Heikin Ashi Candles are a popular technical analysis tool for traders. What is not so well-known is how to read them properly.
Heikin Ashi candles are a Japanese indicator that’s used to predict the future direction of markets. It is easy to understand, but it can be challenging to master.
This article will give you some pointers on what to look for when interpreting the Heikin Ashi candles and how they relate to your trades.
The Heikin Ashi candlestick is a Japanese phrase that means “average bar.”
Heikin Ashi candlestick is a fantastic tool for making candlestick charts more readable and able to spot trends. Traders may use Heikin-Ashi charts to determine when to hold on in trades while a trend continues but exit when the trend weakens or reverses.
When the market is moving, most profits are made. Therefore accurately predicting trends is critical.
The Heikin Ashi candlesticks may be found on the TradingView platform, or you can create your own Excel chart. In this blog post, we will be looking at how to create a Heikin Ashi Stock Chart in Excel.
What is Heikin Ashi
Heikin Ashi candles are a Heikin-Ashi candlestick chart that allows you to smooth outstocks or currency pair volatility.
When trading equities, we may combine the Heikin-Ashi technique with candlestick charts to identify market trends and forecast future prices.
The open-close data from the previous period is combined with the open-high-low-close data from the current period to generate a combo candlestick. To better detect the trend.
Heikin Ashi smoothes out price movement on a chart by displaying values in the form of averages, giving something that resembles a candlestick yet without much noise.
A basic candlestick chart depicts the general trend as well as how volatile a specific candlestick was.
The Heikin Ashi candlestick pattern is used to look beyond the choppiness and volatility prevalent in the market.
Heikin Ashi calculation
The Heikin Ashi candles will use a mathematical formula to indicate the market’s direction.
The open, close, high, and low of a period are all plotted in the traditional bar or candlestick chart. However, Heikin Ashi calculates these values differently.
The Heikin Ashi method for calculating average values on each candle is as follows:
- The candle’s opening is calculated as follows: (open of previous bar + close of the last bar) / 2.
- The closing price is obtained by adding the high, low, and close prices together.
- The highest value of the period, whether it’s open or close, or even high open.
- The current period’s lowest value is plotted against the prior period’s high.
The calculation of today’s HA candle takes current and previous candles into account. This method of smoothing price changes is referred to as HA candles.
Why are they better than regular candles
Regular candles are based on a daily data series. Heikin Ashi candles use a shorter data series of 10 days. They also have more significant candle markers such as valleys, peaks, and the top of an “owl’s eye” candlestick pattern.
When using Heikin-Ashi candles for trading or charting purposes, the difference in duration between the two is one of the most important things to consider before deciding which type to use.
Heikin-Ashi candlesticks reflect the momentum of the asset and may provide greater insight into how it trades. This type of candlestick chart has different body widths, representing the range among all traded prices in that session.
Why are they so popular?
This is because the Heiken Ashi chart makes it easy to recognize trends in the market, something traders rely on for making trades.
Traders rely on symbols, indicators, and averages to determine where they think the stock will go next. Standard charts like linear price charts or bar charts can see an uptrend or downtrend, but with Heiken Ashi, it is much more sophisticated. HAs give traders the ability to see patterns in rallies.
A rally can be broken up into waves, and if these waves are accelerating, the next wave is coming soon. This helps people who trade to know whether or not they need to make a trade now.
How to interpret the Heikin Ashi
Technical traders, such as futures and forex traders, employ the Heikin-Ashi method to identify a specific trend.
On the other hand, hollow white candles with no lower shadows signal a strong trend, while filled red candles with no upper shadow indicate a weakening position.
Reversal candlesticks made with the Heikin-Ashi method are similar to conventional candlestick reversal formations. They have tiny bodies and long upper and lower shadows.
On a Heikin-Ashi chart, there are no gaps since the current candle is calculated using data from the previous candle.
The Heikin-Ashi method, which smoothes price information over two periods, makes trends, price patterns, and reversal points easier to spot.
Candles on a typical candlestick chart are frequently reversed, making them hard to interpret.
The Heikin-Ashi chart type has more consecutive colored candles, allowing traders to identify previous price movements quickly.
The Heikin-Ashi method is a trading strategy that helps traders avoid buying or selling when they see sideways movement. It cuts out false signals in choppy markets to ensure you don’t get caught up in the hype and miss an opportunity.
How to use Heikin Ashi candles for trading
The Heikin Ashi can be used on any timeframe, much as a regular candlestick chart.
In a downtrend, candles tend to stay red, whereas, in an uptrend, they keep the color white.
Even if the overall trend were against them, standard candlesticks will occasionally alternate colors.
There are five primary signals that Heikin Ashi can utilize to determine trends:
- White candles represent an uptrend.
- A rising trend is illustrated by a wax candle with no lower “wicks.”
- Candles with a small body surrounded by two wicks suggest that a potential trend shift may be emerging. (Also known as a “Doji.”)
- Red candles indicate a downward trend.
- A falling candlestick with no higher shadows indicates a significant decline.
On the chart above, notice the numerous white candlesticks in a row with no wick on the bottom, highlighted by the white arrow. This implies that there was, in fact, a significant trend in action.
Candles, each with no upper shadow, suggest a very active downward trend and sentiment shift.
When there are a lot of long wicks in a row on one side of the candle, it might indicate that the market is experiencing significant stress.
When you see a lot of red candles with long wicks on the bottom, you’re seeing the beginnings of buying demand.
Finally, suppose you see a cluster of white candlesticks with long wicks to the upside in a row. In that case, it could signal that selling pressure is becoming more apparent.
The wick shows that the market was shifting in one direction. Still, in the case of a downturn, buyers were able to push back up, and in the case of an uptrend, sellers were unable to keep up.
Use Heikin Ashi candles to stay in trades.
A crucial distinction to bear in mind is that momentary spikes do not necessarily confirm a trend change. For example, if there are four red candles and then a white candle appears, the trader who is short on the market might close out their position or even perhaps go long at that point.
Heikin Ashi candlesticks are popular for people who trade. Candlesticks help them stay in a position longer if they think the price will go up or down. They don’t want to change their minds or stop trading until the candlestick changes color.
However, suppose you’re more aggressive, and the candle has wicks on both sides of it or forms a Doji. In that case, this might signal an impending trade in the other direction.
See why many traders are switching to Heikin Ashi
Because the more minor corrections and consolidations produced by candles imply that a significant trend change is more likely when the direction on a Heikin Ashi graph changes.
The capacity to filter out the clutter of a trend significantly influences your ability to get out of a trade.
The chart below depicts an uptrend that resulted in a few lengthy wicks at the top. The next three candles were red, with no wick on the top; the second and third had no wick at all on the top.
This demonstrates that the color change recognized the market’s shift immediately when it dropped.
The benefits of using Heikin Ashi candles in your trading strategy
The more candles you observe going against the trend, the more likely it is to continue.
Suppose the majority of bullish candles have a long lower wick. In that case, this indicates how much bullish momentum there is in the market.
The same principle applies to a downward motion that includes many red candles without a wick on the top.
When the market begins to have wicks on the bottom of the candles, there is a red one, followed by another few smaller white candles.
This was the final push of the rally before it rolled over. Things were beginning to shift in the limited range and lower wicks seen on the previous few candles and in lower volume.
The Heikin Ashi candles function in the same manner as other types of charting. However, the Doji candlestick, when compared to other forms, appears to have more weight.
A Doji candlestick forms when the market opens and closes at the same price.
When this appears at the top or bottom of a trend, it is exciting and telling on a Heikin Ashi graph. This is because the averaging method uses past information. If candles start to stagnate, it means that momentum is waning.
Real market Heikin Ashi example
Take a look at the EUR/USD’s one-hour upswing in the graph below.
The market runs out of steam in the blue rectangle, which has a lot of dojis.
Take a closer look at the previous white candle, which a red one has now replaced. This signifies that the momentum is rolling over as well.
The market subsequently began a decline. This is typical with the Heikin Ashi indicator, which eliminates a lot of noise.
We should also mention that the candles’ shapes seem to form a lot of flags.
The same chart from the preceding example was zoomed out a bit and created a pair of flags as shown on the chart.
This is a perfect illustration of how the Heikin Ashi indicator displays the trend. The flag’s form indicates a pullback after hitting the upside for the first time. At this point, the trend accelerated and rose dramatically.
Let’s consider this: The Heikin Ashi smoothing mechanism reveals the trend and average, not all of the noise that a flag may have missed.
We must disregard individual noisy moves to look at the trend. It’s a fantastic method to observe the overall move while not being distracted by the details, allowing you to track right along with the direction if and when it appears.
Heikin Ashi’s smoothing mechanism, unlike most moving averages, take the average of the recent move rather than just the high, low, open, and close. This gives you a better overall “feel” for the trend or even if there is one.
The candles will reveal whether there is real momentum if there are wicks on the candle. Suppose there is an uptrend but no wicks on the bottom of the candle. In that case, this indicates that traders should continue following the momentum by placing a stop loss. This also works in reverse.
Patterns and certain candlesticks, like any other charting technique, can be signals. Flags are just as meaningful on Heikin Ashi charts as they are on bar or candlestick charts.
Furthermore, the typical Doji is one of the most significant signals when utilizing Heikin Ashi candles. The Heikin Ashi indicator smoothes out the whole momentum, and a flat close like that can signal a trend has ended.