What Is Heikin-Ashi and How to Trade with It?

Category: Technical Analysis | Monday, February 25th, 2008

In forex or stock market, we can make or lose money when the price goes up and down. We need to be able to predict the direction of the market. Different traders do it using different methods but for most traders, technical analysis of the price charts is the easiest way. So they spend a lot of time to learn technical analysis.

In fact, technical analysis was invented and introduced by Japanese traders and by the invention of the candlesticks. Those who are familiar with the candlestick charts know that candlesticks are the best and fastest tools to understand the condition of the market and the psychological situation of the buyers and sellers.

Japanese traders never stopped improving their technical analysis methods and tools. They worked hard and tried to improve the technical analysis. Heikin-Ashi chart that came after the candlestick chart is one of the several different achievements of Japanese traders.

I don’t say that you can predict faster using the Heikin-Ashi chart, but it is much easier because it eliminates a lot of noise and so it prevents you from taking many of the false signals.

So What Is a Heikin-Ashi chart and How Does It Look Like?

Heikin-Ashi chart looks like the candlestick chart but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different than the candlestick chart.

In candlestick charts, each candlestick shows four different numbers: Open, Close, High and Low price (It is recommended to learn the candlesticks first) and each candlestick is independent and has no correlation with the previous candlestick.

But Heikin-Ashi candles are different and each candle is calculated and plotted using some information from the previous candle:

1- Close price: the close price in a Heikin-Ashi candle is the average of open, close, high and low price.
2- Open price: the open price in a Heikin-Ashi candle is the average of the open and close of the previous candle.
3- High price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the highest value.
4- Low price: the low price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the lowest value.

So Heikin-Ashi candles are related to each other, because the close and open price of each candle should be calculated using the previous candle close and open price and also the high and low price of each candle is affected by the previous candle. So Heikin-Ashi chart is somehow like a moving average, but it is much more than that, because it gives more information.

Why Heikin-Ashi is Better for Trading?

As I already mentioned, Heikin-Ashi eliminates the market noise and so it is much better for trading, both for reversal and also continuation signals to follow the trends. This indicator is also great for volatile currency pairs like GBPJPY.

Lets see how the Heikin-Ashi chart looks like and compare it with the candlestick chart. The upper part is Heikin-Ashi chart and the lower part is candlestick chart:

Heikin-Ashi candle - Heikin-Ashi chart

Different candles in a Heikin-Ashi chart:

1- Bullish candles:

When the market is Bullish, Heikin-Ashi candles have big bodies and long upper shadows but no lower shadow. Look at the big uptrend in the below chart. As you see almost all of the candles have big bodies, long upper shadows and no lower shadow.

2- Bearish candles:

When the market is Bearish, Heikin-Ashi candles have big bodies and long lower shadows but no upper shadow. Look at the big downtrend in the below chart. As you see almost all of the candles have big bodies, long lower shadows and no upper shadow.

3- Reversal candles:

Reversal candles in the Heikin-Ashi charts look like Doji candlesticks. They have no or very small bodies, but long upper and lower shadows. Look at the reversal candles in the below chart:

How can you use the Heikin-Ashi chart in your trades?

Heikin-Ashi is the main thing that some traders use. Heikin-Ashi is great for trading all currency pairs, especially volatile ones like GBPJPY and EURJPY. It is a strong and reliable indicator for intraday trading and scalping with small time frames like 15min, 5min and even 1min. On the other hand, it is also perfect to ride the big and continuous trends in the big time frames like daily and 4 hours.

Heikin-Ashi is also a good indicator and trading tool for new traders, especially those who have a lot of problem with controlling of their emotions. Heikin-Ashi helps you to be patient and take only the good and profitable trade setup. It eliminates the market noise and forms strong and profitable trade setups.

However, like any other indicator and trading system, you have to know how to use this indicator. To have the best result, I have combined Heikin-Ashi with some other critical and important indicators.

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60 Comments:
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Comment by pol

2008-02-26 01:21:08

Hello,
I hope that you feel yourself better this last days.
Please a little question.Why do you use the stoch.settings at 14,7,3?
Is this a ussable setting who works good?I use always 8,3,3 or 14,3,3
Sorry for my bad English.
Thanks