How To Trade with Heikin-Ashi

CandlesticksTraders have an array of indicators to look to when it

comes to identifying setups, patterns, trends and reversals. These are all
viewed on a price chart, which is arguably the most important piece of
information a trader can have. Heikin-Ashi (HA) is a charting technique that is
often overlooked, but offers valuable insights for those who know how to put
this derivative of Japanese candlesticks charts to good use. What is
Heikin-Ashi?Heikin-Ashi candlesticks are an offshoot of Japanese
candlesticks, a form of charting developed in Japan by Munehisa Homma in the
1700s.The purpose of HA charts is to filter noise and provide a clearer visual
representation of the trend. For new traders the trend is easier to see, and for
experienced traders the HA charts help keep them in trending trades and able to
spot spot reversals, while still being able to see traditional chart pattern
setups.How Does It look?Heikin-Ashi price bars are averaged, so each one
won’t reflect the exact open, highs, lows and closes for that period like a normal
candlestick would. HA candles are calculated using the following formulas:HA Close
= (Open + High + Low + Close) / 4
HA High = Maximum of High, Open, or Close
Low = Minimum of Low, Open, or Close
Open = (Open of previous bar + Close of previous bar) / 2Figure 1 shows an uptrend
on a AAPL candlestick daily chart, while Figure 2 shows the same chart in Heikin-
Ashi. All charts created using StockCharts.com

Figure 1. Daily Apple Candlestick Chart

 There are several differences noticeable immediately on the Heikin-Ashi below
relative to the candlestick chart above.
See also How to Read Stock Charts

Figure 2. Daily Apple Heikin-Ashi Chart

The differences include:

 The Heikin-Ashi chart appears smoother, making the short-term trend easier
to see.
 There are no gaps on the Heikin-Ashi charts since the current price bar uses
the prior price bar in its calculation.
 Heikin-Ashi charts don’t reflect the most recent price; because of averaging,
the price on the right of the chart will be different than the last transaction price.
 Many traditional candlestick chart patterns aren’t as effective on the Heikin-
Ashi charts due to the averaging.

There are some similarities though:

 Both are highly visual.

 Some candlestick patterns are still relevant, such as Dojis, which show
indecision.
 Traditional chart patterns, such as head and shoulders and triangles, are
tradable on both types of charts.
 Big down bars with little or no upper shadow signify strong selling pressure.
 Big up bars with little or no lower shadow signify strong buying pressure.
How to Interpret Heikin-Ashi
Heikin-Ashi charts help traders view trends and spot potential reversals. Therefore,
they are most applicable to trend traders. The figures below show how to interpret
bullish HA candles and bearish HA candles in context of uptrends or downtrends.
The HA candles change dramatically in appearance when a strong trending move is
underway relative to pullbacks. Upward trending moves typically have long upward
(in this case, white) candles with very little or no lower shadows.
The shadows are the thin lines that extend out from either side of the fat part of the
candle – called the real body. These shadows represent the maximums and
minimums of the Low, Open, Close and High (see formula above). When a strong
uptrend is underway, and the buying is aggressive, the lower shadows (sticking out
the bottom of the real bodies) will not typically appear.
During pullbacks or weak trending moves there are interspersed down (red) bars, as
well as lots of bars with lower shadows. This doesn’t necessarily indicate a reversal,
but it does mean the trend is in a corrective phase or slowing.

Figure 3. Heikin-Ashi Bullish Candlestick Interpretation

The same concepts apply to downtrends, except strong down trending moves will be
composed of HA price bars with little or no upper shadows. The bars will also
typically be long and moving lower (red in this case).
If there are up bars (white) interspersed, or lots of bars with upper shadows, the
trend is either very weak or the price is in a corrective phase.
Figure 4. Heikin-Ashi Bearish Candlestick Interpretation

Typically during strong trending moves we see strong up bars with no lower shadows
for an uptrend, and strong down bars with no upper shadows for a downtrend.
Just because one up candle, or a couple of candles with upper shadows, appear
during a downtrend doesn’t mean the trend is reversing – it may just be pausing. The
same is true for uptrends.
See also Trend Trading 101
To spot reversals or trend continuations there needs to be a breakout, or a major
shift in price just like what is required with traditional charts.
Using what we know about strong trending moves and weak trending moves from
above, combine it with other technical analysis concepts, such as trendline breaks,
to spot reversals.
Figure 5. Combining Heikin-Ashi with Traditional Technical Analysis to Spot Reversals

How to Trade Heikin Ashi

Like using other types of charts, trading on Heikin-Ashi charts requires finding an
entry, a stop loss location to limit risk as well as a profitable exit point.
Since HA charts make it easier to spot trends and isolate pullbacks the charts are
great for trending trading.
Figure 6 shows a downtrend. The trending moves are easily separated from the
pullbacks due to the color changes. Due to the averaging, the pullbacks are also
often easy to mark with trendlines. When the price breaks back below the trendline, it
indicates the trend is continuing and a short trade can be initiated. Astop loss is
placed just above the recent high and profit can be taken when an up bar occurs, or
at a pre-determined profit target.
Figure 6. Active Trading with Heikin-Ashi

Getting in and out in this fashion isn’t for everyone. Longer-term traders can use one
of the entries, but then stay in the trade for as long as the trend persists. Using long-
term trendlines can aid in this regard. Stops are still utilized in a similar fashion when
entering.

Figure 7. Longer-Term Trading with Heikin-Ashi

Chart patterns are also tradable. Figure 8 shows a triangle pattern which developed
following a strong move higher.
Figure 8. Heikin-Ashi Chart Pattern Trading

The Bottom Line

Heikin-Ashi charts appeal to traders because trends are easier to spot and the way
the bars are calculated creates a smoother appearance. Traditional forms of
technical analysis and chart patterns can still be used and traded with HA. Long up
bars with no lower shadows, or long down bars with no upper shadows signify strong
up and down trends respectively.
HA charts won’t show the current price on the y-axis due to averaging. Also, many
traditional candlesticks patterns will lose relevance due to the smoothing.
Trading on Heikin-Ashi charts is similar to trading on other charts. Focus on trading
in the direction of the overall trend. Use HA price bar characteristics to determine
trend strength, when the trend is slowing down and apply other technical analysis
concepts (such as trendlines) to isolate major price reversals. Apply stop loss orders
to trades, and use slowdowns in the trend as exit points, or wait for a major reversal
if a longer-term trader. Pre-determined profit targets can also be used.
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