Successful trading requires a comprehensive understanding of the charts and technical indicators to help here. Heikin Ashi candles or Japanese's average Japanese bar is also one of them. It is the popular trading strategy that the traders use for analyzing securities prices in the trading market.
Besides predicting asset prices, it also increases the readability of the charts and a lot more. In this article, we will talk about the benefits and limitations of Heikin Ashi and discover the easiest way of reading candlestick charts. So keep on reading to access the complete guide to Heikin Ashi candles.
The Heikin Ashi technique is a Japanese candlestick-based technique used by technical traders to easily identify a given trend. Therefore, the Japanese candlesticks are also known as Heikin Ashi Candlesticks. In Japan, the word Heikin means average, and Ashi means bar. Hence, Heikin Ashi means average bar.
The Heikin Ashi method uses average price data that filter out market noise. These candles are averaged versions of traditional candlesticks that take into account the previous bar's data while determining the price of the current candle, which is also quite dependable.
The Heikin Ashi candles have a smoother look because they are essentially taking the average of the movement. In addition, the Heikin Ashi technique reduces false trading signals. For example, instead of giving two false reversal candles, they only provide traders one signal to receive the valid signal.
It reduces small corrections making the signals more transparent. The Heikin Ashi is considered the most reliable indicator, providing accurate results. They are useful for short-term trading, whether in day trading or swing trading.
It can be used in all kinds of markets to comprehend market patterns. For example, it remains red in a downtrend and green in an uptrend. However, other candles show alternate colors even if the price is moving dominantly in one direction.
What is the Heikin Ashi formula?
The value of each Heikin Ashi candlestick differs from each other according to the data provided. For instance: the value of an open candle will be different from the closed one. The same goes with the high and low. These values are calculated by using a simple formula which is as follows:
For close Heikin Ashi candle:
For open Heikin Ashi candle:
For high Heikin Ashi candles:
For low Heikin Ashi candles:
All these formulas show that we require both the previous and current price data to calculate Heiken Ashi candle values. It is because it gives the average values.
For instance: if we calculate the open value with the previous day's opening price of 10$ and the closing price as $17, it will be ½ (10+17)=13.5.
First, note the open, high, and close values for calculating the high values of the current bar. Then, choose the highest value among all. For example, suppose we have 17,19,20 values. We will choose 20 as it is the highest of these values and then compute the formula to calculate the results.
How to read Heikin Ashi candlesticks?
Reading candlesticks of Heikin Ashi is easier because of the separate positions it gives to each value. The traders have to scrutinize the color, body, and wick of the candles. The top wick of the upper candles shows the highest value of the candle, and the bottom of the lower wick shows the lowest value on the candle.
The body of the candle is the distance between the open and close prices. The difference occurs with the opening and closing prices during the trading session. In terms of color, the green-colored candle reveals that the closing value is greater than the opening value, and the red color shows that the opening value is greater.
The lower opening value appears at the bottom part of the candle's body, and the greater opening value appears at the top part of the candle. So, understanding these aspects is important for reading Heikin Ashi candlesticks as every candle reveals separate prices.
How to construct a Heikin Ashi candlesticks chart?
The Candlestick charts were invented in the 1700s by a Japanese Munehisa Homma. The Heikin-Ashi candlestick chart mainly consists of candlestick patterns. They are very useful for traders because they show all high, low, open, and close price points.
The candlestick chart shows the same data as in the bar graph but unique form. The Heikin-Ashi charts are constructed based on averages over two periods. Due to Heikin-Ashi taking an average, the price on the candle may not reflect the current market price.
The Heikin-Ashi chart can be applied to any market. These charts are used on the stock market to help traders and investors determine and predict the security's price movements. Heikin-Ashi charts usually have red-colored candles during a downtrend and green-colored candles during an uptrend.
The Heikin-Ashi candles change their color when there is a change in trend. In the Heikin-Ashi chart, the down days are represented by filled candles, while up days are represented by empty candles. Heikin Ashi charts are usually used by swing traders and investors on their own.
The Heikin-Ashi charts show smooth directionally moving bars with successive bars of the same color, giving a more accurate picture of price movement. In addition, Heikin-Ashi charts have more consecutive colored candles, helping investors to identify past price movements quite easily.
By calculating average values, it plots smooth price activity. The Heikin Ashi charts are of different timeframes, intraday, weekly, or monthly, etc. So, the different signals help traders to identify the trending directions more easily. Chart patterns and trend lines can also be used on Heikin-Ashi charts.
They are more commonly used as an indicator by day traders as these charts have other certain benefits also. The Heikin-Ashi charts can be used for analysis and making trading decisions. In addition, it can be used to keep a trader in a trade after the trend begins. These charts are plotted differently than the other standard candlestick charts.
How to trade using the Heikin Ashi chart?
Heikin Ashi allows traders to determine when new trends have started or if the existing trends are reversing. The few basic ways to use Heikin Ashi charts in trading are given below:
1. Up trending signal of candlesticks:
When the color of the Heikin Ashi candle changes from bearish to bullish or from red to green, it is a signal for a trader that the price may turn high anytime.
2. Indication of strong uptrend without lower shadow:
If there are green shaved bottoms, it means you will surely see a strong uptrend. Until a lower shadow appears on the chart, ride the uptrend and let the profits continue.
3. Trend Reversal or pause:
The change in color does not always mean that the trend is over. Instead, it could be a reversal or pause.
4. Downtrending signal of candlesticks:
When the color of the Heikin Ashi candle changes from bullish to bearish, or to say from green to red, it means that the price might be about to turn low anytime.
5. Indication of strong downtrend without upper shadow:
The trader must stay short until these candlesticks turn their color from red to green. Then, until an upper shadow appears on the chart, ride the downtrend and let the profits run.
Application of Heikin Ashi Candles
The Heikin Ashi indicator analyses price trends and gives signals in two different directions, namely trend strength and trend reversal. It then further reveals the price movements as per the directions differently. So, let's dive deeper to understand the two main functions of the Heikin Ashi candles.
Trend strength
Heikin Ashi shows different types of signals to measure the trend's strength. For instance: The consecutive green candlesticks having no lower shadows reveals the strong uptrend price movement. The consecutive red candles with no wicks at the top show the strong downtrend price movement.
However, small changes and values usually don't appear on the charts. Therefore, most successful traders suggest using the trailing stop to lock in the profits when the uptrend is strengthened. Moreover, three forms of triangles show the strength of the price trend, especially its persistence.
These are ascending, descending, and symmetrical triangles. The chances of a persistent strong upward trend occur when the Heikin Ashi technical indicator breaks above the ascending or symmetrical triangle's boundary. Conversely, if the candlesticks on the chart touch the bottom of the descending triangle, it signals a strong downtrend.
Trend reversal
Another application of the Heikin Ashi candlestick is to indicate the trend reversal. It does so through Doji candlesticks. These appear as small-bodied candles with long shadows on the chart. It usually indicates the possible uncertainties in the trading market. Yet, in this case, it produces signals when a trend reversal occurs.
This further helps the traders in determining the ideal time of leaving the previous trade, or to say. The previous trend is breaking to lock the maximum profit and reduce the loss. In this way, the traders can also find the ideal opening and closing time for trading.
For identifying trend reversal, it uses two forms of wedges, namely rising and falling. Wedges and triangles are slightly alike. The only difference is in terms of function. The downtrend reverses when either the price goes above the line or breaks at the bottom.
In other words, the trader has to wait for the rising wedge indication until the candlestick breaks below its bottom margin. The presence of a falling wedge indicator also calls for some wait until the price crosses above the top of the indicator's margin to get an indication of a trend reversal.
What are Heikin-Ashi strategies?
There are also Heikin Ashi strategies that the traders can use to ensure maximum profit in less time. Following are some strategies that are essential to have command on.
1. Identification of uptrend and downtrend
As mentioned above, the indication of a strong bullish and bearish trend is one of the applications of the Heikin Ashi technique. These indicators are usually known to be reliable and highly responsive in producing the right signals.
Therefore, the traders can rely on Heikin Ashi technical indicators for identifying the ideal time when the uptrend or downtrend is at peak. For instance: The strong bullish or uptrend situation is favorable for the traders who have long-term positions.
To identify the strength of the bullish trend, the traders have to look for candlesticks that do not have shadows. It gives an authentic signal regarding the strong bullish trend. Moreover, it is ideal for the traders having long-term positions to extend their trade.
Similarly, when there are candlesticks with no upper shadows, it signals a strong bearish trend. It also indicates that the new bearish trend is going to start. Heikin Ashi candlesticks technical indicator also helps in predicting the strength of the upcoming or new trend. It is done by locating the long sequence of candlesticks without tails.
2. Identification of trend pausing or reversal
Apart from identifying uptrends and downtrends, Heikin Ashi also helps in identifying the trend pause and reversal. The small body candles are of great importance here as they indicate when the price trend is pausing or is likely to reverse. Identifying these points is essential for the traders to open new trading positions.
It calls for the real diligence and strategy of the trader. At this point, the trader has to be cautious enough to identify informatively if the trend is pausing or reversing as the Heikin Ashi candles only provide the average value. Therefore, it further helps the traders in locating the breaking trend and emerging trend.
Benefits of the Heikin-Ashi Technique
1. Greater Accessibility:
The Heikin-Ashi is one of the easiest indicators to use, as it requires no installation and can be applied on any trading platform.
2. Easy Comprehension
The Heikin-Ashi candles are easier to interpret than traditional candlestick charts, making it easier to spot market trends. Heikin-Ashi candlesticks are more comparable to traditional candlestick charts. Hence, making it easier to identify market trends and movements. In addition, they provide simple information which is easy to read.
3. Reliable Indicator:
Most traders prefer the Heikin Ashi candles indicator because it is the most reliable indicator as it gives accurate results. These indicators use historical data.
4. Noise reduction:
They can observe the condition of the market very quickly. This indicator reduces small errors and reduces market noise, allowing signals to be more transparent than before. In addition, trend identification becomes easier due to its smoothing effect. Most of today's markets are full of noise; therefore, by reducing noise, the Heikin-Ashi technique can help traders plan more efficiently for their entry and exit points.
5. Applicable on any time frame:
The Heikin Ashi technique can be used on any time frame from hourly, daily, monthly, etc. The time frame is defined by the user, depending on the type of chart they need. It can be hourly or daily. A daily timeframe means that each bar represents the price movements on that specific day and so on.
6. Adaptive towards other indicators
The Heikin-Ashi indicators do not restrict you from using any other kind of technical indicators. Instead, they give even stronger signals on market movement than before and enhance the performance.
Limitations of the Heikin-Ashi Technique
The Heikin Ashi technique also has some limitations that affect the analysis to an extent. The most prominent one is that it isn't favorable for day traders and the traders who look for highly responsive indicators. It requires two values to calculate the average, so it takes a considerably longer time to get the results.
Other than this, most of the relatable price information is unclear in Heikin Ashi candlesticks. It is because you can only calculate the average opening and closing prices even through the formula. So, if you want to find out the actual prices apart from the average ones, you have to find another way which may become complicated.
Conclusion
Heikin Ashi or average bar functions to reduce noise in the price fluctuations to set the reliable trend. By making it a part of their technical analysis, the traders can benefit themselves with the greatest while making their trading easy and profitable. Moreover, the traders can apply these Heikin Ashi candlestick charts to any trading asset.
However, it also has some limitations, but if utilized calculatedly, it can be overcome. In short, the Heikin Ashi candlestick technique is highly useful in increasing comprehension and readability of the charts and identifying average price trends and movements more clearly.
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