Although Japanese candlestick charts are the first choice for most traders, there exist numerous other types of price charts that offer unique insights into market behavior. One such chart is the Heikin Ashi, which at first glance may resemble the traditional candlestick chart as it also incorporates “candles.” However, upon closer examination, the Heikin Ashi chart distinguishes itself through its distinct calculation and plotting methodology, providing a fresh perspective on market trends and movements.
In this write-up, we will explore what Heikin Ashi charts are, what makes them different from the conventional candlestick charts, and how to read them.
What is a Heikin Ashi chart?
Heikin Ashi is originally a Japanese word where Heikin means “average” and Ashi refers to “bar” or “foot.” It is a type of candlestick chart that averages out the pace of price and filters all unnecessary market noise.
This is what a Heikin Ashi chart looks like:
Upon initial inspection, the chart appears to resemble a typical candlestick chart, with each Heikin Ashi candle featuring a body and upper and/or lower wicks. Nonetheless, there are significant distinctions between the two types that we will delve into further in the next section.
By using Heikin Ashi charts, traders can enhance their ability to analyze market trends and make informed decisions on when to stay in or exit a trade. Simply put, these modified candlestick charts present price movements in a visually clearer way, allowing trend traders to easily identify strong price directions and potential reversals.
The Heikin Ashi charting technique was first conceptualized in the 1700s by Munehisa Homma, a rice merchant hailing from Sakata, Japan. By carefully observing the price trends of the rice market, he deduced a correlation between price movements and the psychology of market participants, ultimately creating the Heikin Ashi methodology.
Heikin Ashi vs Traditional Candlestick chart
When comparing the traditional candlestick chart with the Heikin-Ashi chart, the key distinguishing factor lies in the formula utilized. While in the former, each candlestick is based on open, high, low, and close prices of the present time period, the latter incorporates a modified approach that also considers previous prices.
The general idea behind Heikin Ashi charts is to enable traders to easily spot the dominant price trends. Although traditional Japanese candlesticks are effective in identifying favorable entry points by showing potential reversal, continuation, or breakout patterns, implementing the Heikin Ashi technique on a price chart can assist you in determining whether to remain in the trade or exit.
Here is how GBP/USD appears in the traditional candlestick chart layout vs the Heikin Ashi layout within the same time period.
Following some are quick bullet points regarding the unique aspects of Heikin Ashi charts:
- A Heikin Ashi candle consists of 4 parts – open, close, high, and low – like the traditional candlesticks.
- Each Heikin Ashi candle begins from the midpoint of the preceding candle, rather than starting from the closing point of the previous candle like regular Japanese candlesticks.
- Heikin Ashi charts tend to display similar colored candles consecutively, with green candles persisting during a potential uptrend and red candles persisting during a bearish trend. This stands in contrast to Japanese candle charts, which display varying colored candles that alternate frequently in response to real market pricing.
- Overall, Heikin Ashi charts smoothen the price action and present clear signals by cancelling the market noise.
How to read a Heikin Ashi chart
First of all, the Heikin Ashi charts exhibit the trend direction by displaying a continuous stream of “same-colored candles”
- Sequential green candlesticks signal an uptrend
- Sequential red candlesticks indicate a downtrend
Secondly, Heikin Ashi charts can also allow you to detect the strength of the market trend. Generally, the Heikin Ashi candles have smaller wicks compared to their traditional candlestick counterparts as they are based on averages. The trend’s strength can be identified by looking at the 🡪 candle wicks.
- Green candles with no lower wicks stipulate a STRONG bullish trend
- Red candles with no upper wicks signify a ROBUST bearish trend
Simply put, a trend is considered strong if it contains candles with no shadows in the opposite direction of that trend.
Thirdly, when several Heikin Ashi candles with small bodies and both-sided-wicks start to accumulate without a clear trend, they suggest a trend reversal OR pause.
Limitations of using the Heikin Ashi chart
One of the biggest and most important limitations of Heikin Ashi candlesticks is that they do NOT show the ACTUAL market price. In contrast to the traditional candlestick charts, the Heikin Ashi candles do not display the “true” open and close prices at a particular time.
To understand more clearly, let’s say we have two candles – a 1-H Heikin Ashi candle and a 1-H traditional candlestick – with the same time stamp. Here, it’s possible for the Heikin Ashi candle to close in red with different opening and closing prices than the traditional candlestick, which could close in green with different opening and closing prices.
The important point is that the REAL price information is manifested by the traditional Japanese chart, and NOT by the Heikin Ashi. The latter only exhibits the averaged price value; hence traders must consider watching the Japanese candlestick graph for knowing the actual prices.
Moreover, the Heikin Ashi charting display may not be the most optimal choice for traders who engage in short-term trading strategies, such as scalping and day trading due to its low responsiveness as well as the reason mentioned above.
Since Heikin Ashi charts integrate a two-period average, their development and response time is comparatively slower. As a result, utilizing them alongside traditional candlestick charts can be a more suitable approach.
Unleashing a whole new level of clarity in identifying market trends, the Heikin Ashi chart has become the go-to choice for traders looking to filter out the market noise and focus on smooth signals. With Heikin Ashi charts, you cannot only gain a higher level of confidence in implementing trading strategies but also make more effective decisions based on market trends. However, it’s important to keep in mind that Heikin Ashi isn’t without its weaknesses – it displays lagging market data and inaccurate prices. Therefore, to fully capitalize on its benefits, it’s crucial to supplement Heikin Ashi with other chart types and integrate them into your analysis.