Heikin Ashi is a variant of candlestick charts coming from Japan where Heikin translates to ‘average’ and Ashi means ‘pace’.
- Heikin Ashi charts are similar to candlestick charts but are modified slightly to illustrate trends more clearly,
- Consecutive candles that have long green bodies and do not display lower wicks characterise uptrends,
- Consecutive candles that have long red bodies and do not display upper wicks characterise downtrends,
- Heikin Ashi candles with long wicks and/or small bodies are found at turning points and indicate weakness,
- Dojis and Spinning Tops are the only traditional candlestick patterns that translate to Heikin Ashi charts.
- Classic chart patterns are also found on Heikin Ashi charts, such as wedges and triangles.
What is a Heikin Ashi Chart?
Candlestick charts display the open high low close (OHLC) of an asset’s price. Heikin Ashi charts slightly modify the OHLC to display averages instead of the exact opening and closing prices.
Heikin Ashi candlesticks are calculated as follows:
- Open = ½(open of previous bar + close of previous bar)
- High = max[High, Open, Close]
- Low = min[Low, Open, Close]
- Close = ¼(open+close+low+close)
Compared to traditional candlestick charts, Heikin Ashi eliminates some of the noise and captures trends better. Both charts are displayed below for comparison.
With a Heikin Ashi chart, candles do not change colour until the trend changes, and as a result, these charts generally have longer runs of green or red candlesticks.
To set up a Heikin Ashi chart on Interdax, go to the upper left-hand side of the trading chart panel and click on the candlestick symbol, and then select ‘Heikin Ashi’.
How to Use Heikin Ashi Charts
Consecutive candlesticks of the same colour signal a trend in Heikin Ashi charts.
When a market is in an uptrend, the Heikin Ashi charts indicate to let your winning trade run when the candlesticks are green with long bodies and no lower wicks. When a market is in a downtrend, the Heikin Ashi charts display red candles with long bodies and no upper wicks.
In the chart below, we see that for BTC-USD’s rally from $8,000 to $13,880, the Heikin Ashi chart displays a continuous series of green candles with no lower wicks — until the top was reached. The lack of a lower wick signifies the strength of bulls in the market. By continuing to hold a long position as long as there are green candles with no lower wicks, you reduce your chances that you exit a trend too early.
Similarly, if the Heikin Ashi candles in a downtrend do not have any upper wicks and have long bodies, then it suggests bears are firmly in control and not to close your short position.
Therefore, we can also use Heikin Ashi charts to enter trades, as when we see one or two candles with long bodies (and no upper or lower wicks), we can enter a position in the direction of the trend.
Once we’ve entered a position, the charts suggest to close that position when wicks start to appear or the bodies of the Heikin Ashi candles become relatively small.
In the chart above, we see that shortly after the top was in, a green candle was formed with a very small body and large wicks. The large wicks indicate indecision in the market and suggest that the market direction will most likely change.
Another advantage of Heikin Ashi charts is that they can determine when the market is in a range and is not trending.
Non-trending markets are characterised by frequent changes in colour of the candlesticks, as displayed below. If candles change colour every three or four candles and have small bodies, then the trader should remain out of the market until a clear trend is formed.
A trading strategy that works well with the Heikin Ashi chart is to wait for a change in colour (i.e., a change in trend) when you have identified a prevailing trend. For example, the chart below shows a strong downward trend for BTC-USD.
After each pullback, represented by green candles on the chart, we wait for the candle to turn red again and go with the current trend. So after each green candle, we wait for a red candle and enter a short position. The first candles that changed back to red after a green one was posted all indicated further downward moves.
Dojis and Spinning Tops
Instead of looking for a change in the colour of the Heikin Ashi candles, we can also look for Dojis and Spinning Tops. As with standard candlestick charts, Heikin Ashi charts also display Dojis and Spinning Tops. Both patterns suggest reversals in the current trend.
For instance, the chart below shows a Spinning Top and three Dojis in a row after a short-term uptrend. Following the series of green candles with no lower wick, a Spinning Top was formed, giving the first indication to the trader that they should: exit their long position and/or open a short position.
Three consecutive Dojis then followed the Spinning Top, which provided more confirmation of a change in the trend. Following these candlestick patterns, the price entered a downward trend.
After observing a Doji in a downtrend, seek confirmation before entering a long position. For instance, in the chart above, we see a long-legged Doji form, but the price continued to move lower. However, we could have placed a limit order to buy above the open price of the Doji.
Classic chart patterns such as wedges and triangles can also be found on Heikin Ashi charts.
An example of a triangle chart pattern using Heikin Ashi is shown below. The price tested two converging trendlines twice to form the pattern and then the price broke below the triangle, motivating a short position.
Another example is shown below for a descending channel. After a rally, the price trend becomes unclear. However, we can connect the lower highs and lower lows to form a channel. We would want to trade in the direction of the breakout of the channel.
Eventually, bitcoin broke out to the upside of the channel and signalled to go long. As the chart above shows, the price increased rapidly once the channel was broken and we see a series of green candles with no lower wicks as the channel is broken, giving more certainty of the market’s direction.
Heikin Ashi charts provide much simpler interpretations as there are not as many patterns as there is with candlestick charts and the averaging of the open and close prices means that trends are easier to identify.
To enter a position, look for red candles with no upper wicks (if you want to go short) or for green candles with no lower wicks (if you want to go long). You should remain in the position until wicks appear on the bottom (if you’re long) or the top (if you’re short). Heikin Ashi charts also show when the market is not trending. If the colour of the candlestick changes frequently then it is best to wait until a trend emerges.
Reversals are also highlighted by Heikin Ashi charts with two patterns found in traditional candlestick charts; Dojis and Spinning Tops. Classic chart patterns can also be used in conjunction with Heikin Ashi charts. As with traditional candlestick charts, the signals become much more powerful when combined with other indicators (such as volume and oscillators).
Disclaimer: This blog post is for informational purposes only and should not be taken as financial advice.