Heikin-Ashi Candlesticks

Introduction

The intricacies of the stock market come in various shapes and sizes. Whether it be the indicators or the charts themselves, for any situation or event, you can be sure that there’s a way to identify it or even predict it. 

With such information in one’s hands, navigating the landscape may not be as challenging if you were simply left to your own devices. 

So, equipping yourself with the right tools is oftentimes necessary.

Now, one such trading tool that you may want to look into happens to be the Heikin-Ashi Candlesticks, as they’re quite popular within the stock market.

What is Heikin-Ashi?

The Heikin-Ashi trading tool or technique can be traced as far back as the 1700s, with Munehisa Homma as its maker. 

While the technique does incorporate some characteristics of conventional candlestick charts, it differs based on how those values are computed. 

In Japanese, heikin itself means either balance or average, and ashi means foot or bar. Therefore, Heikin-Ashi means average bar, and this resonates with the trading tool in that it uses the security’s average price.

The Purpose of Heikin-Ashi

The entire purpose of these candlesticks is to identify trend signals and predict price movements. And the method uses the average price data for a reason in that it can filter out some of that market noise. 

But why is removing market noise so important? Well, if you don’t have any market noise, then you’ll get a clear indication of market direction or trends, which can aid with determining possible price movements.

The trading tool assists traders by identifying when trades should be held, paused, or whether or not a reversal is supposed to happen. 

With such data beforehand, traders may adjust their positions appropriately, either by locking in those profits or avoiding losses on the position they’ve chosen.

How is Heikin-Ashi Calculated? 

Like any indicator out there, with each having a distinct way to calculate its values, the Heiken-Ashi Candlesticks are no different; their formula is used to calculate every single candlestick on that chart. 

Still, a few of the calculations or formulas tend to be more complicated when compared to those used within standard candlesticks. So here’s a more simplified way of calculating the low, high, open, and close for these candlesticks.

Heikin-Ashi Calculation Formulas

• Heikin-Ashi Close (HA-Close) = (open + close + high + low of current bar) divided by 4
• Heikin-Ashi Open (HA-Open) = (open of previous bar + close of previous bar) divided by 2
• Heikin-Ashi High (HA-High) = the maximum value from the high, open, or close of the current period.
• Heikin-Ashi Low (HA-Low) = the minimum value from the low, open, or close of the current period.

Interpretation of Heikin-Ashi Candlesticks

But how do you read those candles in the first place, you might be wondering? Let’s look at that now, shall we? So, the upper wick’s top would be the candle’s highest value, and consequently, the lower wick’s bottom would be the candle’s lowest value. 

The candle’s body itself represents the difference between the open and close prices of a trading session. If the candle happens to be green, then that means the closing price is higher than the opening price, and it’s displayed at the body’s top, making it a bullish candle. 

But if red is the color of the candle, then that means the closing price is lower than the opening price, and that’s represented at the body’s bottom, making it a bearish candle. 

And finally, if the candles are small in size, then they indicate indecision within that particular trading session.

How to Use Heikin-Ashi in Trading

By now, you must have a bit of an idea of what these candles are supposed to be, which is why we’ll be focusing on how you may use them within your trading endeavors.

Trend Following with Heikin-Ashi

If you are to follow trends using the Heikin-Ashi candles, then you have to first identify them on the chart; only after doing so can you act accordingly. 

For instance, strong signals for uptrends can be seen when you have a lot of subsequent green candlesticks with no lower shadows. 

On the other hand, strong downtrend signals can be viewed when there are a ton of consecutive red candlesticks with no upper wicks.

Spotting Trend Reversals

Spotting reversals with these candlesticks is just as important as following and identifying the trends. That way, you can be sure you won’t make any significant losses. 

So, for example, if you have a long lower wick on a HA candlestick, and that too after a series of bullish candlesticks with no lower wicks, then it means that an uptrend could be losing that bullish momentum. 

Traders may consider this a signal for exiting their long trades if they’ve bought into the market, so think of this as a bearish reversal signal. 

Likewise, if the opposite happens, where you have a red candlestick with an upper wick, then it could be a bullish reversal signal.

Heikin-Ashi with Moving Averages

The HA candlesticks, like any other stock tool, can be paired with other indicators for some additional confirmation, and moving averages are a good start as they can filter out the signals provided here.

In other words, MAs with HA candlesticks can be used as an alternative to confirm trends and when to enter or exit a trade.

Heikin-Ashi as a Support and Resistance Tool

Even resistance and support levels may be identified with the Heikin Ashi Candlestick chart. So, these levels are identified by examining how the candles are structured, like long lower shadows, which indicate support, and long upper shadows, which show resistance.

Heikin-Ashi Strategies for Different Trading Styles

Now that you know about some ways in which these charts may be used within trading, you might be more curious regarding their relation with some of the most popular trading styles within the landscape, namely day, swing, and long-term trading.

Day Trading with Heikin-Ashi

For day trading, which seems to revolve more around short-term gains, incorporating shorter time frames within these charts may help, as it could filter out some of the market noise that traders have to face on a daily basis.

Swing Trading with Heikin-Ashi

For swing traders, whose priorities lie within medium-to-long-term profitability, they may find more use with these charts by including medium time frames, which would allow them to benefit more from reversals.

Long-Term Investing with Heikin-Ashi

As for those whose interests lie in long-term trading, they may incorporate even longer time frames, allowing them to stay within trends longer.

Advantages and Limitations of Heikin-Ashi

As with anything within the stock market these days, there are pros and cons to using these kinds of charts, which we’ll dive more into below.

Benefits of Using Heikin-Ashi

To start off with the benefits, trends appear to be a lot smoother if you use this chart, and they’re more easy to recognize too, which is always welcome within this sector. Because of this, it could help traders stay in their trades more instead of having to make an early exit.

Limitations of Heikin-Ashi

Now onto the cons. Firstly, it’s a lagging indicator, which means that it takes a while for it to identify trends or price momentum. 

Secondly, it’s not exactly the best for sideways markets with little action. And finally, since the price data is averaged, you won’t see actual close and open prices, which may not work that well for certain traders.

Conclusion

The Heikin-Ashi Candlestick Chart can be a good way to filter out a lot of that market noise, which can help with more informed and cautious decision-making. 

The fact it has been in use for hundreds of years speaks volumes for its legitimacy. However, that does not mean that it comes without any limitations, and knowing those is just as important if you are to make the most of them.