Heiken Ashi charts Vs traditional candlestick charts
- Heiken Ashi does not include market noise
- The technique is considered to be more reliable for making trading decisions
- Heiken Ashi chart bars start near to previous session candlesticks
In contrast to traditional candlestick charts that include the market noise which can distort the complexion of the markets, the Heiken Ashi charts do not include this data.
As a result, there will be more bars which represent the same colour (e.g. red for bearish, blue for bullish) and potentially greater distances/intervals between them.
This makes it much easier to figure out where the price movements have occurred, and therefore, and how to act upon them.
Heiken Ashi Charts differ to traditional candlestick charts in that the bars will not change colour for smaller moves, and will only change colour when a full change in direction has occurred, therefore making it slightly more reliable to base trading decisions upon.
Additionally, instead of the price starting on the level of the close from the previous trading window, Heiken Ashi charts tend to start and form at a point that is somewhere in the middle of the previous trading window's final candlestick.
Understanding The Bars
Broadly speaking, Heiken Ashi bars fall into three categories, and are as follows:
- Bullish Bars
- Indecision Bars
- Bearish Bars
For bullish bars, there will be a wick on the top of the bars, but there will be no wick on the bottom.
For indecision bars, the clue is in the name. Traders should disregard the colour of the bar and focus only on the wick of these bars. If there are wicks on both sides of the bar, it represents an indecision bar.
Bearish bars are the opposite of bullish bars, and therefore, the wick will be located at the bottom of the bar, instead of at the top.
The Heiken Ashi formula
The Heiken Ashi formula is calculated using data taken from open and closes from the previous trading period/window, together with open/close and high/low data retrieved from the current trading period/window.
The formula is as follows:
- Heiken Ashi Close = [Open(0) + High(0) + Low(0) +Close(0)] / 4
(values from the current window)
- Heiken Ashi Open = [HA Open(-1) + HA Close(-1)] / 2
(values from the previous window)
- Heiken Ashi High = Maximum [High(0), HA Open(0), HA Close(0)]
- Heiken Ashi Low = Minimum [Low(0), HA Open(0), HA Close(0)]
Heiken Ashi trading strategies
Locating strong movements
Typically, Heiken Ashi is used to locate points at which trends reverse and then become bearish or bullish (i.e. travelling in the opposite direction to where they were previously).
Due to this, as well as the fact that market noise has been filtered out of the charts, it means that the strategy is a lot more reliable as a result. Traders can therefore stick to the trend with the knowledge that they can trust the signal they are basing their trading decisions upon.
Moreover, traders who operate with mainly shorter positions will likely wish to exit their trades, whilst traders using longer positions will stick with their trades, or perhaps even add to them.
Small candles = Pauses & reversals
It is suggested that traders be wary when the 'small body' candles begin to emerge on their charts. Professional traders tend to use these candles in order to accurately assess the moments at which trends will pause or reverse, thereby enabling them to adjust their positions accordingly.
In addition, sometimes it is better to stick with the trend if it is indeed a pause, as this can occur often in certain markets, and these moments are where traders could mistakenly pull out of a trend, thereby losing an opportunity to be successful in a particular trade.
Searching for 'No Shadow' candlesticks
This is regarded as one of the best Heiken Ashi trading strategies in terms of performance. In this strategy, whenever there are instances of candlesticks with lower shadows, this is considered as a signal which suggests that there is a higher probability that a strong bullish trend is emerging. The larger the candles are, the stronger the trend is anticipated to be.
Put your knowledge of Heiken Ashi to the test!
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