Heikin-Ashi is an advanced chart used in the financial market. The term heikin means average in Japanese while ashi means pace. Subsequently, the chart means the average movements of prices.
When applied, the chart shows a close resemblance to the popular Japanese candlestick patterns. In reality, like we will explain below, they are usually different. The chart below shows how the Heiken-Ashi chart looks like.
How to interpret and calculate the Heikin-Ashi
This type of candlestick can tell you several things!
First, a long and hollow candlestick tends to show that there is a lot of buying pressure. Second, if the candlestick lacks a lower shadow is usually a sign of the strength of the price movement.
Third, if there is a long filled (or red) candlestick, it is usually a sign of more selling pressure. Finally, a tiny Heikin candle and that with a long upper and lower shadows is a sign of indecision in the market.
To be fair, the Heikin-Ashi is relatively complicated to develop, which is probably the reason why most people don’t use it.
Also, if you want to use it, it is already provided in some trading platforms like the TradingView. You can also download and install it for other trading platforms. Therefore, you don’t need to calculate it manually.
The first step to calculate the Heikin-Ashi is to find the average of the open, high, low, and closing prices. The open is calculated by finding the average of the previous Heikin-Ashi candlestick and the close of the previous candlestick.
On the other hand, the high is the highest of the three data points. That is the current period’s high, current open, and the current close. Similarly, the low is the lowest of the three data points.
How to trade with the Heikin-Ashi Candlestick patterns
There are several strategies for using these candlesticks. We recommend that you choose the one that best suits your trading style and do some backtests.
Traditional candlestick patterns
First, you can focus on the traditional candlestick patterns like triangles, pennants, channels, and flags. Channels are popular and are usually drawn by connecting high swings and lower swings.
The goal of this strategy is to buy at the support and short at the resistance level, as shown on the chart below.
Similarly, you can trade breakouts using Heikin-Ashi. After all, channels don’t last forever. In the chart above, you could short the USD/ZAR and ride the bearish trend once it moved below the level of resistance.
Another candlestick pattern you can use is the bearish flag. This happens during a downtrend, when the rally pauses and forms what seems like a parallel channel. This is shown in the chart below.
What are the best Indicators to use with Heikin Ashi?
Another approach of using the Heikin-Ashi is to use technical indicators like the moving averages, Bollinger bands, and the Relative Strength Index (RSI). The idea of using these indicators is similar to how they are used in traditional candlestick patterns.
For example, in the chart below, we have applied the Bollinger bands. The indicator is simply a 20-day simple moving average with 2 standard deviations. Therefore, in a strong downward trend, the price will remain along the lower band.
At the same time, if it crosses the middle line, it can be interpreted as the start of the reversal.
Heikin-Ashi is not a popular chart system. But it is also an easy one to use if you have a good understanding of how the traditional candlesticks work.
If this is your first time hearing about them, the right thing you need to do is to study them, practice, and backtest your trading strategy.
External Useful Resources
- How to Use a Heikin Ashi Chart - Babypips