Heikin Ashi is a Japanese trading strategy created in the 1700s by a Japanese Rice Trader known as Munehisa Homma or Sokyu Homma. He started the use of candlestick charts for detecting and profiting from chart patterns.
Most people consider Homma to be the grandfather of price action trading, technical analysis, and the use of candlestick charts as he pioneered the concept of using them to find trading opportunities.
In Homma’s era, the rice market in Osaka used coupons. Rice traders then traded these coupons for a profit before the rice was physically delivered in what could be called an early version of a futures market. Homma observed the impact of traders’ emotions on their trading decisions and found the effect of emotions on fear and greed-driven markets. He pioneered the notion of price action trading centered on bullish or bearish reversals.
Homma created the first candlestick charts, which he used to identify different trading patterns that arose ahead of shifts in rice price direction. As he explained in his 1755 book, The Fountain Of Gold: The Three Monkey Record Of Money, understanding the psychology driving price trends gave him an advantage over other merchants.
Japanese traders are constantly refining their technical analysis approaches and tools. One of the many achievements of Japanese traders is the Heikin Ashi chart, which emerged after the candlestick chart.
The Heikin Ashi chart may not necessarily produce faster predictions, but it is much easier to use because it minimizes a lot of noise which prevents confusion.
Let us first discuss the Heikin-Ashi trading strategies.
What are Heikin Ashi Candles?
Candlesticks are one of the earliest known technical chart indicators available to swing traders for asset price evaluation. Each candle represents a single trading session on a candlestick chart, which can visualize price movements and uncover patterns.
Heikin Ashi is a combination of two Japanese words: Heikin means “average” or “balance,” and Ashi means “foot” or “bar.” The Heikin Ashi charts differ from traditional Japanese candlestick charts in that they include data from the previous session to demonstrate how average values fluctuate over time.
The Heikin Ashi chart appears similar to the candlestick chart. However, the process of calculation and plotting the candles on the Heikin-Ashi chart differs from that of the candlestick chart.
Each candlestick in a candlestick chart displays four different numbers: open, close, high, and low price, and each candlestick is unique and has no association with the previous candlestick.
Heikin Ashi candles, on the other hand, are unique in that each candle is computed and charted using information from the previous candle:
- Close price: In a Heikin Ashi candle, the close price is the average of the open, close, high, and low values.
- Open price: The open price of a Heikin Ashi candle is the average of the previous candle’s open and close.
- High price: The high price of a Heikin Ashi candle is picked from the highest value of the high, open, and close prices.
- Low price: The low price of a Heikin Ashi candle is determined from the lowest value of the high, open, and close prices.
Heiki Ashi candles are linked because each candle’s close and open price are computed using the preceding candle’s close and open price, and the previous candle influences each candle’s high and low price. As a result, the Heikin-Ashi chart is similar to a moving average, but it is much more than that because it provides more details.
The Heikin Ashi Formula
- Open = (open of subsequent bar + close of subsequent bar)/2
- Close = (open + high + low + close)/4
- High = the highest value from the high, open, or close of the current period
- Low = the lowest value from the low, open, or close of the current period
How do you Construct a Heikin Ashi Candlestick?
- Construct the first Heikin Ashi (HA) candle in one period using the preceding formulas. Combine the high, low, open, and close prices to get the first HA close price. Apply the open and shut instructions to open the first HA. The high and low points of the era will be the initial HA high and low points, respectively.
- After calculating the first HA candle, it is possible to continue computing the HA candles using the formulas.
- Calculate the next close using the open, high, low, and close from that period.
- Use the previous open and close to compute the following open.
- Select the highest of the current period’s high or the current period’s HA open or close to compute the next high.
- Pick the maximum of the current period’s low, or the current period’s HA open or close, to determine the following low.
- Note that the HA open and closure for steps 5 and 6 are not exclusive to the period’s open and close. The HA open and close were determined in phases three and four.
Many trading platforms, such as Tradingview and MetaTrader, have Heikin Ashi candlesticks. Specific free online charting sites, such as Investing.com, StockCharts.com, and Yahoo! Finance, also have Heikin Ashi Candlesticks.
How do Heikin Ashi Candlestick Charts Work?
If you want to catch considerably longer and more consistent patterns, a Heikin Ashi chart will help you do so. One of the primary uses of this charting technique is trend detection.
The Heikin Ashi trading style focuses on long-term trends. Minor corrections and consolidations are filtered out, making them practically invisible on the chart.
The price is likely to begin a new move when the direction of the Heikin Ashi graph shifts. This assists in distinguishing between a stock’s possible beginning and end. Because the chart noise is reduced, you can observe the naked trend.
In a trending market, setting a trailing stop is a helpful trade management tool to adopt.
As an outcome, many traders combine the noise-reducing qualities of the Heikin Ashi chart with a trailing stop indicator to maximize the potential of identifying a trending market condition.
Another approach to use a Heiken Ashi graph is to look for chart patterns such as triangles and flags and then apply price action rules.
Most of the time, this works in the same manner as traditional Japanese candlesticks.
However, Heiken-Ashi chart pattern breakouts can be more trustworthy than typical candlestick charts.
How to Understand Heikin Ashi Candlesticks
Traders must understand how Heikin Ashi candlesticks function and what they represent to use them to make sensible trading decisions.
A Heikin Ashi chart will show a series of green (or other colored) candlesticks with no lower shadow or wick in an upward-moving market. In a downward trend, there is no top wick and the candlesticks are usually red.
There is rising volatility when markets change direction and emotion shifts, and candles resemble the dojis on classic candlestick charts, with smaller bodies and longer wicks. As trends change, the colors of the candlesticks change.
In contrast to candles, the Heikin Ashi charts have three types of triangles: descending, ascending, and symmetrical. Suppose candles break over the upper border of an ascending or symmetrical triangle. In that case, the upward trend is likely to persist, while candles falling below the bottom of a descending triangle indicate a bearish trend on the charts.
Heikin Ashi Trading Strategy
Implementing a Heiken-Ashi trading approach can assist traders in identifying the start of solid trends and adjusting their portfolios appropriately, opening or increasing long positions when bullish trends arise, and closing positions when bearish trends begin.
When charts show candlesticks with no wicks or shadows on the lower end, it is a strong indicator for the start of a bullish trend, which traders may use to maximize profits rather than selling stocks early and losing money. When higher-end candlesticks have no wicks, it signals the start of a bearish trend, prompting traders to sell assets to avoid losses. More candles without wicks in a row indicate a stronger trend in the depicted direction.
Candles with shorter bodies and longer wicks suggest that the trend has paused. The trend may then reverse direction, or it may continue along the same path. It takes considerable skill and experience to determine which of these is more likely to occur.
Swing traders prefer to use Heikin Ashi charts because trends are easier to notice.
You may use technical analysis and chart patterns in combination with Heiken-Ashi charts. Long up bars with no lower shadows and long down bars with no higher shadows imply strong up and downtrends.
Trading on Heikin Ashi charts is like trading on any other chart. Concentrate on trading in the general trend’s direction.
When the trend is weakening, use Heikin Ashi price bar features to identify trend strength and use other technical analysis concepts to isolate significant price reversals.
Heikin Ashi is an indicator that shows the market emotions using mathematics. Using the Heikin Ashi trading strategy is ideal for beginners as it helps the trader eliminate the noise and understand the entry and exit points of the trade and profit from it.