Introduction to Heikin Ashi Candles
Let the trend be your friend with Heikin Ashi
It’s all in the name
You may or may not have heard of Heikin Ashi before now, but after reading the following summary you will have a basic understanding of this ancient Japanese trading technique. Just like the normal Japanese candlestick charts you know, as well as the Ichimoku technique, Heikin Ashi was developed by the Japanese and dates back to the 1700’s. The translation of the word ‘Heikin’ is ‘average’ or ‘balance’. The word ‘Ashi’ translates to ‘foot’ or ‘bar’. The Heikin Ashi trading method is all about painting candles that are composed of the average of the previous two candles. You may be asking yourself what exactly an average candlestick is, but you will see that it is simple and can be easy to understand. In this article I will explain the underlying basis of the candlestick, then quickly move to how those candlesticks look. At that point it will be easy to understand how to interpret the Heikin Ashi candlesticks. Let’s dive right into it!
An average Japanese candlestick
Each Heikin Ashi candle is painted with an average of two bars. Just as with normal Japanese candles, a Heikin Ashi candle has an open, a close, a high, and a low. Allow me to better explain each one.
- Heikin Ashi Close
This is the average of the open, high, close, and low of the current period.
- Heikin Ashi Open
This is the average of the previous candle’s open and close.
- Heikin Ashi High
This is the maximum or highest value out of the current period’s high, open, or close. Again, the Heikin Ashi high is whichever of those three values is the highest.
- Heikin Ashi Low
This is the minimum or lowest value out of the current period’s low, open, or close. Just like the high, the low is whichever of those three values is the lowest.
I can imagine this sounds a bit vague or even confusing when first reading this. So here is an example to help illustrate what we are learning.
- The Heikin Ashi Close price, is (open + high + low + close)/4
- The Heikin Ashi Open price, is previous candle (open + close)/2
The main take away here is that the open of a new candle is always at the exact middle (or average) of the previous candle.
What do Heikin Ashi candlesticks look like
Just as with the normal Japanese candlesticks, you’ll have both bullish and bearish candlesticks as well as reversal candles. When a market is bullish you will primarily see a set of green candles consecutively with little to no lower wicks or shadows. Instead, they mostly have upper wicks. The larger the green candle and higher the wick is, the stronger the bullish momentum of the market is. Let’s look at the ZRX chart below as an example of a chart with some strong bullish momentum. You will very clearly see that from April to mid-May there was a clear bullish trend playing out. Take note of the lack of downward wicks during that period.
Understanding the opposing side of the market is the same as above but reversed (obviously). When the market is bearish, you will primarily see consecutive red candles with very limited upper wicks or shadows. Instead the candle bodies will be accompanied by only lower wicks. The larger the red candle and lower the wick is, the stronger the bearish momentum is in the market. Let’s look at the QSP/BTC chart below, specifically for the month of November 2018.
A Heikin Ashi reversal candle looks like a Doji candle. There will be very long wicks but almost no body candle. We also like to call them indecision candles. These candles are very important because they will point out that the current trend has come to an end. So, if you were in a trade, this would most likely be the time to exit. After indecision comes a new trend, which you want to catch. Trading an indecisive market will not do your portfolio any good. The following BTC/UST chart provides a good example of the points of indecision which, as noted above, would be the time to exit your position.
Advantages of Heikin Ashi candlesticks
Now that we have a basic understanding of what Heikin Ashi candlesticks are and what they look like, I assume you would like to know what the advantages of the Heikin Ashi trading technique are. It is important to know that these candlesticks are not a replacement for normal Japanese candlesticks but getting to know them gives you added advantage when trading. Simply put, Heikin Ashi helps you spot the trend. This method can be used with any timeframe, but just like in most charting techniques, the higher the timeframe you use, the easier it is to identify the long-term trend.
Heikin Ashi helps you to visualize if an asset is in a bearish or bullish trend rather quickly, like how Ichimoku does. It defines your bias just by looking at the chart and will help you make a better decision when entering or exiting a trade, because it removes a lot of the noise or clutter of typical charts.
Important to understand here is that Heikin Ashi allows you to trade the trend. This means that you will only enter or exit a trade when a new trend is established. Forget about buying the exact low and the exact high, the trend has not been formed there yet. Instead, Heikin Ashi lets you catch the biggest part of the trend, if you trade it right.
Let’s look at two charts for Ethereum, one with Heikin Ashi candles and one with normal candles. Nothing new to see here in the image below. Just normal candlesticks, red and green through each other with wicks below or above.
Now look at the Heikin Ashi chart below. If you take a close look, you’ll see what I mean by cutting the noise out of the chart.
In a downtrend, Heikin Ashi is likely to show you only red bearish candles, while standard chart will put some green candles mixed in. In an uptrend you will see the opposite, almost nothing but green candles with no red bearish appearing in between them. A Heikin Ashi chart will look clean and smooth because you won’t have all these crazy wicks in both directions. Additionally, you will see that the Heikin Ashi candle sets start from one or more reversal candles, the Doji-like candles, and will continue to build up with candles that will increasingly get larger. The following ETH/BTC chart demonstrates this nicely.
Now let’s try to create a Heikin Ashi chart in Trading View together. You will see how truly simple it is. In the upper menu you can choose your preferred candlesticks. Simply select the Heikin Ashi selection and you are done. Remember that if you click the star icon, the Heikin Ashi button will appear next to the normal candlestick button so you can quickly switch between the two. This is always nice when analyzing the chart and eliminates the need to of creating two charts.
Actual Bitcoin chart with Heikin Ashi candlesticks
If we are looking at an actual daily chart of Bitcoin based on Heikin Ashi candles, it would look like the following chart.
The chart begins with December and shows two Doji-like candles. Remember this is market indecision. Let the market decide if the trend goes up or down, before you trade. You want to see confirmation of change in trend, not just a sign of a possible change. Later in the chart we have a set of bearish candles with most of them showing no upper wicks. This means that there is strong momentum to the downside. This goes on until the 9th or 10th of December. We then see two indecision candles formed with a follow up of the downtrend until mid-December. The 16th of December shows a small indecision candle, but this time it is followed by a set of green candles with long upper wicks. Around the end of 2018 and beginning of 2019 we have some market indecision again. There is no clear trend going on. In such a market it is difficult to trade and considered rather risky. The second week of 2019 we see the first big bearish candle, with long wicks to the downside, which is the start of a new bearish trend. The trend is finished when it’s finished…
To sum things up
This was a short article about the basics of Heikin Ashi. I showed you some examples of bullish, bearish, and reversal candlesticks accompanied by example charts. The thing I want you to remember for now is the following:
- Heikin Ashi cuts the noise and clutter from typical charts
- Heikin Ashi gives you a quick bias of the market, either bullish, bearish, or indecision.
- Heikin Ashi allows you to trade in favor of the trend
- Heikin Ashi helps ensure you enter the market at the right time, not too early
- Heikin Ashi makes sure you exit the market at the right time, not too late
In the next article “How to trade Heikin Ashi candles”, I will write about how to properly trade using Heikin Ashi charts, when and how to enter a trade, and last but not least, how and where to exit the trade while making that money we all desire. I will also write something about the ability to trade with Heikin Ashi accompanied by other indicators like Ichimoku. I like to combine the two together to quickly see what’s going on in the market. Thank you for reading and I hope you found this short lesson informative.
The Birb Nest is a trading community simultaneously serving hundreds of clients with a team of thoroughly examined and tested Nest Team members with proven technical analysis, fundamental analysis, and IT expertise.
For more information on The Birb Nest, our exclusive products and services, and additional trading resources, visit TheBirbNest.com.
