Heikin-Ashi charts were developed by Munehisa Homma, a Japanese rice trader in the 1700s. They are spelled as Heiken-Ashi, which means “average bar” in Japanese.
Heikin-Ashi candles are different from standard candlesticks because of the way they are calculated. In a standard candlestick chart, each candle is independently formed based on it’s open, close, high and low points. It is not attached to the previous candle.
While the opening price of an Heikin-Ashi candle is always the average of open and close price of previous candle, which means a new candle will be formed at the 50% mark of the body of the previous candle.
This helps in smoothing the whole thing out and gives a clear trend.
Now that we know how Heikin-Ashi candles are calculated, let’s get going with the business part of this post
How to use the Heikin-Ashi Candlestick chart ?
There are 5 major rules to remember while using this candlestick chart. You can also match these points with the chart given above for better understanding.
- Continuous green candles show an uptrend while a wave of continuous red candles show a downtrend.
- Green candles with no lower wicks indicate a strong uptrend while Red candles with no upper wicks indicate a strong downtrend.
- Doji candles show a potential trend reversal. (Note: This should always be used in combination with some other indicator as this trend could always carry on in the same direction).
- Green candles with lower wicks indicate that sellers are coming into the market and the uptrend is losing strength. Red candles with upper wicks indicate that buyers are coming into the market and the downtrend is losing strength.
- Larger the body of a candle, stronger the trend. When Candles start getting smaller, the end of that trend could be near.
The Heikin-Ashi candlestick chart can also be used just like a standard chart for finding chart patterns like triangles and wedges, or trade setups.
Entry and exit points may vary slightly, compared to using a candlestick chart, since the price on an HA chart may be slightly different from what is on the candlestick chart.
Below are some examples of Heikin-Ashi charts with these patterns.
Benefits of using Heikin-Ashi
- Easily Available : This is one of the most accessible indicators that does not require any installation and can be found on any trading platform.
- Easier to Identify Trends: It is easy to interpret as any trader is able to read the candlestick patterns. Heikin-Ashi candlesticks are better deciphered than traditional candlestick charts hence it is easier to identify market trends and movements.
- Reliability: Heikin-Ashi is a very reliable indicator, providing accurate results. It uses historical data, which is also quite dependable.
- Filtering of market noise: The indicator filters out market noise and reduces small corrections making the signals more transparent.
- Timeframe tolerant: The technique can be used on any time frame from hourly, daily, monthly, etc. However, bigger time frames are more reliable.
Limitations of Heikin-Ashi
- It is a lagging Indicator – As HA uses historical price data to form a new candle, a time delay is usually there. This is not an issue for a swing trader because they have more time to let their trades play out, but day traders need quick entry-exit points and this is not suitable for that.
- Opening and closing prices are not accurate – Heikin-Ashi data is averaged; hence, it does not show actual open and close prices. This may not work well for day traders or scalpers with more active assets.
Heikin-Ashi Candles are amazing to identify a trend and ride it to maximize your profits, however it should only be used to swing trade and not for day trade. Higher the time frame, more reliable the Heikin-Ashi candlestick chart is.
Tip: Use Heikin-Ashi candles along with RSI 50% mark line and chart patterns for a swing trade to achieve a high success rate.
I hope you enjoyed this post and got an idea of how to use Heikin-Ashi candlesticks. For any other query, you can let me know in the comment section below.
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