I’ll ask…
Have you ever found it difficult to trade using Japanese candlestick charts?
There are too many green and red candlesticks on the chart to decide whether I should be the buyer or the seller.
So in today’s article…
We hope to make your life easier by introducing Heikin Ashi candlesticks.
Here’s what you’ll learn:
- What is Heikin Ashi Candlesticks?
- Why You Should Start Using Heikin Ashi Candlesticks in Trading
- How not to use Heiken Ashi (and what to do instead)
- Heikin Ashi Trading Techniques to Profit in Bull and Bear Markets
nice?
So let’s start with the basics.
shall we?
What is Heikin Ashi Candlesticks?
Heiken Ashi is a type of candlestick used in technical analysis.
It looks a lot like the Japanese candlesticks I’ve seen.
but!
There are slight differences that you should be aware of.
As for Japanese candlesticks…
Each candlestick is independent of the other and only sees the actual open, high, low and close prices during the period.
What I mean is:
You can view daily charts, hourly charts, or minute charts.
However, each candle is not affected by other candles.
For Heikin Ashi, each new candlestick is calculated based on the previous one.
What I mean is:
Heiken Ashi’s closing price is the actual O+H+L+C average of the current candlestick.
Therefore…
High is the maximum H, O, or C value of the current candlestick.
Low is the minimum L, O, or C value of the current candlestick.
The open price is the previous candle’s open price + half the previous candle’s close price.
This means that bullish and bearish candlesticks are slightly different even in Heiken Ashi.
To summarize things…
I will briefly explain the difference between the two.
For Japanese candlesticks:
- Bullish Candlestick Closes Above Open
- A bearish candlestick closes below its open
For Heikin Ashi candlesticks:
- A bullish candle closes above the middle of the previous candle
- A bearish candle closes below the median of the previous candle.
Makes sense?
Now you understand the difference between Japanese candlesticks and Heiken Ashi…
Let me tell you the “why” to consider trading with Heikin Ashi.
Sounds good?
Then read on!
Why You Should Start Using Heikin Ashi Candlesticks in Trading
If you’re a novice trend trader and can’t identify nutty trends…
In such a case, Heiken Ashi candlesticks are very useful.
Here is a simple example.
Take a look at this USDJPY Japanese candlestick chart.
Next, let’s compare with the same USDJPY Heiken Ashi chart.
Now tell me…
Which trends can you spot at a glance?
No need to guess again…
The trend is clear at a glance with the dollar yen average bar chart!
Still not convinced?
Here are some more examples of how these work in multiple trading terms.
upward trend
The uptrend characterized by these green candlesticks can be confirmed by:
- big body
- No lower core
- The top core is often longer.
downward trend
Here we can see a small pullback or downtrend with red candlesticks like this:
- big body
- No upper core
- The bottom core is usually longer
reversal
So how do you determine when the market is reversing?
Look at these candles like this:
- Super long top and bottom core
- but the body is very small
These look exactly like Doge Reversal Candlesticks.
So easy, right?
You almost get a chart with less noise, and you can look beyond the small reversals in the trend that keep your analysis paralyzed.
This means that the Heiken Ashi can be used as a market trend filter to decide whether to go long or short.
But like any other tool or concept out there, it’s not the Holy Grail.
It has some strengths and some weaknesses.
I have explained the function of Heiken Ashi.
strange?
Let’s move on…
How not to use Heiken Ashi (and what to do instead)
recall…
Heiken Ashi’s closing price is the actual O+H+L+C average of the current candlestick.
Its open price is the previous candle’s open price + half of the previous candle’s close price.
This means that as a 1 minute scalper…
I don’t want to use Heikin Ashi candlesticks.
why?
Opening and closing prices are calculated based on average prices, so they take time to form.
Therefore, scalping decisions cannot be made quickly.
If you’re a scalper who needs the latest prices…
It is best to stick with Japanese candlesticks.
So, to maximize the potential of Heiken Ashi candlesticks, do the following instead…
Trade using Heiken Ashi on higher timeframes, such as higher timeframes.
With it, you can easily identify trends and enter into trades (which we will discuss next).
Moving on…
Heikin Ashi Trading Techniques for Trading with Trends in Bull and Bear Markets
In this section…
I would like to share Heikin Ashi trading techniques with examples so that you can start trading successfully.
Even a novice trader!
Let’s get straight to the point…
How to use Heikin Ashi for bullish trend continuation
There are four parts to this bullish trend continuation technique.
- Use Heikin Ashi Candlesticks to Identify Trends on Higher Timeframes
- Use the 20 and 50 EMAs on the lower timeframes to wait for a pullback to value territory
- Go long with a valid entry trigger
- Stop loss is 1 ATR below recent swing low, take profit before previous swing high
Let me explain…
First… use Heikin Ashi candlesticks to identify trends on higher timeframes.
On the right…
We can see that USDJPY is clearly on an upward trend at this stage, as the Heiken Ashi candlesticks are green with a large body and few lower cores.
However, the price has fluctuated quite a bit, so it’s best not to jump in too soon in case there is a big crash.
So what you want to do is this…
Then use the 20 and 50 EMAs on the lower timeframes and wait for them to return to the value area.
at this point…
The price has retreated within the EMA and is resting just above the 50 EMA.
This is when the market is “resting” and the area between 20 EMA and 50 EMA acts as a worthy area to start looking for entry triggers.
Third, go long with a valid entry trigger.
The entry trigger will be a large green candlestick with little to no lower core after the price bounces off the 50 EMA.
After confirming the shape of this candle, make the next candle long.
Why is a large green candle a good entry trigger?
Recall that the closing price of a Heikin Ashi candlestick is the average of the actual O+H+L+C of the current candlestick.
Also, despite being an average (which can be affected by the day’s highs and lows), it still ends above the previous Heiken Ashi candlestick high.
This acts as a valid entry trigger for a bullish trend continuation as it implies that there is momentum behind the move.
And finally, take a stop loss 1 ATR below the recent swing low and a profit before the previous swing high.
The stop loss is simply 1 ATR below the most recent swing low (below 50 EMA).
If you want to know more about the secrets of stop loss hunting, check out this video. I won’t go into too much detail here.
We also need to take profit before the previous swing high.
If you are just starting out with this simple trend continuation technique, don’t set your profit targets too greedily.
Next…
How to use Heikin Ashi for bearish trend continuation
If the bearish trend continues, it will simply be the other way around.
- Use Heikin Ashi Candlesticks to Identify Trends on Higher Timeframes
- We will use the 20 and 50 EMAs on the lower timeframes to wait for a pullback to value territory.
- Short with a valid entry trigger
- Stop loss 1 ATR above recent swing high and take profit before previous swing low
First, use Heikin Ashi candles to identify trends on higher timeframes.
Using just the Heikei Ashi candlesticks on the daily chart, we can see that the price is currently bearish, with a large red body candlestick with little to no wick on top.
Next…
Then use the 20 and 50 EMAs on the lower timeframes and wait for them to return to the value area.
We want the price to enter the range of values within the 20 EMA and 50 EMA.
You can see that there are doji formed even in the 20EMA and 50EMA.
This means that the short-term bullish candlestick has lost momentum and the market is about to turn bearish.
Third, short the active entry trigger.
This latest red Heiken Ashi candle has no upper core, has a long body, and closes much lower than the previous candle, triggering an entry.
You will be short at the opening price of the next candlestick.
And finally, take a stop loss 1 ATR above the recent swing high and take profit before the previous swing low.
Setting your stop loss 1 ATR above the previous swing high gives your trades space to “breathe” so you don’t exit the trade too soon.
That way, you can take profit before the previous swing low.
but…
You don’t want to set a low profit target beyond the swing as the market is likely to reverse completely without even touching the swing.
Makes sense?
So that’s it!
Here’s how to trade Heikin Ashi in different market scenarios.
So let’s quickly recap what we learned today.
shall we?
Conclusion
To summarize everything in this training guide…
Here’s what I learned today:
- OHLC prices for Heiken Ashi candlesticks are calculated differently than Japanese candlesticks
- Use Heiken Ashi candlesticks as a trend filter to know when to be a buyer or seller
- Avoid using Heiken Ashi for scalping as candlesticks take longer to form and are not accurate opening or closing prices for a period.
- Heikin Ashi trend continuation technique to profit in both bull and bear markets
Come on, you…
Have you used Heiken Ashi in trading before?
If not, why not try Heikin Ashi in your trading?
Let us know in the comments section below.