Heikin Ashi

The Heikin Ashi is a trading technique one uses in combination with candlestick charts when buying and selling financial securities to predict future prices and identify market trends. It makes it easier for traders to analyze trends and read candlestick charts.

This method uses average price data, which helps filter the market noise. It helps traders determine whether they should pause or hold onto a trader. Moreover, the technique helps them identify if a reversal will occur. Accordingly, traders can take their decision, i.e., lock in on profits or prevent incurring losses on a specific position.

• Heikin Ashi meaning refers to a modified technique for charting candlesticks that involves rearranging how a financial instrument’s price is shown to help traders decide whether to enter or exit a position more confidently.
• This Japanese technique tries to filter out the market noise, enabling one to predict price movements better and identify trends.
• There are certain differences between Heikin Ashi and candlesticks. For example, unlike conventional candlesticks, the former utilizes average price data and involves time lag.
• Heikin Ashi filters out the market noise, while a conventional candlestick chart does not.

Heikin Ashi meaning refers to a candlestick-based trading method that involves utilizing candlestick charts to visualize and represent market price data. Using this Japanese trading tool, individuals can spot market trend signals and predict price movements. Munehisa Homma developed this technique in the 1700s. This method has features similar to conventional candlestick charts utilized in trading financial instruments. However, they differ concerning the method used to calculate the values for candlesticks.

In Japan, Heiken means ‘balance’ or ‘average’, and Ashi means ‘foot’ or ‘bar’. Therefore, the meaning of Heiken Ashi is ‘average bar’. Therefore, it resonates with the trading method using a security’s average price.

A Heikin Ashi chart can have data of different timeframes, for example, monthly, intraday, weekly, etc. A user can define the time series based on the chart type desired.

Filled candles represent down days, while empty candles denote the up days. One must note that different chart platforms may use color for candles. For example, the down days can be black or red, and the up days can be green or white.

In this kind of chart, the candlesticks mostly remain green or white during an uptrend and red or black during downtrends. Contrary to Heikin Ashi, traditional candlesticks have alternating colors even if the price of a financial instrument moves dominantly in a particular direction.

Chart And Interpretation

Let us look at the DIA/Bitcoin Heiken Ashi chart to understand the concept better. 

Source 

Interpreting charts like the one above will be a straightforward task if one keeps the following pointers in mind:

• The top of every upper wick represents a candlestick’s highest value. In other words, it is the high of the trading session. 
• A candlestick’s body shows the difference between the open and the close of a particular session. 
• The bottom of all candles’ lower wick denotes the lowest value or low of the trading session.
• When the candlesticks are red, the closing price is below the opening price in that trading session. 
• For green candlesticks in the chart, the opening price is below the closing price in that particular trading session. 
• Green candles without any lower shadow indicate a strong uptrend. 
• Red candlesticks without any upper shadow signal a strong downtrend.

One can look at some of the similar charts available on the TradingView platform to develop a better understanding of the concept.

For this formula, one uses the previous period’s open-close data and the current duration’s OHLC or open-high-low-close data. First, let us check out the formulae.

Heikin Ashi Open = HA Close (-1) + HA Open (-1) / 2

Heikin Ashi Close = (Open0 + Low0 + High0 + Close0 / 4

Heikin Ashi Low = Min (Low0, Open0, Close0)

Heiken Ashi High = Max (High0, Open0, Close0)

Where:

• -1 and 0 refer to prior and current period figures.
• HA is Heikin Ashi

To understand the concept better, let us look at a few Heikin Ashi examples.

Example #1

Suppose John, a trader, uses the Heikin Ashi technique to decide whether to exit his short position. He spots a long-bodied black candle that does not have any upper wick. Knowing that the candle indicates a strong downtrend, he held on to his short position to maximize his gains during the bearish trend.  

Example #2

With the introduction of Heikin Ashi candles on the IG trading platform, IG Group is continuing to improve the charting capabilities of the platform. The indicator is accessible by users irrespective of whether they use the platform via their smartphone or desktop. According to the IG team, this new feature is a highly-requested addition to the list of charts offered. This is because traders who spot trends without complex analysis often use this technique.

Such a chart can apply to all markets. The majority of the trading platforms offer this chart. Traders can select it to take their buy-and-sell decisions. Let us look at a few primary signals that help individuals spot buying opportunities and trends.

• Green or hollow candlesticks without a lower shadow signal a strong uptrend. If individuals can spot this pattern, they should let their profits run and resist the urge to sell their profitable position too early.
• Red or filled candles signal a downtrend. When traders spot this pattern, they might consider adding to their short position while exiting the long ones.
• Candles having a small body bordered by lower and upper shadows signal a trend change. Traders with a high risk appetite might consider buying or selling the security here. Other traders wait for confirmation before choosing to go long or short.
• Green or hollow candlesticks signal an uptrend. If traders spot it, they might consider exiting short positions while adding to their long positions.
• Red candles without higher shadows signify a strong downtrend. Traders may consider staying short until the trend changes.

False signals rarely interrupt the trends. As a result, traders can spot the trends easily.

The benefits and limitations of this trading technique are as follows:

#1 - Pros

• Traders find it easier to decipher Heikin Ashi patterns than conventional candlesticks. Hence, identifying trends and estimating price movements is easier.
• The technique is reliable and offers accurate results.
• This method filters out the market noise and minimizes small corrections, thus making the signs more transparent.
• One can use this technique for any duration, for example, monthly, daily, and hourly.
• The chart is easily accessible as most trading platforms offer it.

#2 - Cons

• Using historical price data means this technique involves a time lag.
• Since this technique uses average price data, it does not show the exact close and open prices. As a result, this might not work for traders with many active securities, for example, day traders.
• Many traders utilize price gaps to trigger entries, position a stop loss order, or analyze the price momentum. That said, this technique lacks the use of price gaps.

The concepts of Heikin Ashi and traditional candlesticks can confuse individuals new to securities trading. While both can be used to predict price movements and identify market trends, one must know certain contrasting features to determine which option is suitable for making the best trading decision.

So, this table highlights the critical differences between Heikin Ashi and candlesticks.

This has been a guide to what is Heikin Ashi. We explain its formula, how to trade it, compare it with candlestick, examples, pros & cons. You can learn more about from the following articles –

• Momentum Trading
• Trend Trading
• Momentum Indicator