Heikin Ashi Candles: how to read, use and trade this charting technique

Heikin Ashi Candles: how to read, use and trade this charting technique

Hekin Ashi is a charting technique born as a variant of the most famous Japanese Candlestick method. Originally introduced in Japan, Heikin Ashi candles (sometimes called as “Heiken Ashi”) are an excellent method to filter out market noise, the tiny or short movements that might confuse traders catching them on the wrong side of the market.

By the end of this article, I’m sure you will definitely consider this technique for your daily trading: let’s start!

Heikin-Ashi vs Japanese Candlestick – a Comparison

Heiken Ashi provide a clear view of market price action. Price movements appear smoother, without erratic variation or sudden changes in colours, especially during sideways trends.

Look at the following pictures and spot the differences with the Japanese Candlesticks in the crypto market:

Heikin Ashi charts - shadows and strength
Heikin Ashi charts - shadows and strength

Notice that we are looking at the same financial instrument in the same time unit. It’s clear that at a glance we can spot main price trends and retracements activities by just looking at the changes is price color.

Heikin-Ashi vs Bar Chart – a Comparison

Benefits of this charting technique are even more clear in comparison to Bar Chart, as you can see yourself by looking at the picture below:

Again, this pictures is about the same financial instrument, in the same time-span.

Let’s do some calculation! – How these candles are built

I promise. This will not be a mathematics lecture, but I think you should definitely know how Heikin Ashi candles are build if you want to understand why they are so useful but at the same time why they are not the holy Graal of trading.

These candles as the traditional Japanese ones, provide Open, Close, Maximum and Minimum for each trading session. Despite this, the values presented are not real levels touched by price action, rather are derived from simple arithmetical calculus.

The open level, equals to midpoint of the previous candle:

Open = [Open (previous bar) + Close (previous bar)]/2

Instead, the close of each candle is equal to the average level between Open, Close, High, Low:

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

The highest point of a Heikin Ashi candle is the actual high of the period. It could be the highest shadow, the open, or the close:

High = Maximum Price Reached

Instead, the lowest point of the candle is the low of the period: as for the maximum, it could be the lowest shadow, the open, or the close:

Low = Min Price Reached

On a practical purpose, we don’t care about the construction method. This charting representation if freely available on tools like Tradingview and Metatrader, but to we need to understand how they are build to learn why they act as native filter of the erratic movements of the market.

This is for sure the main benefit you might experience by shifting from a traditional representation of market action to the Heikin Ashi view. In the example below, you can see that market gaps are filtered out.

Market GAPs don't exists in Heikin Ashi charts

How to Read Heikin Ashi Candles

The reading of Heiken Ashi charts is very simple. Price action appear more fluid and organised, without rapid changes in candles colours even during consolidation. The result is that movements appear clear and structured.

Look at the chart below:

Heikin Ashi charts - shadows and strength

An additional consideration relative to shadows. During strong trends, they are more or less absent, while they start to appear in trends showing initial signs of weakness:

Heikin Ashi charts - shadows and strength

Candlestick analysis however, is still important even for the Heiken Ashi: pattern formations like doji or shooting star, might spot potential inversion even in these cases, finding interesting and early entry opportunities in the market:

Heikin Ashi charts - a doji

Conclusions – What we’ve learned today

Today, we’ve seen a different method to display market action, an un-common charting technique which might help traders to spot trends, initial signs of weakness or reversal in the market, filtering out market noise.

What do you think about that? Will you try to implement this charting method in your everyday trading or you prefer more traditional methods like bar or candlestick charts?

I hope you found this content helpful! I suggest you to check out our new posts in the blog section. Good luck for the next trade!

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