Heiken-ashi-trading

The Heikin Ashi candlesticks are a great tool of interest to many Forex traders. 

So, you were riding a trend…

You began to think that the price is about to move against you…

So you closed the trade…

But the price kept going higher by 300 pips.

You missed out a huge amount of profit. 

This is a common mistake among Forex traders.    

It’s caused by the fact that most traders don’t know how to identify main trends and market reversals. 

In this article, I will be showing you how to solve this problem using the Heikin Ashi candlesticks. 

Let’s get started…

What are Heikin Ashi Candles?

They are a charting method which get attached to your price chart on your trading terminal. 

The chart resembles a typical Japanese Candlestick chart, but it has a number of variations that makes reading it a bit different from reading the traditional candlestick chart. 

Consider the graphic given below…

Heikin Ashi candles

An untrained eye may recognize the above graphic as a standard Japanese candlestick chart. 

However, it’s not. 

It’s a Heikin Ashi chart. 

From the graphic, you can tell that each candle has a body, and an upper and lower candlewick (shadow) just as Japanese candlesticks. 

However, a closer look at the graphic will reveal that each of the candle bars begin from the middle of the bar before it, not from the level at which the previous candle closed. 

This is the factor that all traders should use to differentiate between the two charting patterns. 

Heikin Ashi Calculation

Each candle has an open, close, high, and low. 

So, the formula is made up of four segments. 

The opening level of the candle is equal to the midpoint of the previous candle. 

If you take a closer look at the graphic given above, every new candle begins from the middle of the previous one. 

So, to calculate the open of a candle, use the following formula…

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

The close of every bar is equal to the average level between the four parameters, that is, open, close, high, and low. 

It can be calculated using the following formula…

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

The highest point of each candle takes the actual high of the period. 

This can be the highest shadow, the open, or the close. 

It can be calculated as follows…

High = Max Price Reached

The lowest point of each candle should be the actual low of the period. 

This may be the lowest shadow, open, or close. 

It can be calculated using the following formula…

Low = Min Price Reached

Japanese Candlesticks vs. Heiken Ashi Candles

The Heikin Ashi candles smooth the price action. 

Due to that, most noise shown by the traditional Japanese Candlesticks is not shown in this type of chart. 

Consider the chart given below….

Heiken Ashi Candles

The above chart is an example of a Japanese Candlestick chart. 

The red rectangles on the chart indicate positions at which there is much noise. 

This is shown by differences in the sizes of the candle bars as well as their shadows. 

A large variation between these two factors are an indication that there is much noise in the market. 

So, the Japanese Candlesticks are good for showing noise in the price action. 

Consider the graphic given below…

Heiken-ashi-candle

The above graphic show the Heiken Ashi candlesticks. 

There is no much variation in the sizes of the candles bars. 

Also, the candles don’t have shadows. 

This means that the chart is smoother. 

The reason is that it isolates some of the noise in the price action. 

So, most Forex traders prefer using these candles as a way of hiding noise in the market. 

This provides them with a clearer way of analyzing the price action. 

So, the Japanese Candlestick chart shows noise in the price action, but this type of chart hides noise in the price action. 

How to use it

This type of chart can help you catch longer and persistent trends in the market. 

One of the major uses of this chart is to detect trends. 

Its trading style puts so much emphasis on persistent trends. 

It ignores small corrections and consolidations, leaving them out of the chart. 

When using its graph, you will realize that when the direction changes, the price will most likely begin a new move. 

This way, traders can distinguish between the potential beginning and the end of a trend for a currency pair. 

This chart pattern filters noise, hence, you will only see a naked trend. 

A stop loss is a good tool for trade management for any trader who is pursuing a trending market. 

Due to this, most traders combine this chart pattern with a trailing stop loss to get the most out of a trending market condition. 

You can also use its graph by looking for chart patterns and applying price action rules. 

In most cases, this will work in the same way as with the Japanese Candlesticks. 

However, breakouts from this type of chart pattern are more reliable than breakouts from traditional candlestick charts. 

The Trends

As we have stated above, one of the major advantages of using this type of chart is ease of trend identification. 

The chart makes it easy for you to distinguish between strong trends and unsustainable price action. 

Let’s have a look at bullish and bearish trends using the type of price graph…

Bullish Heikin Ashi Trend

This trend looks like the normal Japanese Candlestick trend on the first glance. 

However, upon a closer look, you will realize that the trend is primarily built by bullish candles and doesn’t have lower candlewicks. 

When the price is increasing, the price action will create very little to no lower shadows. 

Consider the graphic given below…

Heiken-ashi-bullish-trend

The above graphic shows a strong bullish trend. 

The bullish trend has been marked by a blue line. 

Notice that the candles in this trend don’t have lower candlewicks. 

Again, there are no bearish candles within the trend. 

This is an indication that the bullish trend is very strong and shows no signs of reversing into a bearish trend. 

Bearish Heikin Ashi Trend

This type of trend has similar functions as the bullish one but in the opposite direction. 

This means that it only consists of bearish candles. 

A strong bearish trend shows bearish candles with little or no upper candlewicks. 

Consider the graphic given below…

heinek-ashi-bearish-trend

The above figure shows how a strong bearish trend is formed on this type of chart. 

The candles in the above trend have no upper candlewicks. 

Again, there are no bullish candles in the trend

This is a clear indication that the declining momentum is very strong. 

So, a strong bearish trend on this type of chart is characterized by candles with little or no upper shadows.

The Patterns

This type of chart forms three types of patterns. 

Let’s begin with the Doji reversal candlestick. 

Doji

The Doji candle is formed when the price closes at the same level where it opened. 

The candle does not have a body and it resembles a dash. 

When the Doji is formed after a directional move, it signals the potential for a reversal. 

It’s an indication that the price action is stalling and may begin a counter trend move.

Consider the graphic given below…

Heiken-ashi-trading

The above figure shows the formation of a Doji candle. 

The figure begins with a bullish price move, then changes to a bearish price move, and lastly changed to a bullish price move. 

After the first bullish price move, a Doji candle was formed. 

This has been pointed to by a black arrow marked as Doji at the top of the figure. 

The formation of this Doji candle was immediately followed by a change in the direction of the price. 

The price changed from a bullish trend to a bearish trend. 

After the bearish price move, another Doji candle was formed. 

This has been pointed to by an arrow marked as Doji at the bottom of the figure. 

The formation of this Doji candle was followed by a reversal in the direction of the price. 

The price action changed from a bearish trend to a bullish trend. 

So, two Doji candles have been shown in the figure. 

The two candles meet the description that we gave for a Doji candle. 

In both cases, the price action closed at the same level where it opened. 

Again, the bodies of the two Doji candles resemble a dash. 

The reversal in the direction of the price action after the formation of the Doji candles confirms the fact that a Doji candle sends the signal that the price is stalling and may begin a counter trend move. 

Triangles

You can also find triangle patterns in this type of chart. 

When trading this chart formation, the trick is to follow the direction that the price action breaks through. 

If the price action breaks through the upper level of the triangle pattern, it acts as an indication that the increase is more likely to be extended. 

If the price action breaks through the lower level of the triangle pattern, it sends the signal that the price action is more likely to begin a bearish trend. 

Consider the figure given below…

triangles-with-heiken-ashi

The above chart shows the formation of an expanding triangle. 

This has been marked using the two black lines running across the chart. 

The price action keeps on swinging between these two levels for some time. 

Finally, the price action managed to break through the lower level of the triangle in a bearish direction. 

See how the minimum target position was determined. 

First, the size of the triangle chart pattern was measured. 

This is shown by the first magenta arrow facing downwards and running from the upper level of the triangle to the lower level of the same triangle. 

The same amount of distance has been applied from the point at which the price action manages to break out through the lower level of the triangle. 

This distance has been applied downwards. 

The distance has been used to determine the minimum target position on the chart. 

This has been shown using the magenta line marked as Minimum Target on the chart. 

So, the distance of the minimum target from the breakout point should be equal to the size of the triangle formation. 

As you can see, the bearish move continued for long. 

The price action managed to reach the minimum target. 

Wedges

The Wedge is another type of pattern that you will find on this type of chart. 

This pattern can occur as either Rising Wedge or Falling Wedge pattern. 

The Rising Wedge pattern has a bearish potential. 

On the other hand, the Falling Wedge pattern has a bullish potential. 

Consider the figure given below…

wedge-with-heiken-ashi

The above graphic shows how a Rising Wedge chart pattern is formed. 

The two black lines running across the chart show the positions at which the pattern is formed. 

As we had stated earlier, the Rising Wedge chart pattern has a bearish potential. 

The above figure shows the price action breaking out through the lower level of the pattern and in a bearish direction. 

This confirms the Rising Wedge chart pattern. 

See how the minimum target has been applied. 

First, the size of the pattern was measured. 

This has been shown by the magenta arrow running from the top to the lower level of the pattern. 

The size of the pattern and the position of the minimum target must be equal. 

The same amount of distance was then applied from the breakout point downwards. 

This gave the position of the minimum target. 

This has been marked as Minimum Target on the figure. 

Note that the breakout point is the position at which the price action breaks through the lower level of the pattern.

The figure also shows that the price action maintained the bearish breakout and managed to reach the position of the minimum target. 

Consider the graphic given below…

wedge-heiken-ashi-trading

The above graphic shows the formation of the Falling Wedge chart pattern. 

As we stated earlier, the Falling Wedge chart pattern has a bullish potential. 

The above figure shows the price action breaking out through the upper level of the pattern and in a bullish direction. 

This confirms the formation of the Falling Wedge chart pattern. 

The size of the chart pattern was measured. 

The first magenta line on the figure shows this. 

The size of the chart pattern and the position of the minimum target must be equal. 

So, the size of the chart pattern was used to determine the position of the minimum target. 

See that the position of the minimum target has been measured from the breakout point upwards. 

This is the opposite of what we did with the Rising Wedge chart pattern. 

Also, from the figure, you can tell that the price action maintained the bullish trend and managed to hit the minimum target. 

Heiken Ashi Indicator for MT4

You can use the MetaTrader4 chart terminal to display this type of chart. 

The MT4 platform comes with the smoothed Heiken Ashi indicator. 

To add it to your chart, simply click insert -> indicators -> custom. 

You will then find it. 

The indicator will then replace your original price chart. 

In most cases, the MT4 uses red color for bearish and white color for bullish candles. 

If you are using a very bright color like white for your background, you won’t see the bullish candles. 

To solve this problem, you can open the add-on settings and change the color for the bullish candles to another color. 

How to Trade with Heiken Ashi Candles- Buy Trade

This chart pattern can become very powerful when you combine it with price action analysis. 

It can help you spot the emergence of new trends and the reversal of current trends. 

You need to identify the Support and Resistance levels as well as other important swing points. 

These can act as future turning points on the chart. 

You must consider the chart and candle patterns when determining when to open and close your trades. 

Also, make sure that you use a stop loss order that conforms to a level that is prior to your entry point. 

If the price moves in your favor, you can replace the regular stop loss with a trailing stop

This way, you will make more profit. 

Hold your trade until the price actions signals that there is a potential for trend reversal. 

You can also exit your trade when the price action creates a relatively large candle that is opposite to your trade. 

As you know, these candles filter out noise from the charts. 

This means that a big opposition candle likely indicates a shift in sentiment. 

Heiken Ashi Chart Analysis Example

We now want to discuss how to trade this chart formation. 

Consider the graphic given below…

heinek-ashi-with-chart-patterns

The chart begins with a bearish move. 

A Doji candle is suddenly formed. 

This has been pointed by a black arrow marked as Doji. 

The body of the Doji candle resembles a dash. 

At this position, the price closes at the same level where it opened. 

This confirms the formation of a Doji candle. 

A price reversal in a bullish direction follows the formation of the Doji candle. 

The beginning of this price reversal gives you an opportunity to buy the currency pair. 

This has been shown by the green arrow marked as Buy. 

As you know, you should not trade without a stop loss. 

A stop loss protects your profits in case the price begins to move against you. 

The stop loss order should be placed just below the position where the price begun to reverse. 

This has been shown using a red horizontal line marked as Stop Loss. 

The formation of the Doji candle was an indication that the price action was about to reverse or at least stall the downtrend. 

The bullish trend did not go for long before the price action began to reverse into a bearish direction. 

This reversal from a bearish to a bullish trend resembles a Bull Flag pattern.

This has been shown by the blue lines marked as Bull Flag. 

The Bull Flag pattern ends with the formation of another Doji candle.

This has been pointed to by a black arrow marked as Doji. 

The price action then breaks through the upper level of the Bull Flag and begins a new bullish trend. 

This bullish move doesn’t continue for long before beginning to reverse. 

This reversal leads to the formation of another Bull Flag pattern. 

This has also been marked using blue lines marked as Bull Flag. 

The price reversed again into a bullish direction and broke through the upper level of the Bull Flag. 

On its way up, the price consolidated into a point forming a triangle. 

The consolidation is marked by bearish candles with small bodies. 

This led to the formation to a triangle shown using blue lines marked as Triangle. 

The price action then managed to break through the upper level of the triangle and moved in a bullish direction. 

The price action then created descending tops on the chart. 

These have been shown using the red diagonal line marked as Descending Tops. 

The exit from the trade comes after the formation of the descending tops. 

Note that the second descending top is trying to resume and maintain the previous bullish trend. 

However, it failed to, but instead begun to make a bearish move. 

This sends a signal that the overall bullish trend might have been reversed. 

This means that it may be dangerous for you to keep on staying in the trade. 

A further reversal of the bullish trend could leave you with a loss or even wipe out your entire trading account. 

This is the best time for you to exit the trade and it has been shown clearly by the red arrow marked as Close. 

So, that’s how you can use this type of chart for a buy trade. 

What about a sell trade?

Let me show you…

How to Trade with Heiken Ashi Candles- Sell Trade

Consider the graphic given below…

heiken-ashi-trading

The above chart shows how you can use the chart technique in a short trade. 

The first set of blue lines on the figure shows the formation of a head and shoulders pattern on the chart

The neckline for this formation has been shown using a magenta line. 

The bearish candles formed before the formation of the second shoulder don’t have upper shadows. 

These have been shown using black arrows marked as No Upper Shadow. 

This may be a signal that the bullish trend is coming to an end. 

The price action finally manages to break through the neckline in a bearish direction. 

This is a great opportunity for you as a trader to go short. 

This has been shown on the chart using a green arrow marked as Sell. 

You need a stop loss order for your trade. 

This will protect your profits in case the price begins to move against you. 

The stop loss order should be placed just above the second shoulder of the pattern. 

This has been shown by a red horizontal line marked as Stop Loss. 

If the price action reverses into a bullish direction, it will trigger this stop loss. 

You will then exit the trade automatically. 

The price action then begins to make a sharp bearish move. 

If we try to use a target that is based on the size of the pattern, it will be reached too soon. 

However, it will not be good for you to exit the trade when the price action is still moving in a bearish direction. 

Instead, it will be good for you to stay in the trade and make more profit. 

The intensity of the bearish trend suddenly reduced. 

This led to the formation of a Falling Wedge chart pattern. 

This has been shown using the two blue lines marked as Falling Wedge. 

The price action then broke through the upper level of the Falling Wedge pattern in a bullish direction. 

This is good opportunity for you to close the trade. 

This has been showing by a red arrow marked as Close. 

This will prevent you from making a loss. 

Congratulations!

That’s how you can trade this chart pattern!

In both cases, the price action was completed using a pure price action. 

This is possible and is the best way to trade the type of chart. 

Conclusion:

This is what you’ve learned…

  • The Heikin Ashi chart is made up of candles with a special calculation. 
  • Its formula is made up of four parts, which correspond to Open, Close, High, and Low. 
  • An untrained eye may not distinguish its candles from the Japanese candlesticks. 
  • This type of chart emphasizes on average price action. 
  • It smoothens the price action, leaving out noise. 
  • Because of this, it helps traders identify bigger trends instead of small price swings. 
  • It shows bearish trends using bearish candles with little to no upper shadows. 
  • It shows bullish trends using bullish candles with little to no lower shadows. 
  • During a strong bearish trend, you will find few or no bullish candles. 
  • During a strong bullish trend, you will find few or no bearish candles. 
  • Some of the common patterns that you will find in this type of chart include the Doji, Triangles, and Wedges. 
  • The Doji is a candle that resembles a dash and signals the potential for trend reversal. 
  • A Rising Wedge has a bearish potential while a Falling Wedge has a bullish potential. 

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