Now that you’re familiar with the three most popular chart types, it’s time we pushed ourselves and took it one step further to start developing trading strategies. There’s another type of price chart that you should know about that uses a totally different technique to display price action.
From the name of this article, it is probably obvious what it is called – Heikin Ashi, also known as HA chart or the Heikin Ashi indicator. But what is exactly the Heikin Ashi technique and how do you use it in your technical analysis strategy?
Heikin Ashi, also known as Heiken Ashi is a modified technical analysis candlestick charting technique used by traders to help them filter market noise and predict trend direction in financial markets.
Practically, the Heikin Ashi indicator rearranges how the price is displayed on candlestick charts so traders can see more clearly whether to remain in a trade or exit. This can be attributed to the fact that Heikin Ashi candlesticks have different patterns and colors than traditional candlesticks. Consequently, due to the shape of Heikin Ashi candlesticks, many traders feel it is easier to predict price movement and in particular identify a trend reversal candlestick pattern.
Where does the name come from?
Have a guess and if you get it right, crack open another Heikin-Ashi. It comes from Japan. In Japanese, Heikin means “average” and Ashi means “pace”. So together, Heikin Ashi means the “average pace of price” (or average bar).
Here’s an example of a Heikin Ashi chart.
Looks familiar? To the untrained eye, the Heikin Ashi chart looks like your typical Japanese Candlestick chart. It has a body and an upper and/or lower shadow (or wick). But as you can see, Heikin Ashi candles have a different shape and the price data is displayed differently than traditional charts.
So, what’s the difference between a Heikin Ashi candlestick chart and a traditional Japanese candlestick chart? I mean, they look almost identical.
A picture is worth a thousand pips so let’s look at some actual charts. The chart on the LEFT is the traditional Japanese chart, and the chart on the RIGHT is the Heikin Ashi chart.
As you can see from the chart on the right, directional moves are smoothed out in a way absent from the left chart. You can see the candles on a traditional candlestick analysis chart frequently change from green candles to red candles (up or down) which can make them difficult to interpret.
On the other hand, candles on the Heikin Ashi chart display more consecutive colored candles (no empty candles), making it not only more readable but also easier for traders to get information about past price movements and identify a bullish or bearish trend.
You’ll notice that Heikin Ashi charts have a tendency for its candles to stay green during an uptrend and red during a downtrend. This is in contrast to traditional candlestick charts that alternate colors even if the price is moving strongly in one direction and the market trends are clear.
It is also clearer to see that the Heikin Ashi chart is much smoother looking in terms of price action as it reduces the noise on the chart and allows traders to analyze trends more clearly. Another thing that makes Heikin Ashi different from a traditional candlestick chart is how the price movement is displayed in terms of the open and the close.
Let’s zoom in on the Heikin Ashi chart so you can see what I am talking about.
If you look closely at the Heikin Ashi chart, you can see that each of the Heikin Ashi candlesticks starts from the MIDDLE of the candlestick before it, and not from the level where the previous candlestick had closed. This makes a very clear illustration of red candles and green candles and therefore, it is a better charting technique to find price momentum in the markets.
Heikin Ashi candlesticks are formed this way on a trading chart due to the method used in how they are calculated. So, let’s move on to see how the Heikin Ashi formula works.
Calculating your Heikin Ashi candlesticks is easier than trying to calculate how many Heinekens you were drinking last weekend. So open another one and let’s discuss the Heikin Ashi formula.
Heikin Ashi charts smooth price activity by calculating average price values.
An Heikin Ashi calculates its own open (Heikin Ashi open), high (Heikin Ashi high), low (Heikin Ashi low), and close (Heikin Ashi close) using the actual open (O), high (H), low (L) and close (C) of the time frame (1 minute, 5 minute, 15 minute, etc.).
To calculate the Heikin Ashi values, traders use the following formula.
HAO = (Heikin Ashi open of previous bar + Heikin Ashi close of previous bar) / 2HAC = (Open + High + Low + Close) / 4HAH = Highest of High, Open, or CloseHAL = Lowest of Low, Open, or Close.
There’s a reason why Heikin Ashi candlestick charts have gained such enormous popularity recently, especially among day traders and swing traders (although it could be a great technique for position trading as well).
Many traders simply believe that the Heikin Ashi price data is much more accurate and easy to use than typical candlestick charts and help them to easily find entry and exit points. That makes sense, right? I mean, we did look at the charts. Indeed, it seems that the Heikin Ashi technique is a great technical analysis tool to identify trends. Further, by removing the market noise, it is simply easier to get a sense of the market sentiment with HA charts and to realize whether there’s selling or buying pressure in a certain market.
Technically, to use Heikin Ashi candles on a trading chart, you need to find out if this indicator is available on your chosen broker’s trading platform. In case it is, you simply open a new chart and choose Heikin Ashi candles instead of line charts or traditional candlesticks.
As always, if you have any questions about the Heikin Ashi technique and how to use it in your trading strategies, leave a comment below or send me a private message via the Contact Us section.