CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Heikin-Ashi or Heiken-Ashi means ‘average pace’ in Japanese. So, from its name, you already know that the indicator uses average price data to plot candlesticks and visualize market movements to help make informed trading decisions. The technique was developed by the creator of candlestick charts himself – Munehisa Homma. At first glance, this indicator may look complicated, but it’s not difficult to use even for novice traders. Here’s a look at the indicator and some trading strategies to make the most of it.
Heikin-Ashis are considered better candlesticks than the ones traders typically use. This is because they incorporate the average from previous and current prices, eliminating the noise.
Image: Traditional vs Heikin-Ashi Charts
The formulae to plot HA-candles are:
HA Open = (HA Open−1_ + HA Close−1_)/2
HA Close = (Open0 + High0_ + Low0 _+ Close0__)/4
HA High = Max (High0_, HA Open0_, HA Close0_)
HA Low = Min (Low0_, HA Open0_, HA Close0_)
The 0 suffix shows that these are values from the current period, while the −1_ indicates that these values are from the prior period.
There are 3 main types of candles:
Due to its unique nature, the HA indicator has many advantages that drive traders to incorporate it in their trading strategies:
A few disadvantages of HA-Charts are:
Heiken-Ashi candles can be used for a variety of assets, including forex, stocks and commodities. All you need to do is to set up a timeframe and apply the indicator on your chosen instrument.
The most common use of the HA is to give you the confidence of holding your positions for longer. Here are a few trading strategies using HA charts:
Rising, long-bodied green candlesticks with no lower wick and a long upper wick signal a strengthening uptrend. You may open long positions or hold the positions you’ve already bought to maximise gains.
Falling, long-bodies red candlesticks with no upper and a long lower shadow indicate that the market is dominated by bears and the downtrend could continue for a while. You may consider holding onto your short positions to optimise gains from the bear trend.
In an uptrend, when lower wicks start to appear, it is considered a signal of weakening bullish sentiment, which indicates that a reversal may be due. You may confirm the signal with other indicators and then plan their exits from long positions.
Similarly, the appearance of upper shadows and diminishing size of red candles indicate that bears are losing their grip on the market. If you have short positions, this may be a good time to exit them. If you’ve been on the sidelines to buy, you can use this opportunity to do so. In both cases, confirming the reversal with other indicators helps you make better decisions.
For trading reversals with HA, it is recommended to rely on broader signals, such as head and shoulders, triple tops or triple bottoms. This is because these occur when the reversal is sustained and apparent on the HA chart. In this case, trading decisions are made in the same manner as trading with normal candlesticks.
| Heikin-Ashi Signals | ||
| Trend Behaviour | Uptrend | Downtrend |
| Normal | Rising green bodies | Falling red bodies |
| Strengthening | Rising, longer greens with no lower shadow | Falling, longer reds with no upper shadow |
| Weakening | Emergence of lower shadows and a reduction in size of candles | Emergence of upper shadows and a reduction in size of candles |
| Consolidation | Smaller bodies with growing upper and lower shadows | Smaller bodies with growing upper and lower shadows |
| Reversal | Tiny body with very long upper and lower shadows | Tiny body with very long upper and lower shadows |
Since HA shows the directional trend combining it with momentum indicators helps identify the strength of bears or bulls in the market. Knowing that the minor fluctuations causing noise have been eliminated, makes the discovered opportunities more reliable. The most commonly used indicators with HA charts are:
Green HA candles show buying pressure, while red ones show selling pressure. Combining it with moving averages helps identify the dominant trend direction. Here is a popular strategy to combine the two:
Add the 50-day and 12-day simple moving average (SMA) to the HA chart.
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