- November 3, 2020
- Posted by: CoachShane
- Category: Trading Article
Heikin Ashi charts may not be as popular as bar charts and traditional Japanese candlesticks but for traders who use them, they don’t care how popular they are.
Charts generally calculate the high, low, open, and close which makes the main difference between (HA) Heikin Ashi and other charting types, being the plotting of the average price. Heikin Ashi literally means “average bar”.
Heikin Ashi chart users see the noise of the market removed and a much cleaner representation of price movement.
So what is a Heikin Ashi chart?
We can define it as a charting method that shows the average value over time. While you will never know the exact price value of the instrument/ Forex pairs for example, at any one time (which could be a problem for day traders), there are other useful benefits of using Heikin Ashi charts that we will discuss.
Reading The Heiken Ashi Chart
For a moment, try to forget what you know about Japanese candlestick charts because some things are counter intuitive.
As an example, a long upper shadow on a green Japanese candlestick is considered weakness. Not the case with Heikin Ashi charts
Since the Heikin Ashi chart is an excellent trend determination charting method, let’s outline what to look for when considering trend direction.
See if you can pick these out on the chart example:
- Bullish Trends: Green bodied candles with upper shadows indicate an uptrend and you would be holding long positions. Short positions would not be taken
- Bearish Trends: Red bodies for the candles and lower shadows indicate a bearish trend direction. Holding short or looking for shorts would be the smart play
- Possible Trend Change: If you are familiar with doji candlesticks, we are looking for the same thing with the Heikin Ashi chart.
Whenever you see the colors flipping from red to green and back again, you could be looking at a ranging market and this is a sign to step aside.
One important thing to note is I would only consider a strong bull trending market once the green candles have zero lower shadow length. The opposite is true for a strong bearish market.
How To Calculate Heikin Ashi Candlesticks
Most charting platforms do the work for you and calculate the Heikin Ashi chart for you.
For those using a platform like MT4, you can download a Heikin Ashi indicator here. If you use Metatrader, you should be familiar with adding an indicator to a chart.
Like any indicator, I like to know how the calculation is done to help recognize any nuances to using them. As mentioned, the HA chart will not give you the exchange price at any given time.
The calculation for the Heikin Ashi chart is as follows:
Open = (Open of Previous Bar + Close of Previous Bar) / 2
High = Highest value of High, Open, Close
Low = Lowest value of Low, Open, Close
Close = (Open + High + Low + Close) / 4
You can see by the calculation that there is lag time between real price and the price shown by a Heikin Ashi chart. It is similar with trading indicators that rely on past price to plot so you can see why the calculated HA candle will not be the exact exchange price.
That is why I say it is vital to know the nuances of anything you use for trading.
Without understanding that there is a difference in price between the bar chart or candlestick chart compared to the Heikin Ashi chart,, could have you entering trades that you would not if your chart was up to date.
Remember, the Japanese candlestick chart will show you the exact price of the instrument you are trading. The HA chart will show you a calculated average that uses data from the previous candle plot.
How To Use Heiken Ashi Candlestick Patterns
Chart patterns – or chart art as I like to call it – include patterns such as flag and triangles. To be honest, I treat almost all chart patterns the same and don’t get bogged down in the name of the pattern.
But for those who do enjoy digging into things, Heikin Ashi charts may make your preferred chart pattern easier to see.
On this chart of Corn, we have easily defined ranges, complex pullbacks (flags), triangles, and you would trade these the way you would on a Japanese candlestick chart.
I would use these to alert me to a consolidation environment and wait to see which way price breaks from the pattern.
I would then look to see strong bullish or bearish action (remember to look for the upper or lower shadows) and trade in that direction.
Another reminder – Heikin Ashi is not showing you the true price. It is showing you an average that needs the prior candle open/close to form part of the calculation.
Heiken Ashi Strategy For Day Trading
There are a few ways to use Heiken Ashi candles as a trading strategy and that can include strategies that use trading indicators.
To keep things simple, let’s look at a strategy that uses trend direction determined with price action, common chart patterns, and the doji reversal candles of the HA chart.
Here we have a chart of the one hour EURCAD Forex chart. You could go lower with other instruments but I prefer one hour charts for intra-day Forex trading.
Setting up the context we can see on the left side a strong push to the upside and a range had formed with many inside candles.
Remember, we are looking to the direction of the breakout from any pattern and at this point, a downside break could mean the beginning of a down trend.
- Range formed and smaller HA candles are forming with rejections off of the resistance zone of the range. Doji candles with a small body are being formed and we get a break to the downside the forms a double bottom
- Pullback trades actually have an edge in the market and for this potential down trend to confirm via price action, we need a lower high put in. As price pulls back, doji candles form and we can draw a trend line. The break of the trend line and the first red candle to form without a upper shadow, we take a short position.
- Lower low is made and price pulls back. Doji candles form and we draw our trend line. Price breaks and we short the first red candle with no upper shadow
- Another lower low and price pulls back to make a rough double top. The green candles get smaller and a red doji plots on the chart. Trend line break and short taken
- Price forms a higher low and while price pulls back with higher lows, the green candles begin to print with upper and lower shadows unable to stay above the resistance. Breakdown occurs
- Price forms a range with many dojis. Price breaks out of the range and bases at the top of the resistance zone and plots a doji. Trade can be entered when price breaks high of previous 2 candles
I have not added in stops, trailing stops or price targets on this chart. You will need to use the actual price of the instrument at the time you note these setups.
You can see that using technical analysis helps make Heikin Ashi useful for a day trading strategy.
Multiple Time Frame Trading – Heiken Ashi Technique
For those not familiar with multiple time frame trading, here is what you should know:
- You have a higher time frame chart where you consider trend direction and any market structure
- You have a medium time frame chart where you do your technical analysis and hunt for trade setups
- You have a lower time frame chart that you use for entries for the setups found on the medium time frame
Heiken Ashi charts are great for having you on the right side of the higher time frame trend.
This is a day trading setup for crude oil using the 60 minute time frame for trend and 15 minutes for trades. I am not using a lower time frame to time entries.
On the left chart, you can see strong down move in play and many people would want to short. Glance at the hourly chart (#1) which is showing very long shadows which is weakness.
While not visible well on this chart, at #2 all the red candles have upper shadows which is weakness and when combined with that extra large shadow, longs are the better probability on the lower time frame.
The left chart on the third arrow shows strong momentum to the downside with a green Japanese candlestick putting in a lower shadow. Look over to #3 and our green candles have no lower shadows and the upper shadows aren’t very large. The one hour chart is telling you to consider longs even with the strong 15 minute chart pullback.
Let’s touch on a few important facts about Heikin Ashi chart that we have already covered
How Is The Heikin Ashi calculated?
It is a calculation that takes into account values from the previous day and uses an averaging formula to plot today’s candle
What is the difference between Heiken Ashi and candlestick?
The Japanese candlestick plots actual price values while the Heikin Ashi candlestick uses averages and smooths out price action
How to use Heikin Ashi for intra day trading?
You can use them much the same as regular candlesticks to trade off of. You can consider using HA as a trend determination charting method.