Heikin-Ashi Candles

What Is the Heikin-Ashi?

Heikin-Ashi, which translates to "average bar" in Japanese, is a fun and nifty technical analysis method often used alongside classic candlestick charts for trading various assets like cryptocurrencies, stocks, and commodities. It adds a touch of flair to the world of trading!

Benefits of the Heikin-Ashi

The main advantage of the Heikin-Ashi is that it makes charts easier to understand, helping users spot and examine trends—crucial for profitable trading. By smoothing traditional candlestick charts and greatly reducing noise, it showcases the well-known trader saying, "the trend is your friend," in the best possible way.

How Is the Heikin-Ashi Formulated?

The Heikin-Ashi technique resembles traditional candlestick charts, but with a unique visual distinction. Instead of using bars and wicks to represent an asset's open, high, low, and closing price like regular candlestick charts, Heikin-Ashi employs a modified formula.

How to Calculate Heikin-Ashi Candles

The candlestick’s close is determined as follows:

Close = ¼ (Open + High + Low + Close)

The candlestick’s open is determined as follows:

½ (Previous bar’s open + Previous bar’s close)

The candlestick’s high is determined as follows:

High = Max [High, Open, Close]

The candlestick’s low is determined as follows:

Low = Min [Low, Open, Close]

Heikin-Ashi Chart vs. Traditional Candlestick Chart

At first glance, a Heikin-Ashi chart may resemble a regular candlestick chart, but the modified candlestick formulas result in more visually defined trends.

As seen in the example chart, a Heikin-Ashi chart appears much smoother, with uptrends remaining green (blue in this example) despite down days and downtrends staying red (pink in this example) even on up days. This feature helps traders to recognize and evaluate the strength of an asset's ongoing trend.

Another notable distinction is that the current price of a cryptocurrency or asset on a standard candlestick chart may not match the current price on a Heikin-Ashi chart. This is because regular candlestick charts focus on closing prices, while Heikin-Ashi charts use an average.

How to Trade the Heikin-Ashi

Trading using the Heikin-Ashi technique is simpler than many other technical analysis methods due to its clean and streamlined appearance.

For instance, green candlesticks without lower wicks suggest a robust uptrend, which might encourage traders in profit not to cash out. Green candles can also hint to traders that they may want to expand their long positions or exit short ones.

Trend shifts are typically shown by Heikin-Ashi candles with small bodies and wicks on both ends. In a cautious trading approach, traders should seek confirmation before entering long or short positions to take advantage of the trend change.

On the other hand, red candles signal a downtrend and could be a sign to add to short positions or exit long ones. Similarly, red candles without upper wicks represent a strong downtrend, prompting traders in profitable short positions to wait patiently to collect profits.

As a simplified chart that's easy to interpret, Heikin-Ashi often produces fewer false signals compared to other technical techniques or indicators. In general, traders usually stay in a profitable trade until the Heikin-Ashi changes color — though this doesn't guarantee that a trend will change.

Use Other Technical Indicators With Heikin-Ashi

Lastly, just like any other technical analysis methods and indicators, the Heikin-Ashi works best when combined with other technical tools, like support and resistance levels, and incorporated into a thought-out trading strategy. No single method can guarantee success, and using a technique on its own often doesn't lead to the highest profits.

What Are the Limitations of Heikin-Ashi?

1. A Conservative Trading Technique The main drawback of the Heikin-Ashi method is that it can be overly cautious. Since it relies on averaged price data, trade opportunities take more time to emerge, making it less suitable for high-frequency traders or those who focus on short-term scalping. The technique isn't fast enough to cater to these needs. Instead, the Heikin-Ashi method is a better fit for swing traders who are willing to exercise considerable patience.

2. Inaccuracy Another significant concern with the Heikin-Ashi technique is, as mentioned earlier, its imprecision concerning crucial price information. Since it only shows an averaged price, the actual live price of a cryptocurrency or asset isn't fully accounted for. Therefore, traders need to make a conscious effort to stay informed about the current price at which an asset is being traded.

3. Missing Price Gaps Furthermore, while it may not be a significant concern for cryptocurrency traders, the Heikin-Ashi technique does not account for price gaps, which some traders factor into their trading strategies.

Summary

The Heikin-Ashi technique offers an easy-to-understand and highly visual technical analysis approach that eliminates noise and displays clear trends, making it suitable for even novice traders. By glancing at a Heikin-Ashi chart, anyone can grasp a cryptocurrency or asset's trend.

However, this simplicity is also the Heikin-Ashi technique's most significant drawback. Due to its reliance on averaged price data, real-time prices are not adequately represented, and the technique is slow to respond to market volatility. As a result, it's not the best fit for scalpers and high-frequency traders.