Heikin Ashi Explained
Anyone accustomed to regular candlestick charts will know that they are intuitive and easy to use. Each candlestick simply represents the open, close, high and low that the price made during a specified time interval.
With a Heikin Ashi chart, each candle doesn’t just include information about the price at the current time interval. It also brings forward information from the past.
To create a Heikin Ashi candlestick, the following formula is applied:
HA close = ¼ x (O + H + L + C)
HA open = Average of previous HA open and HA close
HA high = Max( HA open, H, HA close)
HA low = Min( HA open, L, HA close)
And because each HA candle uses values from the last one, the first HA candlestick has to be initialized. Conventionally this is done by using the open, high, low and close at the first bar in the chart (or the start point).
The figure below shows two sets of candlestick patterns. The top one is a Heikin Ashi chart and the lower is a standard candlestick chart.
How To Interpret Heikin Ashi Candlesticks
At first sight the charts look quite similar. If you look closely though there are some important differences. The first big difference starts at candle #4.
The HA candle is showing a doji type pattern which marks indecision and a possible reversal. Yet the candle on the standard chart has already started to rise at this point. This is marked with a long bullish white candlestick.
Similarly, at candle #6, the Heikin Ashi chart is still rising, whereas the standard candlestick chart is displaying a bearish hammer.
The second big difference is the length of the candlesticks. A Heikin Ashi candlestick is always either the same size or bigger than the standard candlestick at the same chart position.
Finally, at candlestick #14, the standard chart shows a small bearish candle. The Heikin Ashi chart however shows something completely different. It’s showing a strong bullish candlestick – because it’s incorporating some of the strength of the bullish candle just before it.
So what does all of this add up to? The Heikin Ashi system is averaging out some of the price changes because it is combining information from the past. Remember that standard candlesticks only incorporate information from the current time interval.
This “carry-forward” property makes HA charts a hybrid between regular candlestick charts and moving averages. But unlike moving averages which have a finite averaging period, each HA candlestick is connected to every one before it, however far in the past.
When is Heikin Ashi Useful?
Heikin Ashi charts are useful for short term trend trading strategies. In forex, this makes them a popular choice for scalpers, swing traders, and day traders. All of which are trying to locate short but profitable trends.
Once again if we take a look at Figure 1, the Heikin Ashi chart is grouping together bullish and bearish candlesticks into clusters. It does this by filtering out some of the noise at each time interval.
This averaging can make it easier to understand the price action on a shorter time horizon. That is, with HA charts it is easier to spot places where the market is trending in the short time horizon.
Figure 2 shows a USDJPY one hour chart. The top chart is a standard candlestick chart, the middle is a Heikin Ashi chart, and the lower is smoothed Heikin Ashi chart. Notice how the trends stand out much more clearly in both the HA chart and the smoothed HA.
The Heikin Ashi indicator isn’t shipped with Metatrader, but you can download it and install it yourself by going to the Metatrader website.
Smoothed Heikin Ashi
With standard Heikin Ashi, the candlesticks are derived from the price. An alternative to this is known as smoothed Heikin Ashi. With smoothed Heikin Ashi, the formula uses not the price but points on the moving average line. This adds an extra level of smoothing. The first is the smoothing of the moving average itself and the second is the averaging at each HA candlestick.
The smoothed Heikin Ashi chart looks more like a regular moving average line when the moving average period is large. The main difference will be that you’ll see colors where the trend is rising or falling. This makes it helpful for visualizing trends. See Figure 2.
How to Recognize and Trade Heikin Ashi Patterns
A Heikin Ashi chart is traded in much the same way as a standard chart, but just obey a few simple rules.
Rule 1: The first is the rule that the Heikin Ashi candle will always be either equal in size or longer than the standard candle at the same position. This means the Heikin Ashi candle can display a level which the market never actually reached at that time. For example, see candle #3 in Figure 1. Just like a moving average line, if a HA candle pierces a support or resistance line, the price may not necessarily have crossed that line.
Rule 2: The second rule is that Heikin Ashi candles incorporate some delay because of their averaging properties. This can be both good and bad depending on the way you look at it. It means you’re more likely to see groups of bearish or bullish candles and be able to identify those as trade entry or exit points. On the flip side, the averaging causes a lag in response so that the HA candles start to react slightly later than regular candles when a trend changes direction.
The following candlestick patterns are useful in Heikin Ashi:
- Bullish and bearish engulfing patterns – a reversal
- Doji, hammer and inverted hammer – a reversal
However the real strength of HA is not so much in interpreting its candlestick patterns, but its ability to highlight profitable trends.
Conclusion
The Heikin Ashi system gives you another way to interpret regular price charts. They’re most useful for technical trend trading.
The advantages are:
- Heikin Ashi charts make it easier to spot trends because the candles cluster together in bullish/bearish lines
- Smoothed Heikin Ashi serves as a good trend visualizer
- Each Heikin Ashi candle carries information from the past. None are ever completely independent.
The disadvantages of Heikin Ashi are:
- The averaging causes information at each candlestick to be delayed by more than one time interval.
- The charts can be misleading because the price may not necessarily have touched the levels that the candlestick shows at that time interval.
Price Action Trading
Definitive Guide
Price action trading with candlesticks gives a straightforward explanation of the subject by example. It includes data insights showing the performance of each candlestick strategy by market, and timeframe.