Summary
- the Heikin-Ashi is a technical analysis technique used with traditional candlestick chart.
- Heikin-Ashi vs. Candlestick: A distinct visual difference between the Heikin-Ashi and a traditional chart is that is smooths out the traditional candlestick by using a modified formula.
- The primary benefit of the Heikin-Ashi is that it makes charts more reader-friendly and helps users identify and analyze trends.
- Because the Heikin-Ashi doesn’t provide averaged price information, real-time prices, and it is slow to react to volatility — making it ill-suited for scalpers and high-frequency traders.
What is the Heikin-Ashi?
Meaning “average bar” in Japanese, the Heikin-Ashi is a technical analysis technique used with traditional candlestick charts when trading cryptocurrencies, stocks, commodities, etc.
Benefits of the Heikin-Ashi
The primary benefit of the Heikin-Ashi is that it makes charts more reader-friendly and helps users identify and analyze trends — which is the bread and butter of making profitable trades. It does this by smoothing out the traditional candlestick chart and significantly cutting out noise.
There is a saying among traders that “the trend is your friend,” and the Heikin-Ashi technique best illustrates this sentiment.
How is the Heikin-Ashi formulated?
The Heikin-Ashi technique is similar to traditional candlestick charts, but it has a distinct visual difference.
Whereas normal candlesticks charts are created by creating bars and wicks — which illustrate an asset’s open, high, low, and closing price — the Heikin-Ashi uses 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]
A Heikin-Ashi chart vs. A traditional candlestick chart
Visually, a Heikin-Ashi chart looks similar to a normal candlestick chart, but the modified candlestick formulas create distinct visual trends.
The Bitcoin CME Futures daily chart using the Heikin-Ashi technique. Source: TradingView
As illustrated in the above chart, a Heikin-Ashi chart looks significantly smoother, with trends clearly defined — uptrends remain green, despite down days, while downtrends remain red, despite up days. This allows traders to identify and analyze the strength of an asset’s current trend.
Another key differentiator is that the current price of a cryptocurrency or asset on a normal candlestick chart may be different than the current price on a Heikin-Ashi chart. This is due to the fact that normal candlestick charts look at closing prices, while Heikin-Ashi charts take an average.
How to trade the Heikin-Ashi
Trading with the Heikin-Ashi technique is easier than many other technical analysis techniques, thanks to its smooth and simplified appearance.
For example, green candlesticks with no lower wicks are indicative of a strong uptrend, so traders in profit may be dissuaded from taking profits. Being indicative of an uptrend, green candles may also signal to traders that they might want to increase their long positions or exit their short positions.
Trend changes are usually indicated by Heikin-Ashi candles with small bodies with wicks on both the top and bottom. In a conservative trading strategy, this indicates that a trader should look for confirmation before entering a long or short position to capitalize on the trend change.
Opposite to green candles are red candles, which indicate a downtrend and may signify a time to add to short positions or exit long positions. Likewise, red candles with no upper wicks indicate a strong downtrend, so traders in profitable short positions may patiently wait to realize profits.
Being a smoothed-out chart that is easy to read, Heikin-Ashi often gives fewer false signals than other technical techniques or indicators. Generally speaking, traders usually remain in a profitable trade until the Heikin-Ashi changes color — though, naturally, this does not guarantee that a trend will change.
Use other technical indicators with Heikin-Ashi
Finally, like all technical analysis techniques and indicators, the Heikin-Ashi is best used in conjunction with other technical indicators — such as support and resistance levels — and in a well-defined and carefully considered trading strategy. No technique guarantees success, and techniques rarely turn the most profits when used in isolation.
what are the limitations of Heikin-Ashi?
1 A conservative trading technique
The primary limitation of the Heikin-Ashi technique is that it is perhaps too conservative. Because it uses averaged price information, trade set-ups take longer to develop — making it ill-suited to high-frequency traders or low-time frame scalpers. The technique simply does not react quickly enough for these purposes. Rather, the Heikin-Ashi technique is better suited for swing traders looking to exercise a large amount of patience.
2 Inaccuracy
The other main issue with the Heikin-Ashi is, as mentioned previously, its inaccuracy in regards to important price information. Because only an averaged price is displayed, the actual live price of a cryptocurrency or asset is not really considered — so traders must make an effort to remain aware of the current price at which an asset is currently changing hands.
3 It is missing price gaps
Additionally, though less of an issue for cryptocurrency traders, the Heikin-Ashi technique is missing price gaps — which some traders consider in their trading strategies.
Conclusion
The Heikin-Ashi technique is a beginner-friendly and highly readable technical analysis technique that cuts out the noise and illustrates clearly defined trends. Even the most novice trader can look at a Heikin-Ashi chart and understand a cryptocurrency or asset’s trend.
However, it is this simplicity that is also the Heikin-Ashi technique’s biggest flaw. Because it presents averaged price information, real-time prices are largely abandoned and the technique is slow to react to volatility — making it ill-suited for scalpers and high-frequency traders.
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