There are a few types of price charts you can come across while trading. The most popular is the Japanese candlesticks. But is it the best one? How can you utilise another kind that is called Heiken-Ashi? Read today’s article and you will find the answers.
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What is the Heiken-Ashi candlestick?
In Japanese, Heiken-Ashi (or Heikin-Ashi) means “average bar”. It uses a different formula in comparison to a normal candlestick chart. The formula for a normal candlestick chart is a series of OHLC that is open-high-low-close candles. The formula for a Heiken-Ashi chart is COHL that is close-open-high-low.
Close is a quarter from open + high + low + close.
Open is half of the open of the previous bar and close of the previous bar.
High is a maximum of high, open and close.
Low is a minimum of low, open and close.
How does the Heiken-Ashi chart look like?
The Heiken-Ashi chart is quite similar to a standard candlestick chart. The difference lies in the distinctive formula used for calculating a single bar. A trader can choose a specific time frame such as 5 minutes, an hour or even a day.
The bullish candles are empty and the bearish ones are filled. They can be also coloured in a way that the up candles are white or green and down candles black or red.
The Heiken-Ashi chart looks smoother than the regular candlesticks chart. This is because the average movement is taken into calculations. The candles remain green (or white) during the uptrend and red (or black) in a downtrend. Normal candlesticks change the colour more often even when there is overall movement in one direction.
The price shown on a Heiken-Ashi may differ from the current asset price. This is again because of the fact that an average is taken into account. Sometimes you will see there are two prices displayed on the y-axis. One will be the present asset’s price and the other one the price from the Heiken-Ashi calculations. In the case of the regular candlestick chart, the price will be the same for the current price of the candlestick and the current price of the underlying instrument.
Trading on the Heiken-Ashi candlestick charts
You will find this type of candlestick on most platforms offered by brokers. And it is possible to apply the Heiken-Ashi to any type of market you are trading on. Let’s see how you can identify the trend with the help of the Heiken-Ashi.
To get the best trading opportunities with the Heiken-Ashi candlesticks you should follow some rules. Generally, there are five signals that you should be aware of. These are:
- The green or empty candles inform you about the uptrend in the market. This is the time you can open a long position or close the short one.
- The green or empty candles without wicks at the bottom are signals of a strong upwards trend.
- The red or filled candles give a sign the market is in the downtrend. Close long positions and open short ones.
- When there is no upper shadow on the red or filled candles, you may assume the downtrend is strong.
- A change in the trend is signalled by the candles with a small body and the wicks on both sides. Watch the market especially well as the risk is much bigger.
Usually, it is a good idea to keep the position open until the colour of Heiken-Ashi candles changes although it does not always mean the end of the trend. It might be also only a pause.
Consider an example of the 5-minute GBPUSD chart below.
Summary
Trading requires you to carry out the analysis of the market. You should be able to identify the trend because this is when the most profitable transactions are made. The Heiken-Ashi technique can be used together with candlestick charts to get more readable chart. It will help in recognising the trend and predicting future prices. And by knowing this you will recognise those moments when the trend is likely to continue and you should keep the position open or when you should close it because the trend pauses or reverses.
The Heiken-Ashi chart looks much smoother than a regular candlestick chart. The trends are easier to spot because they are not interrupted by false signals.
Check how the Heiken-Ashi chart looks like on the demo account. Many brokers offer free practice accounts that are supplied with virtual cash. You can try trading with the Heiken-Ashi there and see if this is something for you.
Share your thoughts on the Heiken-Ashi candlesticks in the comments section below.
Wish you profitable trades!