Effective Trading with HeiKin Ashi Candles

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HeiKin Ashi (HeiKin – “average”, Ashi – “rhythm”) is a popular way of price representation that resembles the Japanese candlestick charts. Unlike line charts, HeiKin Ashi candles do have open, high, low and close prices, and the open and close price is represented by a solid body just like in Japanese candlestick charts.

OHLC prices in HeiKin Ashi are calculated in a different way than OHLC prices for Japanese candlesticks, which is one of the main differences between these two chart types. As a result, HeiKin Ashi charts have a smoothing effect on the price action, and are popularly used for trend trading as market noise is not as present as with other chart types. This article will give an in-depth overview of HeiKin Ashi charts, the way they’re calculated, and how they can be used for trend trading and in combination with various chart patterns.

How to Add HeiKin Ashi Candles to Your MetaTrader Platform

Before we move on, let’s explain how to add HeiKin Ashi candles to MetaTrader. Traders that use the MetaTrader trading platform can easily attach HeiKin Ashi candles to their chart by going to Insert -> Indicators -> Custom and select the HeiKin Ashi. However, the default settings for HeiKin Ashi charts on the MetaTrader platform are sometimes red for bearish candles, and white for bullish candles. If you’re using a very bright background color, you may not be able to see the bullish candles until you switch to a darker background. Simply open the settings of the chart and change the colors of the background. The settings we have used in this article are shown on the next picture.

How to Add HeiKin Ashi Candles to Your MetaTrader Platform

 

Also make sure to untick the “Chart on foreground” box and select the “Line chart” type on the common tab. Now you should have the same HeiKin Ashi chart on your platform as in this article.

HeiKin Ashi and Japanese Candlesticks

The HeiKin Ashi candles are very similar to Japanese candlesticks, which still remain the most widely used chart type among traders. The main idea behind HeiKin Ashi candles is that they “smooth out” the price action, making it easier to make trading decisions without the usual market noise that Japanse candles can produce. The following chart shows a comparison between HeiKin Ashi candles and Japanese candles.

HeiKin Ashi

Japanese Candlesticks

At the first glance the two charts look almost the same. However, there are some important and subtle differences between HeiKin Ashi charts and Japanese candlestick charts. The most obvious is that each next HeiKin Ashi candle starts at the middle of the previous candle, and not at the closing price. This is the major distinguishing factor between these two chart types.

Just like Japanese candlesticks, HeiKin Ashi candles have an open, high, low and close. However, the calculation for each differs to some degree from the calculation of Japanese candlesticks.

As mentioned, the opening of each HeiKin Ashi candle is at the middle of the previous candle. This is the most obvious difference between those two chart types.

Open = (Open Previous Candle + Close Previous Candle) / 2

The close of a Heikin Ashi candle is the average price between the open, high, low and close. This is another, more subtle difference compared to Japanese candlesticks.

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

The High and Low of HeiKin Ashi candles is calculated the same way as with Japanese candlesticks. The High is the maximum price reached, and the Low the minimum price reached.

High = Maximum Price Reached
Low = Minimum Price Reached

Is Trading with HeiKin Ashi better than with Janpanese Candlesticks?

Many forex traders may ask themselves if trading with HeiKin Ashi charts gives a reliable advantage over trading with Japanese candlesticks. To answer this question, let’s compare the advantages and disadvantages of both charting types.

  • HeiKin Ashi Advantages and Disadvantages

The main advantage of HeiKin Ashi charts compared to Japanese candlesticks is that they “smooth out” the price action and reduce market noise. This is achieved by the way the HeiKin Ashi candles are calculated. As the close is actually the average price of the period’s open, high, low and close, during strong bearish or bullish trends it can have the same level as the high or low of the candle, meaning that no wicks are present.

This situation is especially helpful during major up- and downtrends, where candles without upper or lower wicks emphasize the power of the underlying trend.

The major disadvantage of HeiKin Ashi candles is closely related to its main advantage – smoothing out the price action. Although market noise is minimalized with this approach, it still creates an environment where some price levels that are easy to spot on Japanese candlesticks, are “smoothed out” on HeiKin Ashi candles. This is shown on the following chart, which shows the differences in price action and candle patterns recognition between HeiKin Ashi charts and Japanese candlesticks.

HeiKin Ashi Advantages and Disadvantages

  • Japanese Candlesticks Advantages and Disadvantages

Japanese candlesticks are arguably the most popular chart type for price representation, and there are many strong reasons for that. This chart type was introduced to the Western world by Steve Nison, and it has reached great popularity since then. The main advantage of Japanese candlesticks is the way they represent open, high, low and close prices, which makes it very easy to spot major candlestick and chart patterns. In addition, the close of a Japanese candle is the actual close price for the period, contrary to a HeiKin Ashi candle which averages the OHLC prices and takes that as its close price. The body of a Japanese candlestick is the real distance between the period’s open and close price.

The following chart is the same as the HeiKin Ashi chart above, but uses Japanese candlesticks as its chart type. Notice how the price is not smoothed out which makes it easier to spot the Shooting Star pattern at the beginning of the chart.

Japanese Candlesticks Advantages and Disadvantages

The main disadvantage of Japanese candlestick charts is that, compared to HeiKin Ashi candles, it might be more difficult to spot a trend reversal or trend inception due to the market noise. While strong uptrends or downtrend create HeiKin Ashi candles that have no wicks, Japanese candlesticks can still have upper or lower wicks which makes it more difficult to define the strength of the trend. However, by using other techniques of trend recognition, such as higher highs and higher lows during uptrends, and lower lows and lower highs during downtrends, it is easily possible to overcome this obstacle of Japanese candlesticks.

Trading with HeiKin Ashi Candles

Traders can use the same trading signals with HeiKin Ashi candles as they’re used to with Japanese candlestick charts. This means, any technical tools such as channels, support & resistance, chart patterns and candlestick patterns can be as successful utilized on HeiKin Ashi candles as on other chart types. In the end, the only real difference between these two chart types are the way price is represented on the chart.

As can be seen on the chart above, the green triangle in the middle of the chart worked just as well as it would on other chart types. With the break of the upper line of the triangle, the price continued its uptrend. Later in the chart, a bullish flag formed, signaling a possible continuation of the trend. Points (2) and (3) show candle patterns similar to Spinning Tops in Japanese candlesticks, which signal indecision and a possible swing reversal, as has happened in the chart. Point (1) is a pinbar candle which later formed a double top chart pattern.

HeiKin Ashi Trading with Trend Indicators

HeiKin Ashi candles can be very useful for trend trading when combined with a trend indicator, such as the Average Directional Movement Index (ADX). The ADX indicator measures the strength of a trend, and rises above a value of 25 when the trend becomes very strong. This is shown on the next chart with the yellow transparent area.

On the other hand, HeiKin Ashi candles tend to be without any upper wicks during strong downtrend, and without any lower wicks during strong uptrends. This fact combined with an ADX reading of above 25 creates nice trading opportunities, as shown on the chart above. The candles have no wicks because the buying pressure was not high enough to push the price above the opening price.

Trading Trends with HeiKin Ashi Candles

HeiKin Ashi candles represent trends in a visually more appealing way than Japanese candlesticks, because the smooth price action makes it easier to spot downtrends and corrections without additional market noise. The following chart shows a downtrend with a correction on a HeiKin Ashi chart. Notice again how the candles during the downtrend have almost no upper wicks.

The same applies for uptrend conditions. The following chart shows an uptrend, represented by HeiKin Ashi candles. Notice how the candles have almost no lower wicks during the uptrend, which adds to the strength of the trend.

Trading HeiKin Ashi Chart Patterns and S&R Zones

Just like with Japanese candlesticks, the majority of chart and candlestick patterns can be applied to HeiKin Ashi charts. Some traders may even find that breakout trading with HeiKin Ashi candles is more reliable than with Japanese candlesticks, as the smoothed-out price action creates less fake signals. Let’s take a look at how common chart patterns look on HeiKin Ashi charts.

Symmetrical Triangle Breakout

The chart above shows a common chart pattern that can be both bearish and bullish, depending on whether the price breaks the upper or lower line. This pattern is called the symmetrical triangle pattern, and can be drawn effectively on both Japanese candlestick charts and HeiKin Ashi charts. In the case above, the price broke the lower triangle line and continued its previous downtrend.

Beside symmetrical triangles, HeiKin Ashi charts can also be used to trade on ascending and descending triangles the same way as with symmetrical ones.

The Head & Shoulders Pattern

 

The head & shoulders pattern can be easily identified on HeiKin Ashi charts. Points (1), (2) and (3) on the chart above show the shoulders and head of the pattern, while the green line below the pattern is called the “neckline”. With the break of the neckline, the exit target is the height of the pattern itself, which is represented with the green dotted arrows. During downtrends, inverse head & shoulder pattern form, which have the same targets and entry triggers as head & shoulder patterns during uptrends.

Support & Resistance Zones

The smooth price action of HeiKin Ashi charts makes them perfect to identify and trade on support and resistance zones. The way these charts are calculated produces a smaller number of fake breakouts than Japanese candlestick charts, and smaller trend corrections are less emphasized which leaves the overall trend in the main focus. The chart above shows how support and resistance lines are used with HeiKin Ashi charts.

Conclusion

This article showed the main advantages and disadvantages of HeiKin Ashi candles compared with other chart types. Although HeiKin Ashi candles are similar to Japanese candlesticks on the first glance, there are some important and subtle differences between them. The most obvious one is the opening price of HeiKin Ashi candles, which is placed at the middle of the previous candle’s body. The other, more subtle difference, is the calculation of the closing price which is the average between the open, high, low and close prices for the period.

HeiKin Ashi charts have an advantage during trending market environments, as they smooth out the price action and make unimportant smaller corrections less visible. In addition, the way how the closing price is calculated reduces or eliminates the shadows during strong uptrends and downtrends, which can be used to gauge the strength of the underlying momentum. One way of using HeiKin Ashi candles in trend trading is with the combination of trend indicators, such as the Average Directional Movement Index (ADX). The ADX indicator returns a value of above 25 during strong trends, which is used by traders to trade trending markets in combination with HeiKin Ashi charts.

 

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