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Heikin Ashi: Definition, How It Works and What It Indicates?          

Heikin Ashi: Definition, How It Works and What It Indicates?

Heikin Ashi: Definition, How It Works and What It Indicates?

Heikin Ashi is a Japanese candlestick-based trading tool that helps visualize a trend better. Heikin Ashi is used to identifying trends more easily. It does so by eliminating the market noise and focusing on the current trend. The name Heikin Ashi is a combination of two Japanese words – Heikin and Ashi. “Heikin” means “average” or “balance,” while “Ashi” means “foot” or “bar.”

The Heikin Ashi charting technique was developed in Japan by Dan Valcu in the late 1990s as an alternative to the traditional candlestick chart. It is based on the principles of Japanese candlestick charting, which is a technique used to analyze the price movement of assets.

The Heikin Ashi helps traders identify trends and reversals more easily. The Heikin Ashi chart will show a series of green candles in a bullish trend, while in a bearish trend, it will show a series of red candles. 

What is Heikin Ashi?

The Heikin Ashi is a charting method that shows a current market or price trend with more clarity by avoiding market noise. Heikin Ashi comes from a family of Japanese candlestick patterns. Heikin Ashi shows trends more prominently as there will only be green candles during a bullish period and red candles during a bearish period. This is in contrast with normal candlesticks which could have minor red candles even in a bullish time period and vice versa. Take a look at the image below. 

The left is a normal candlestick and the right is Heikin Ashi. You can see that the right chart shows trends more clearly. There are only green candles during a bullish run and red candles during a bearish run.

There are two schools of thought regarding the invention of Heikin Ashi. 

The first school of thought believes that Munehisa Homma, a Japanese rice trader from Sakata, is credited with developing the candlestick charting technique in the 18th century. Homma used this technique to analyze the price movements of rice and identify trading patterns that formed ahead of changes in the direction of rice prices. Homma’s work in developing the first candlestick charts helped him to gain an edge in trading and become one of the most successful traders of his time. His trading strategies and techniques were documented in his 1755 book, “The Fountain Of Gold: The Three Monkey Record Of Money”. 

The second school of thought believe that the Heikin Ashi charting technique was developed in Japan by Dan Valcu in the late 1990s. Valcu was a trader who wanted to create a chart that would filter out market noise and provide a clearer picture of the trend. Heikin Ashi is based on the principles of the Japanese candlestick charting technique, which dates back to the 18th century.

Traders use Heikin-Ashi to determine the overall trend and identify potential buying and selling points. Investors, traders, and chartists can use Heikin-Ashi to evaluate the market sentiment and spot reversal points. Heikin-Ashi charts can be used in any market, including stocks, commodities, currencies, and indices.

How Does Heikin Ashi Work?

Heikin Ashi technique works by taking the average of the opening and closing of the previous candle in a chart, adding the high and low and then dividing the result by four. This average value will then be used to create the next candle. The Heikin Ashi candle is then determined by the open, close, high and low price of the asset, as well as the Heikin Ashi average.

Heikin Ashi candles are usually coloured differently from regular candles and can help traders identify trends more easily. A green candle means the close price is higher than the open price and the trend is up. A red candle means the close price is lower than the open price and the trend is down. This can help traders identify both the strength and direction of the trend, allowing them to make better trading decisions

What Does Heikin Ashi Chart Indicate?

Heikin-Ashi charts indicate trend-reversals and price breakouts, as well as identify potential entry and exit points for traders. Heikin-Ashi charts are also useful for identifying areas of support and resistance. Generally, rising Heikin-Ashi candles indicate an uptrend, while falling Heikin-Ashi candles indicate a downtrend. Along with other technical indicators, Heikin-Ashi charts can be used to analyze the behaviour of market prices in more detail and make more informed trading decisions.

Heikin Ashi indicates market sentiments though its candles and patterns.

What Does Heikin Ashi Chart Indicate?
Heikin Ashi: Definition, How It Works and What It Indicates? 13
  • A long green candle indicates the uptrend. The stock remains bullish during these periods.
  • Small candles, regardless of the size, show indecision. 
  • A long red candle indicates a downtrend. The stock remains bearish here.
  • Long lower shadows in a red candle indicate buying pressure.
  • The method for calculating the Heikin Ashi values is mentioned below.
  • Calculate the midpoint of the current candlestick by adding the open and close prices and dividing by 2. This gives the midpoint value (MP).
  • Calculate the average price of the previous candlestick by adding the open, high, low, and close prices and dividing by 4. This gives the average price (AP).
  • Calculate the new Heikin Ashi values for the current candlestick using the following formulas.

HA Close = (Open + High + Low + Close) / 4

HA Open = (HA Open of previous candle + HA Close of previous candle) / 2

HA High = Max(High, MP, HA Open)

HA Low = Min(Low, MP, HA Open)

Where HA Open of the previous candle is the Heikin Ashi open value of the previous candlestick, and HA Close of the previous candle is the Heikin Ashi close value of the previous candlestick.

Let us take an example of this calculation method.

Let us assume the previous day’s candlestick had the following values.

  • Open: 1000
  • High: 1100
  • Low: 950
  • Close: 1050

Method

Calculate the midpoint value (MP) of the current candlestick:

MP = (Open + Close) / 2 = (1100 + 1150) / 2 = 1125

Calculate the average price (AP) of the previous candlestick:

AP = (Open + High + Low + Close) / 4 = (1000 + 1100 + 950 + 1050) / 4 = 1025

Calculate the new Heikin Ashi values for the current candlestick:

HA Close = (Open + High + Low + Close) / 4 = (1100 + 1150 + 1075 + 1125) / 4 = 1112.5

HA Open = (HA Open of previous candle + HA Close of previous candle) / 2 = (1000 + 1050) / 2 = 1025

HA High = Max(High, MP, HA Open) = Max(1100, 1125, 1025) = 1125

HA Low = Min(Low, MP, HA Open) = Min(950, 1125, 1025) = 950

Therefore, the Heikin Ashi values for the current candlestick are:

HA Open: 1025

HA High: 1125

HA Low: 950

HA Close: 1112.5

These values can be plotted on a chart for visual representation. Modern trading tools allow you to see the plotted chart without any complex calculations among other chart types

What is the Heikin Ashi Strategy?

Heikin Ashi is used as a strategy to figure out trends in the market.

A bullish trend is indicated by a more than five consecutive green candles without a lower shadow. A single similar candle is similar to the one in the picture.

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A bearish trend is indicated by consecutive red candles without an upper tick. A red candle without a wick will look similar to this.

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Heikin Ashi often forms triangle shapes as well. The key here is to follow the direction in which the price action breaks out.  Ashi price action breaching the pattern’s upper boundary indicates that the uptrend is likely to continue. Price action breaking the triangle’s lower level indicates the price to begin a new bearish move.

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The chart displays an Expanding Triangle pattern (blue). Then, based on the measured move calculation, the price action breaks the lower level of the triangle and reaches the minimum target of the pattern.

What is the Heikin Ashi Trading System?

The Heikin Ashi Trading System is a popular trend-following trading strategy. The strategy is based on the Japanese candlestick charting technique and combines elements of both trend-following and momentum trading.

The Heikin Ashi Trading System looks for entry points when a strong trend is established in the market. It then attempts to capture profits as the trend progresses. The system attempts to identify short-term price reversals that can be used to enter the market.

The Heikin Ashi Trading System is a complex system and requires significant knowledge of technical analysis and charting techniques. It also requires a good understanding of the markets and the underlying fundamentals that drive the market. This system is not suitable for beginners and should only be used by experienced traders

How Can you Use Heikin Ashi in MT4?

Ensure that the Heikin Ashi indicator is installed in the MT4 platform first. Then, select it from the list of indicators and apply it to the chart. The Heikin Ashi indicator will be displayed as a line chart overlaid on the price chart. By interpreting the signals generated by this chart, traders can make informed decisions about when to enter and exit positions.

Aside from Heikin Ashi, MT4 also offers a wide range of charting and technical analysis tools to help traders make better decisions. Some of these tools include Fibonacci Retracements, Moving Averages, and Bollinger Bands, among many others. By combining these tools with Heikin Ashi, traders can gain a better understanding of the markets and identify potential trade opportunities

What are the Advantages of the Heikin Ashi Chart?

There are five main advantages of the Heikin Ash chart that makes it popular among traders. Below listed are four main advantages.

  • Heikin Ashi removes market noise: The Heikin Ashi chart removes market noise by using a modified formula for calculating the opening, closing, and high and low prices of each period. The formula takes into account the previous period’s prices to determine the current period’s prices, which results in a smoother chart that is less susceptible to sudden price fluctuations.
  • Heikin Ashi makes it easier to read trends: Heikin Ashi is able to give traders a much smoother price chart. Normal candlesticks will have shorter ups and downs even within strong trends. But Heikin Ashi negates this and investors are able to see a much clearer picture of the market.
  • Heikin ashi is easier for novice investors to understand: It can be difficult to comprehend all the complex information displayed on standard Candlestick charts for a beginner. Heiken Ashi charts are the best at displaying general market trend information.
  • Heikin ashi is the best option to understand the general trend: Heikin ashi is often the best option for gaining an understanding of the market’s general trends. Simply examining the candlestick chart will reveal the market’s future direction. This chart does not contain any information that would have been difficult for a novice Forex trader to comprehend and analyse.
  • Heikin ashi helps confirm entry and exit points: As the size of the candle bodies generated by Heikin-Ashi candles on a chart indicates the strength of a trend, it also helps us determine when to keep an asset or depart the market. A larger candle indicates a strengthening trend, therefore we can maintain our position. A decreasing candle body indicates that the trend is beginning to weaken, allowing us to quit the market.

Heikin ashi is particularly helpful for novice investors who may find traditional candlestick charts overwhelming. The Heikin Ashi chart can help traders better identify market trends and make more informed trading decisions by using a modified formula to calculate prices.

What are the Disadvantages of the Heikin Ashi Chart?

Heikin ashi comes with disadvantages as well especially since it smoothes out market movements. Below are 4 main disadvantages.

  • Heikin ashi is often late at showing the immediate price movement: Heikin ashi shows only bullish or bearish bars until there is a strong movement in the other direction. It can hence be late to show newer price movements as it cancels out the noise using averages.
  • Heikin is often not suitable for scalping: Heikin Ashi charts may not be suitable for very short-term trading or scalping strategies because they create a lag in signals and reduce granularity. The smoothing effect of the chart can cause traders to miss out on quick opportunities for profit, and the modified formula used to calculate prices may not provide enough detail for traders who need to make rapid trading decisions. 
  • Heikin ashi has limited granularity: The averaging effect of Heikin Ashi charts can also limit granularity, making it harder for traders who want more granular data to make quick trading decisions.
  • Heikin ashi has less platform support: Certain trading platforms and programs don’t support Heikin Ashi charts, making it difficult for traders to utilise this type of chart on those platforms.

it’s important for traders to carefully evaluate the drawbacks of Heikin Ashi charts before incorporating them into their trading strategies as it has the potential to hamper your market timings.

How Much Does Each Bars in Heikin Ashi Chart Worth?

The value of each bar in a Heikin Ashi chart depends on factors such as the time frame, the price action, and the overall trend. The open, close, high, and low of each bar are all taken into consideration when determining its worth.

The open and close prices of each bar denote the opening and closing prices for that period, which is typically one day in a daily chart and one hour in an hourly chart. The open price is the first price of that period, while the close price is the last price of that period.

The high and low values of each bar denote the highest and lowest prices during that period, respectively. These values are used to create a graphical representation of the underlying trend. If the high-low range is wide, it suggests that there is a lot of price volatility during that period. If the range is narrow, it suggests that the price is relatively stable.

How is the Accuracy of the Heikin Ashi Chart?

The accuracy of the Heikin Ashi chart is contingent on the employed trading method and the time frame being evaluated. Heikin Ashi charts are intended to reduce market noise and present a better view of price movements, which can be beneficial for traders seeking to spot longer-term trends and make more educated trades. But the chart’s smoothing effect can also cause a delay in signals and diminish granularity, which may not be acceptable for traders who want more detailed information for short-term trading or scalping techniques.

What is an example of a Heikin Ashi Chart?

What is an example of a Heikin Ashi Chart?
Heikin Ashi: Definition, How It Works and What It Indicates? 14

The above is an example of a Heikin ashi chat. The chart shows clearer trends with greens showing a bullish trend and reds showing bearish trends.

This is the chart of the same company in the same period using normal candles. You can see here that the price movement is more bumpy and granular. 

What is the Best Indicator for Heikin Ashi?

The best indicator to use when implementing Heikin Ashi is the Moving Average Convergence Divergence (MACD). The MACD is a technical indicator that uses the relationship between two different moving averages of price to identify potential turning points in the market. The MACD can effectively assess the momentum of the market, allowing traders to make more informed decisions when trading with Heikin Ashi. The MACD is considered a reliable indicator for Heikin Ashi because its strong signal-to-noise ratio prevents traders from making incorrect decisions due to false signals

Why Most People Don t Use Heikin-Ashi for Trading?

One of the major reasons why Heikin-Ashi is not used as often is that it is a more complex form of technical analysis. It requires a trader to understand the nuances of the chart, including how it is calculated, which can be difficult for some people. Heikin-Ashi charts do not provide as much detail as traditional charts, which can make them more difficult to interpret. 

Another reason why Heikin-Ashi is not used often is that it is better suited for a longer-term trading strategy, rather than the short-term strategies that are often employed by traders. 

Is Heikin-Ashi dependable?

Yes. Heikin-Ashi can provide a clearer view of the trend of an asset in the longer term. It can be easier to identify the overall direction of the trend but avoid getting caught up in short-term fluctuations.

Is Heikin-Ashi greater than candlestick?

Yes, Heikin-Ashi charts tend to be more reliable than candlestick charts, making them better suited for trend-following strategies for a longer time frame. But both types of charts are still useful for market analysis and should be used together in order to get the best results.

Is Heikin-Ashi excellent for day trading?

Yes, Heikin-Ashi is an excellent tool for day trading, as it helps to identify trend reversals and trend continuations that may indicate when to enter and exit trades.

Do Traders Use Heikin-Ashi?

Yes, traders do use Heikin-Ashi. The major reason behind its popularity is that it makes it easier to read trends.

What is the Difference between Heikin Ashi from Candlesticks Chart?

The main difference between the Heikin Ashi chart and the traditional candlestick chart is that the Heikin Ashi chart eliminates the noise by smoothing out the price action. This helps traders identify trends more easily and gives more reliable signals than traditional candlesticks. The Heikin Ashi chart also helps traders spot potential reversal points better and reduces false signals, as the chart smoothes out the noise and highlights the overall trend.

Arjun
Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam
Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.

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