specific type of candlestick chart. The candles on Heikin-Ashi charts differ from traditional candlestick charts by incorporating data from the previous session to show how average values change over time.  

Highlights

Traditional candlesticks use open and close prices to form the body of the candle and high and low prices as the wicks. The Heikin-Ashi formula uses a combination of four price averages – open, high, low and close values – from the current and previous trading sessions. 

As a result, each Heikin-Ashi candle is lined up with the middle of the preceding bar, instead of the close of the previous candle.

The open price used in a Heikin-Ashi candle is based on the average of the open and close from the previous candlestick. 

The close is an average of the open, high, low and close of the current period.

The high on the candle wick is the highest number out of the session open, intraday high, or close. Similarly, the low on the wick is the lowest number of the session low, open or close. 

In this way, the Heikin-Ashi calculation creates a smoother-looking candlestick chart that makes it easier to identify and follow price trends.

Heikin-Ashi candles were developed by Japanese rice trader Munehisa Homma back in the 1700s. Homma is considered by many to be the father of technical analysis for his work in identifying price trends.

Homma created the first candlestick charts and used them to identify definite trading patterns that formed ahead of changes in the direction of rice prices. Understanding the psychology driving price trends put him at an advantage to other traders, as he outlined in his 1755 book, The Fountain Of Gold: The Three Monkey Record Of Money.

How to read Heikin-Ashi candlesticks charts

Analysing Heikin-Ashi candles provides a way for traders to identify the start of major price trends and trend reversals by filtering out the day-to-day noise in the stock markets. 

This is especially useful during periods of high volatility, when it may be easier to lose sight of longer-term movements. Traders could potentially use the charts to try to identify when to open or hold a trading position and when to exit ahead of a reversal.

The Heikin-Ashi indicators can be applied to any time frame – hourly, daily, monthly, etc. Combined with other technical indicators they could form a fuller picture of the direction of an asset price. Heikin-Ashi charts may be used to analyse forex and commodities, as well as stocks and indices.

Reading Heiken-Ashi candles may be relatively straightforward, but it is important for traders to understand how they work and what they represent if they intend to try and use them to make more informed trading decisions.

In an upward trending market, a Heikin-Ashi chart will show a progression of green, or other coloured, candlesticks with no lower shadow or wick. Conversely, in a downward trend, there is no upper wick on, typically, red candlesticks.

Heikin-Ashi trading strategies

Heikin-Ashi charts may be set with most charting software and platforms by simply selecting ‘Heikin Ashi’ as the chart type and choosing the desired data source and timeframe.

Charts showing candlesticks without wicks, or shadows, on the lower end signals the beginning of a bullish trend. When candlesticks have no wicks on the higher end, they indicate the start of a bearish trend. The longer the sequence of candles without wicks, the stronger the trend it signifies.

Candles with shorter bodies and longer wicks indicate that traders should be aware of a pause in the trend. The trend could then reverse direction, or it could resume its movement in the same direction. This requires some skill and experience to interpret which of those is more likely to happen.

When markets are changing direction and sentiment shifting, there is more volatility and candles resemble the dojis on traditional candlestick charts, with smaller bodies and longer wicks. As trends reverse, the candlestick colours switch.

In addition to the candles, there are three kinds of triangles drawn on Heikin-Ashi charts: descending, ascending and symmetrical. 

If candles break above the upper boundary of an ascending or symmetrical triangle, the upward trend is likely to continue, whereas if there are candles falling below the bottom of a descending triangle, the chart indicates a bearish trend. 

Heikin-Ashi trading strategies for different markets

• Forex 

In foreign exchange (forex) trading Heikin-Ashi candles could be combined with other signals like moving averages (MAs) and momentum oscillators to identify bullish or bearish divergences between the two. Heikin-Ashi candles could also be used to identify potential support and resistance levels.

• Stocks

A Heikin-Ashi strategy for stocks could involve identifying trends in the stock’s price and using them as a guide for when to buy and sell. This can be done by looking for support and resistance levels, as well as looking at the Heikin Ashi candles. Traders may also look for candlestick patterns that signal potential trend reversals, such as dojis, hammers, and engulfing patterns. They can also use technical indicators such as MAs, oscillators and volume.

Advantages and disadvantages of the Heikin-Ashi trading

Advantages

• Trend spotting. Heikin-Ashi charts could help identify trends more easily than standard candlestick charts. This is because these charts smooth out the noise of random fluctuations and emphasise the underlying trend.

• Visual representation. Heikin-Ashi charts provide a visual representation of the market, making it easier to interpret the chart patterns.

• Enhanced trading signals. The charts could potentially help traders identify trading signals that may not be visible on standard candlestick charts. For example, the red and green ‘smoothed’ candles on Heikin-Ashi charts can be used to identify bullish and bearish trends.

• Less prone to false signals. Heikin-Ashi charts are less prone to false signals than regular candlestick charts. This is because the smoothing effect of the Heikin-Ashi charts eliminates short-term volatility and emphasises longer-term trends.

Disadvantages

• Delayed signals. By averaging values, Heikin-Ashi candles do not show exact opening and closing prices for an asset, and by incorporating historical prices, they introduce a time lag into the trend line. The delay may put day traders or scalpers at a disadvantage, particularly in fast-moving markets like forex, by giving signals that have already become obsolete. 

• Short-term limitation. The smoothing of the data could make it difficult to identify short-term price trends.

• Learning curve. As Heikin-Ashi charts are different from traditional candle charts it may take inexperienced traders a while to properly learn how to analyse and interpret them effectively.

• Unpredictable data. Heikin-Ashi charts rely heavily on the underlying data which can be unpredictable or incorrect.

Conclusion

Heikin-Ashi charts are designed to filter out some of the market noise and provide a smoother view of the trend of the price data over a given period of time. This makes it easier to identify trends and potential trading opportunities.

A Heikin-Ashi candle strategy could be a helpful tool for traders looking to make more informed trading decisions. It could help identify trends and spot potential reversals more quickly than traditional candlestick charts. However, there are limitations to the charts as they may take time to learn how to interpret due to their uniqueness, they may also make it difficult to identify short-term trends.

As with any trading strategy or tool, traders should ensure that they do their own research before making a decision and try to avoid trading more money than they can afford to lose.

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