Heikin-Ashi Made Easy: Boost Your Trading with This Tool

Heikin-Ashi (also spelled Heiken-Ashi) means “average bar” in Japanese. It is a technical analysis indicator and a chart type, depending on how it is used.

The Heikin-Ashi technique can be used alongside candlestick charts when trading securities to identify market trends and predict future prices. It’s useful for improving the readability of candlestick charts and simplifying technical trend analysis.

Traders can use Heikin-Ashi charts to identify trends and potential trend reversals across various financial markets. Most profits are generated during market trends, so predicting trends correctly is necessary. Heikin-Ashi can be applied to different trading strategies, including day trading and swing trading.

Read on to learn how to use Heikin-Ashi as part of your trading strategy.

What is the Heikin-Ashi technique?

The Heikin-Ashi technique uses an average of price data to create a Japanese candlestick chart that effectively filters out market noise.

Heikin-Ashi charts share some characteristics with standard candlestick charts but differ based on the values used to create each candle. Rather than using the open, high, low, and close like standard candlestick charts, the Heikin-Ashi technique uses a modified formula based on two-period averages.

This results in a smoother chart presentation, making it easier to detect trends and reversals. However, it also hides gaps and some price data.

Heikin-Ashi is useful for short-term trading strategies, such as day trading or swing trading. It can be used in any market, including forex, stocks, commodities and indices.

This chart type and indicator can help traders identify trends and stay in profitable trades. However, before using it, forex traders must grasp how it works, as the averaging of prices may lead to potential pitfalls.

Heikin-Ashi identifies trends

Technical traders use the Heikin-Ashi technique to identify a given trend more easily. Hollow white (or green) candles without lower shadows indicate a strong uptrend, while filled black (or red) candles with no upper shadow indicate a strong downtrend.

Heikin-Ashi reversal candlesticks have small bodies and long upper and lower shadows, just like traditional candlestick patterns. Heikin-Ashi charts have no gaps because each candle is calculated using data from the previous candle.

Because the Heikin-Ashi technique smooths price information across two periods, it makes it easier to identify trends, price patterns, and reversal points. Candles on a traditional candlestick chart often alternate between upward and downward movements, which can make them challenging to read. Heikin-Ashi charts typically have more consecutive-colored candles, helping traders identify past price movements easily.

The Heikin-Ashi technique reduces false trading signals in sideways and erratic markets, helping traders avoid making trades during such periods. For example, instead of getting two false reversal candles before a trend begins, traders who use the Heikin-Ashi technique are more likely to receive a genuine signal.

How to use the Heikin-Ashi indicator

Heiken-Ashi is both a chart type and indicator because it converts the actual price levels of the underlying asset using the Heikin-Ashi formula.

Here are five primary signals that identify trends and buying opportunities:

1. Strong uptrend: Hollow or green candles with no lower “shadows” indicate a strong uptrend.
2. Uptrend: Hollow or green candles signify an uptrend. Traders could add to their long position and exit short positions.
3. Trend change: Candles with a small body surrounded by upper and lower shadows show a trend change. Traders who like to take risks might buy or sell here, while others will wait for confirmation before going long or short.
4. Downtrend: Filled or red candles indicate a downtrend. Traders might want to add to their short positions and exit long positions.
5. Strong downtrend: Filled or red candles with no higher shadows show a strong downtrend. Traders may stay short until the trend changes.

Pros of using Heikin-Ashi

These signals can make locating trends or trading opportunities easier than with traditional candlesticks. The trends are not interrupted by false signals as often, making them easier to spot and act upon.

Heikin-Ashi vs. Renko charts

Heikin-Ashi charts take average prices over two periods, whereas Renko charts are formed by showing movements of a specific size.

Although a Renko chart has a time axis, the boxes or bricks are not based on time but only on price movement. Unlike Heikin-Ashi charts, where a new candle will form every period, Renko charts will only produce a new brick/box when the price has moved a certain amount.

Limitations of the Heikin-Ashi technique

Since the Heikin-Ashi technique uses price information from two periods, trade setups take longer to develop. This generally is not an issue for swing traders who can wait for their trades to unfold. However, day traders who need to capitalise on quick price movements may find Heikin-Ashi charts too slow.

The averaging of data also hides important price information. Many traders consider daily closing prices important, yet these prices are not visible on a Heikin-Ashi chart. Traders only see the average closing value. To manage risk, traders need to be aware of the actual price and not just the averaged values.

Another important element missing from the Heikin-Ashi charts is price gaps. These gaps are used by many traders to analyse price momentum, set stop-loss levels, or trigger entries.

Is Heikin-Ashi reliable?

Heikin-Ashi uses averages, which may not reflect current market prices. This technique smooths out trends on a chart, providing a clearer technical trend indicator. However, it should be used with technical analysis to accurately determine exit points.

Heikin-Ashi charts and technical indicators can smooth out price fluctuations, making trends easier to identify and trade. But when a Heikin Ashi trade signal occurs, the actual price may be significantly different from what the latest HA close is showing. The difference between the trade signal and actual price may be too big; such discrepancies can negate the profitability of a potential trade.

Since HA charts are based on average price movements, it is challenging to setting precise stop-loss levels. In practice, traders may use trailing stop-losses with moving averages or changes in colour on the HA chart. However, the risk is unknown at the start of the trade. To control the risk, CFD traders should refer to normal candlestick charts to set stop-loss levels based on actual price levels and patterns rather than average levels.

Like any other technical indicator, traders need to understand how Heikin Ashi works, including its advantages and limitations. Only then can traders use it effectively in their trading strategies.

Which indicator works best with Heikin-Ashi?

Trading is preference-based, so the best indicators to use with Heikin-Ashi are the ones you are most familiar with and have practiced using. Several technical indicators are commonly used with Heikin-Ashi:

Moving averages:

Moving averages can help confirm trends and identify potential entry and exit points.

Bollinger bands:

Bollinger Bands can help identify periods of high volatility and potential reversal points.

Relative Strength Index (RSI):

Relative Strength Index (RSI) can help identify overbought and oversold conditions.

In summary

The Heiken-Ashi technique is a valuable tool in technical analysis. It can improve trading results by reducing price fluctuations and producing clearer signals.

Its ability to smooth out price fluctuations and provide clearer signals makes it a popular choice among traders looking to identify market trend signals and forecast price movements.

Incorporating Heikin-Ashi with other technical analysis methods can enhance its effectiveness, offering a more comprehensive view of market conditions. However, it’s important to understand the limitations of Heikin-Ashi, such as slower trade setup times and missing price data.

By understanding its strengths and weaknesses and using Heikin-Ashi in conjunction with other technical indicators, traders can effectively identify patterns, spot trading opportunities, and manage risk more efficiently. While Heikin-Ashi is an effective tool, its reliability depends on how it is used within a broader trading strategy.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.