Heiken Ashi Charts: Identify Trends with Reduced Market Noise

Heiken Ashi Charts

Heiken Ashi charts, also known as Heikin Ashi charts are charts formed with Heikin Ashi candlesticks. These candlesticks have evolved from conventional Japanese candlesticks. It was developed in the 1700s by Munehisa Homma. He was a Japanese trader. We can term them as offshoots of standard candlestick charts too.

In the Japanese language, Heikin means average and Ashi means pace. Together these words create a combination – average pace. Hence we can say that the Heikin Ashi charts give the idea of the average pace of price of a stock.

These candlesticks are not treated like normal candlesticks. We need to understand the structures of these two types to understand how these charts behave.

Traditional Candlesticks

The traditional candlestick charts consist of four price components, Open, High, Low, Close or OHLC. These prices are reflected in the candles. Also from the colors of the candles, we can identify the bullishness or bearishness of the price trend.

These candles are green (bullish) or red (bearish) in color. Above they have wicks and below they have shadows indicating the highs and lows of that period. We use combinations and shapes of different candlesticks in our interpretation of charts.

Candlesticks only specify the price action and traders’ mood for a specific period for which the candlestick is created e.g. day, hour, week, half-hour, 15 minutes etc. We do not get any idea of previous price actions or trend direction.

Read more: Candlestick patterns

Now let us understand what the Heikin Ashi charts are.

Heikin Ashi Candlesticks

Heikin Ashi candlesticks appear a little different from normal candlesticks. Heiken Ashi uses previous period price action and combines them with current price action to come up with smoother candles. This is why we find the Heiken Ashi candlesticks are comparatively smoother and less volatile.

As we can see, when the Heiken Ashi candles look like normal candlesticks they signify a weakening of the trend. Or it may show the start of a new trend.

Normal Heiken Ashi candlesticks have either wick or shadow are missing. That and a long body signifies the continuation of a trend and strength of a trend.

A Doji-like structure may show consolidation or a possible reversal of the trend.

This is the basic difference between these two in appearance. But in application these two are different.

Heikin Ashi Candlesticks vs Normal Candlestick Chart

Let us discuss what this has in store for us. There are two charts joined together. The top one is the normal candlesticks chart. They are formed following the OHLC method and the price is reflected accordingly.

The lower section of the diagram shows the Heikin Ashi charts. Though they look similar, during a trend the characteristics of the Heiken Ashi candles change. The candles are strong and during an uptrend, the shadows of the candlesticks are missing. The candles are smoothened out because they are taking into account the inputs from the previous bar and calculations are done accordingly. Due to this smoothening process, the down bars in the uptrend are less prominent than the normal candlesticks.

the Heiken Ashi candles are calculated differently. This is the reason their applications are different.

Let’s delve deep into the calculation of the Heiken Ashi formula.

The Heikin Ashi Formula

The Heikin Ashi formula is calculated by taking into account the price action of the previous period. All the open, high, low, and close prices are calculated differently. Let us find out how.

Heikin Ashi open = The opening price of a Heiken Ashi candlestick is calculated by taking the average price data of the previous Heikin Ashi candlestick opening price + closing price of the previous Heikin Ashi candlestick.

Heikin Ashi open = (Previous Heiken Ashi candlestick open +previous Heikin Ashi candlestick close)/2

The Heikin Ashi close price is calculated by taking the price data point of the current Open, High, Low and close and dividing it by 4 to get an average price.

Heikin Ashi close = Current (Open + High + Low + Close )/ 4

Heikin Ashi high price is obtained by taking into account the highest of three current data points – Maximum of current High, current Open or current Close prices.

Heikin Ashi low is calculated by taking into account the minimum of three price data points – current period low, current Hiekin Ashi open and current Heikin Ashi close.

Heikin Ashi formula

There is an inherent fallacy in the logic of the calculation of Heiken Ashi candlesticks. When the opening price of a Heikin Ashi candlestick is calculated, we calculate the opening and closing price of the previous bar. But it sounds like that logic – Which came first, the hen or egg? It sounds ridiculous though.

But what do we do, when no previous data is available? How to form the first Heiken Ashi candle, as there are no previous data?

The first bar is calculated by taking the current OHLC data. So, we have the first Heikin Ashi candlestick which is created by taking the data of the current price. This is somewhat artificial because it doesn’t follow the Heiken Ashi candlestick formation rules.

But the effect of the first artificial candlestick formation is very low. And it is found that the effect of these data is smoothened out after the first 7 to 10 Hekin Ashi candlesticks. Later, in the Heikin Ashi chart, we do not find anything abnormal and the chart behaves normally.

This image shows us how a Heikin Ashi chart uses standard candlestick data and creates a Heikin Ashi candlestick. It is noticeable how a Doji and A Marubozu have been combined to form one Heikin Ashi candlestick pattern during the uptrend in the Heikin Ashi chart.

Similarly during a downtrend and further uptrend later we can see these combinations are used to form Heikin Ashi candles. This chart also clearly explains the structural differences between standard candlestick patterns and Heikin Ashi candlestick patterns.

How Do You Use Heiken Ashi Charts?

As we have discussed already, the Heiken Ashi charts are a little different from traditional candlestick charts. Therefore, we need to interpret the candlestick patterns differently.

The normal candlestick chart turns red when Open > Close and turns green when Open < Close. By the colours, we understand that a single candlestick is bearish when it is red and bullish when it is green. But a series of candlesticks creates too much noise for a trader. The trader can’t understand the trend or interpret correctly the meaning because of too much of noise.

The Heikin Ashi candles smooth out these noises, making candles less fluctuating. Because of this lack of fluctuations, the reader of charts can see the trend easily. So these charts are interpreted differently.

Let’s look at this chart of Nifty 50. This is a 30 min. chart of nifty 50 of 24-05-22. We can see long consecutive green candles and long consecutive red candles. There are also normal candles with long wicks and shadows. Also, there are small star-like candles. There is one more interesting point to look for. All the green candles have only wicks and long red candles have shadows only. All these types of candles convey different signals.

Heikin Ashi Candlestick Signals

This chart is conveying different signals for a trader. These are universal Heiken Ashi candlestick signals.

Heiken Ashi charts show trends better than normal candlestick charts. We can also extract information on trend strength from these candles. But small correction and consolidation phases may not be seen due to the smoothening effects of the candles. The trends are clearly seen with these types of candles because the candles use previous candles’ inputs in the formation of the current candles.

Bullish trend

Consecutive green candles show the current trend. These candles do not have any lower shadows. A long green candle means a strong trend. The bullish trend can be clearly seen in the chart above.

Bearish trend

Consecutive red candles show a bearish trend. These bearish candles do not have any upper wicks or top shadows. A long red candle shows the strength of the bearish trend.

Price congestion

There are Doji or star-like candles with smaller bodies that suggest the price congestion is taking place. During the congestion period, there will not be strong directional price movements. After the congestion period is over the trend may continue or reverse in opposite direction.

Trend reversal

Trend reversal occurs when the price comes out of the existing trend and starts moving in the opposite direction. The presence of Doji or Stars shows the uncertainty of the trend. It shows the traders are losing confidence in the current trend. The presence of Doji in the Heikin Ashi candlestick pattern indicates of a potential trend reversal is due.

There are some other Heikin Ashi chart patterns that help us to extract more information from these charts.

Triangles & Wedges

We can find three kinds of triangles in the Heikin Ashi charts. The ascending triangle, descending triangle and the symmetrical triangle. If the Heikin Ashi candles break the upper extremes of the symmetrical or the ascending triangle, the uptrend is expected to continue. On the other hand, if the candles break below the bottom line of the descending triangle, the bearish trend may continue.

Wedges are of two types, the rising wedge and the falling wedge.

The presence of a rising wedge indicates that a trader better waits until the candlestick breaks below the bottom line of the wedge pattern and reversal takes place.

On the other hand, if a falling wedge pattern is seen, the trader should wait until Heikin Ashi candlesticks break above the upper line to see the reversal of a downtrend.

Trading with Heiken Ashi Charts

Here, immediately above is a chart that shows how we can trade with this chart using signals from the Heikin Ashi candlestick chart. Along with the Heikin Ashi charts, the analyst has used MA (moving average) and two stochastic indicators having different patterns. All these were used to get trade confirmation.

We have a daily chart of the State Bank of India ( SBIN) here shown above. In this chart, there are a few things added to the Heikin Ashi chart.

A 20-period SMA in blue lines.

Stochastic ( 14/3/3 ) and stochastic ( 50/3/3 ) were added to it. We will see how these indicators help us in trades. The signals from the Heiken Ashi chart will be used along with these indicators.

Buy signal using Heikin Ashi

Entry

Heiken Ashi chart should show green candles with no lower shadow.

Stochastic ( 14/3/3 ) has to be above 50 marks.

Stochastic ( 50/3/3) has to be above 50 marks.

The Heikin Ashi green candles must be above the 20 SMA line.

Stop-loss

Stop-loss should be placed below the last swing low. The last swing low lies below the previous red candle. We should also consider the exit strategy to be used instead of using a stop loss. Once taken entry, if any of the buy conditions are violated, we will consider an exit.

Exit

There is a multiple exit advantage with this strategy. A trader will exit if a red candle occurs. Or if stochastic reaches the overbought zone, i.e. the stochastic goes above 85. Or if the Heikin Ashi candle goes below the SMA line, even if it is green, the trader can consider exiting from the position.

Also if the trailing stop loss is breached, the trader may exit. Placing a trailing stop loss is easy in the Heikin Ashi chart. Place the stop-loss just below the low of the previous candle.

Sell signal using Heikin Ashi

Heiken Ashi chart should show red candles with no upper wick or shadow.

Stochastic ( 14/3/3 ) has to be below 50 marks.

Stochastic ( 50/3/3) has to be below 50 marks.

The Heikin Ashi red candles must be below the 20 SMA line.

Stop-loss should be placed above the last swing high. The last swing high lies above the previous green candle. We should also consider the exit strategy to be used instead of using a stop loss. Once taken entry, if any of the sell conditions are violated, we will consider an exit.

There is a multiple exit advantage with this strategy. A trader will exit if a green candle occurs. Or if stochastic reaches the oversold zone, i.e. the stochastic goes near or below 15. Or if the Heikin Ashi candle goes above the SMA 20 line, even if it is red, the trader can consider exiting from the position.

Also if the trailing stop loss is breached, the trader may exit. Placing a trailing stop loss is easy in the Heikin Ashi chart. Place the stop-loss just above the high of the previous red candle.

Important Aspects of Heikin Ashi Strategies

Heikin Ashi uses prices from the previous bar. Therefore Heikin Ashi always shows the median price movement of the stock.

Heikin Ashi produces unique candlesticks taking price data from the previous and current price data points. For details kindly check the Heikin Ashi formula.

Due to the unique characteristics of candlestick construction, Heikin Ashi candles can be used for day trading, swing trading and even scalping.

Long candles are important. A long green candle shows the strength of a bullish trend.

A long red candle shows the strength of a bearish trend. Longer the candle, the stronger the trend.

The high of Heikin Ashi candle is the highest price of the current period.

Low of Heiken Ashi candle shows the lowest price of the current period.

Heikin Ashi chart indicates the price trend. Hence we can use trend indicators like ADX, RSI, and moving average along with HA charts to gauge the strength of a trend.

Due to the inherent capability of trend indication, these charts can be used with options for using spreads or as a part of a hedging strategy.

Advantages of using Heikin Ashi Charts

The HA charts are very accessible to traders. No installation is required. Most of the chart providers supply these charts along with the trading platform.

Unlike the normal candlestick charts, the Heilkin Ashi chart is easily decipherable. Even a novice can easily identify trends and interpret price movements.

The Heikin Ashi charts are comparatively more reliable and Heikin Ashi historical charts show more or less accurate trends.

Market noise is filtered out. Hence the interpretation is easy and reliable.

The entry, exit and stop-loss prices are very easy to apply.

These charts are easily capable to adopt other technical indicators. Therefore it is easy to get stronger market signals.

The Heiken Ashi charts are equally efficient in all time frames. A trader can trade intraday, swing or long-term trades using these charts.

Can be used to trade in the future and options for hedging as well as trend trades.

Limitations of Heikin Ashi Charts

The formation of Heikin Ashi candles depends on the historical price from the previous bar. That is the base price on which the current period candle is formed. It automatically includes a time lag that is not reflected.

No gap is found in Heikin Ashi chart patterns. Trading on the basis of gaps is an important aspect of trading using normal candlestick charts. Important trading techniques have been developed using Gaps for trading. But Heiken Ashi charts do not have these advantages like the normal candlestick charts. Therefore Gap trading is not an option here. But for stop-loss using Gaps, the trader can have a look into normal candlestick charts and consult that simultaneously.

The actual open and close price is not available in HA charts. The open and close price is averaged here. There traders and scalpers trading highly active stocks may find these charts difficult to suit their own trading techniques.

Conclusion

In the end, it can be generally concluded that HA charts are more reliable and accurate than normal candlestick chart patterns as far as the price trend and price movements are concerned. It has many advantages over limitations. But for information on accurate price data points, one should consult the traditional candlestick chart.

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