Heikin Ashi, is the Japanese name for a type of Candlestick pattern which slightly differs from how price is calculated and represented. The main difference between the Heikin-Ashi Candlesticks and the traditional candlesticks is that prices are calculated using previous information. The Heikin Ashi candlesticks are best used for representing trends within the time frame being used.
Below is a description of how Heikin Ashi candlesticks plot price.
- HA Open = (HA Open price 1 bar ago + HA Close price 1 bar ago)/2
- HA Close = (Open + High + Low + Close)/4
- HA High = Highest value of High or HA Open or HA Close
- HA Low = Lowest value of Low or HA Open or HA Close
As we can see from the above, the way price is depicted using Heikin Ashi Candles are very different from how the traditional candlesticks plot price. It is because of this calculation that Heikin Ashi candlesticks are used for representing trends that are a lot easier to identify.
In Figure 1 above, we can see a comparison between the traditional candlestick charts (bottom right) and the Heikin Ashi Candlesticks (top left). Although the main trends are visually almost similar, the Heikin Ashi candles show the corrections with the trend very clearly.
How to read market sentiment with Heikin Ashi Candlesticks?
If you find it difficult to read the many different candlestick patterns, the Heikin Ashi candlesticks might over an easier way to read the market sentiment as there are only three main types of Heikin Ashi candlesticks.
- Bullish sentiment
- Bearish sentiment
The chart below shows an example of how Heikin Ashi’s candlesticks are much easier to read.
Bullish Sentiment: These candles represent that the bulls are in control. They have little to no lower wicks.
Indecision: These indecision candles are represented by both upper and lower wicks with small bodies. When these types of Heikin Ashi candles appear, it represents that the market is undecided on which way to move.
Bearish Sentiment: Opposite to bullish sentiment candles, the bearish Heikin Ashi candles have little to no upper wicks.
Figure 2 represents how the Heikin Ashi candles moved higher and after the appearance of an indecision candle, prices start to drop again. One of the biggest advantages of Heikin Ashi candles is that when you understand the candlestick patterns, they can be traded directly without the need for any further indicators.
Heikin Ashi Candlestick Patterns
Besides the market sentiment, there are other candlestick patterns for Heikin Ashi.
Heikin Ashi Inside Bars: These are represented with the second candle completely engulfed within the previous candle’s high and low. After waiting for the next candle to close, the bias is established. The chart below (Figure 3) shows one such example.
- We identify the Heikin Ashi inside bar and so we wait for the market to establish the sentiment
- The next candle represents indecision, so we wait until we get a clear signal
- The third candle establishes the market sentiment with a bullish Heikin Ashi candlestick, we now enter long
- We notice a bullish Heikin Ashi candle but with a lower wick, this indicates temporary weakness in the market, so we now manage the risks for this trade
- We see a bearish Heikin Ashi candlestick with indecision. At this point, traders can either continue to hold the long positions or exit after this candle appears
The above example shows how price action trading with Heikin Ashi candles is simple and easy.
Heikin Ashi Chart patterns: Chart patterns such as Head and Shoulders, bullish/bearish flags and so on can also be traded with the Heikin Ashi candlestick charts. The chart below (Figure 4) shows how a bullish flag pattern is formed with the established bullish trend.
The main difference with trading the chart patterns is that traders can read the Heikin Ashi candlesticks before taking a position. For example, the chart below, we can see a clearly bullish Heikin Ashi candlestick emerging out of the flag’s consolidation. This signal alone is enough to take a long position with stops coming at the lows of the previous corrective decline, depicted by the bearish Heikin Ashi candlesticks.
The Heikin Ashi candlesticks can be a great way to help traders to read the market sentiment and trade accordingly. Besides using these candlesticks with other indicators, Heikin Ashi candles can be used to trade or even learn price action trading or trading with chart patterns. If you are new to trading or want to learn price action trading, try using Heikin Ashi candlesticks, they are simple and easy to use.