A mainstay of the forex trading experience and utilised by countless investors every day, Japanese candlestick charts are perhaps the greatest tool in a speculator’s arsenal due to the amount of information they pack into a simple format.
However, there is another unique variant of these handy graphs that some novice traders may still be unfamiliar with known as ‘Heikin Ashi’ charts, which offer a different look on the activity of the markets from a trend-based perspective.
Let’s examine how they work and how, when used correctly, they can help you make smarter trading decisions.
What is a Heikin Ashi Chart?
Meaning ‘average bar’ in Japanese, Heikin Ashi charts are essentially an augmented candlestick displays that allows traders to discern potential market trends and price movements more easily than when relying solely regular candlesticks charts.
These types of charts are designed to enable investors to stay on the right side of the market momentum, so they can keep their positions open as long as possible before closing out when the sentiment begins to shift for maximum profitability.
In other words, where standard candlestick charts are useful for discerning the best entry point for a given trade — for instance, by making potential breakout points or reversals easily visible to the viewer — Heikin Ashi variants rework the data to be more centred around if and when to exit the trade, and do so illuminating whether a trend looks to be weakening or strengthening in the near term.
Further reading: https://www.thinkmarkets.com/uk/learn-to-trade/indicators-and-patterns/general-patterns/heiken-ashi-candles-strategy/
How Do Heikin Ashi Differ from Standard Japanese Candlestick Charts?
Heikin Ashi charts are visually very similar to regular candlesticks in that they consist of a red and green ‘candle’ figures to denote upwards and downwards price movements sequenced over a user-specified timeframe (referred to in technical parlance as a ‘time series’); here’s a breakdown of your standard candlestick for a quick refresher:
However, the way Heikin Ashi charts are calculated and plotted differs, as where standard candlesticks feature an open-high-low-close (OHLC) structure, these variants instead use a close-open-high-low (COHL) system, whereby the open of each candlestick is identical to the midpoint of the previous candle’s value range.
Let’s examine the calculation for each of the four components:
Put simply, the close is simply the average value of the current candlestick’s constituent values.
As stated above, the open of each candlestick picks up at the exact midpoint of the previous one — a key aspect to note, as Heikin Ashi candles are affected by the previous data set in a way regular candlesticks are not.
The high and low, meanwhile, are simply the highest and lowest points recorded during the time period the candlestick represents, i.e. the two opposite extremities of value.
The benefit of filtering the market information through calculations is chiefly one of convenience; by focusing on averages as opposed to raw figures, much of the noise, momentary shifts and anomalies are factored out of the data.
You’re then left with a chart that’s less prone to presenting false signals, whilst being smoother and easier to interpret at a glance.
Further reading: https://www.ig.com/uk/trading-strategies/how-to-trade-using-the-heikin-ashi-candlestick-201218
How to Use Heikin Ashi Charts in Forex Analysis
Like standard candlesticks, Heikin Ashi charts can be used with virtually any market you choose — and most reputable trading platforms such as MetaTrader 4 will have a specific built-in viewing option available as standard.
Heikin Ashi are designed to show both the direction of the market movements (i.e. up or down in value) and the strength or severity of the trend, so a few key signals to look out for are as follows:
· Green or hollow candles without a lower shadow indicate a significant uptrend, suggesting you should maintain or even amplify your long positions
· Green or hollow candles indicate an uptrend, so you should consider closing your short positions and/or adding to long positions
· Smaller-bodied candles with both upper and lower shadows indicate a transitional phase leading to a market reversal; it’s often wise to wait for further data at this point before making any big decisions!
· Red or filled candles indicate a downtrend, meaning you should think about closing your long positions and/or adding to short positions
· Red or filled candles without an upper shadow indicate a significant downtrend, suggesting you should stick with short positions until further notice
As always, these signals are only indicative and there are no guarantees, so cross-referencing your findings with other types of analysis and implementing a robust risk management system remain vital.
Further reading: https://tradingstrategyguides.com/heiken-ashi-strategy/
Are there Any Drawbacks to Using Heikin Ashi Charts?
Owing to the fact that they’re mainly concerned with displaying smooth curves that correspond to wider trends, Heikin Ashi charts don’t actually provide true, accurate pricing information; indeed, the true closing prices of each candlestick are inevitably obscured by the algorithmic weighting systems we’ve just covered above.
In this sense, they’re better off thought of as an indicator of overarching swings rather than a primary source of immediate price data, and as such will likely need to be used in conjunction with real-time price figures (such as those offered by traditional candlesticks) for best results unless your trading strategy is based entirely around long-term holding.
For example, traders such as scalpers who rely on quick-fire open and closing of positions (taking a ‘quantity over quality’ approach) will typically find Heikin Ashi charts too unresponsive for their liking as they react to trends already in motion — combining data from two different time periods — to give their results.
In a sideways market or one with no consistent upswing or downswing, this means you’ll be forever playing catch up and the small price jumps in either direction (which are scalpers’ bread and butter) will have been ironed out of the chart display by the calculations.
More hands-off traders — for instance swing traders who are happy to sit and let trends expose themselves over days, weeks or even months — will find lots of value in the Heikin Ashi system, though, and investors whose strategy lies somewhere in-between could benefit from adding these helpful charts to their analysis toolkit.
Further reading: https://forextester.com/blog/heikin-ashi-indicator
Use at your own risk disclaimer
The content contained herein does not construe any form of advice and the user must not take this as such. We do not accept any liability for the direct or indirect usage of the content held in this article. We strongly advise that you obtain independent financial, legal and tax advice before proceeding with any currency or spot metals trades.
