In trading, it is essential to predict the direction of the market. Different traders do this using different methods, yet for most traders, technical analysis of the price chart is the easiest approach.
Those familiar with candlestick charts know that they are among the best and fastest ways to understand market conditions.
Japanese traders endeavoured to make technical analysis and price prediction easier and faster. The Heikin-Ashi chart, which followed the candlestick chart, is one of their many achievements. With Heikin-Ashi charts you can make predictions more quickly. Furthermore, they are easier than candlestick charts to interpret and trade.
Heikin-Ashi Chart: meaning and visualization
A Heikin-Ashi chart looks like a candlestick chart, but the method used to calculate and plot its candles is different.
In candlestick charts, each candle shows four different prices: open, close, high and low. Every single candlestick is independent of the others and has no relationship with the previous or next candlestick.
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By contrast, Heikin-Ashi candles are calculated and plotted using information from the previous candle:
1 Open price: The open price of a Heikin-Ashi candle is the average of the open and close of the previous candle.
2 Close price: The close price of a Heikin-Ashi candle is the average of the open, close, high and low prices of the current period.
3 High price: The high price of a Heikin-Ashi candle is the highest value among the high, open and close prices.
4 Low price: The low price of a Heikin-Ashi candle is the lowest value among the low, open and close prices.
So the candles on a Heikin-Ashi chart are related to one another, because the open price of each candle is calculated using the previous candle’s open and close prices, and the high and low prices of each candle are influenced by the preceding candle. That’s why a Heikin-Ashi chart is slower than a candlestick chart, and its signals are delayed.
Advantages and disadvantages of the delay
This delay has made the Heikin-Ashi candle a useful indicator for volatile currency pairs because it prevents us from rushing, making mistakes and trading against the market.
What we have understood so far is that the Heikin-Ashi chart is delayed, whereas the candlestick chart is much faster. So, what is the point of using Heikin-Ashi if it is slower than a candlestick chart? Precisely because of this delay, the Heikin-Ashi chart generates fewer false signals and helps us avoid poor decisions. Moreover, Heikin-Ashi candles are easier to read because, unlike candlesticks, they do not display an overwhelming number of different patterns.
Different Candles in a Heikin-Ashi Chart:
1- Bullish candles:
When the market is bullish, Heikin-Ashi candles have large bodies and long upper shadows but no lower shadow. Look at the strong uptrend in the chart below. As you can see, almost all of the candles have large bodies, long upper shadows and no lower shadow.
2- Bearish candles:
When the market is bearish, Heikin-Ashi candles have large bodies and long lower shadows but no upper shadow. Look at the pronounced downtrend in the chart below. As you can see, almost all of the candles have large bodies, long lower shadows and no upper shadow.
3- Reversal candles:
Reversal candles in Heikin-Ashi charts resemble Doji candlesticks. They have very small or no bodies, but long upper and lower shadows. Look at the reversal candles in the chart below:
Basic Usage of Heikin-Ashi charts
Some traders rely solely on Heikin-Ashi to trade. This approach is especially useful for those who are not patient or disciplined enough, or for those who lose because they enter too early and exit too late. It helps you follow trending markets, because it keeps you waiting for a longer time, and then it lets you in when you are at the beginning of a strong trend.