Heiken-Ashi Candles: Definition, Calculation & How to's
2020-12-04
2020-12-04
Heikin-Ashi CandlesMikhail Hypov
The Heikin-Ashi chart looks very similar to your usual Japanese candlesticks, which are an extremely popular and convenient technical analysis tool. However, Heiken-Ashi is calculated based on a unique formula, which is completely different from the standard one. Today, I’m going to tell you how the Heiken-Ashi bars work, and how they differ from Japanese candlesticks, how to read their signals, and how to trade in the Forex market.
The article covers the following subjects:
What Are Heikin-Ashi Candlesticks?
“Heikin Ashi” means “average bar” in Japanese. Interestingly, there is no correct spelling of this phrase in the Latin alphabet. Some well- known traders and publications use “Heikin-Ashi”. Others use “Heiken- Ashi.”
The indicator is used to filter out market noise. This stems from the unusual design of the Heikin-Ashi candlestick - it is built by averaging four parameters: open, close, max, and min (maximum and minimum price values).
To put it differently, the standard Japanese bar chart is redrawn into an average form with minor price fluctuations smoothed out. Therefore, for simplicity’s sake, Heiken-Ashi can be called a kind of candlestick moving average.
The upper part of the [EUR/USD][1] chart shows traditional Japanese candlesticks, and the lower part shows Heiken-Ashi. By comparing them visually, you can see that the lower chart is smoother. It shows no gaps, and many bars are opened closer to the middle level of the previous bars.
By the way, you can only access Heikin-Ashi charts in the [online terminal][2]. You can open it in any browser without logging in. In the MetaTrader 4 platform, this tool looks like an indicator placed over a chart. I’m going to describe how to use it below.
Heikin-Ashi is often used as a trend indicator. Moreover, the [Price Action][3] reversal patterns developed for traditional candlesticks can give powerful signals as well.
Another feature of the indicator is the latency in calculations. New Heiken-Ashi bars are only formed after the following Japanese candlesticks appear on the chart. Therefore, the tool is very efficient for highly volatile assets on small timeframes.
Some of the currency pairs that fit the description are CAD/JPY, GBP/JPY, and GBP/JPY. For these pairs, Heikin-Ashi will effectively remove noise and prevent false breakouts and trend reversal signals.
What Is the Heiken-Ashi Indicator?
In MetaTrader 4, you can add Heikin-Ashi charts for free since it’s included in the standard set. So, you don’t need to download it elsewhere.
The tool works best with a moving average. This way, it will not be drawn on top of Japanese candlesticks. On the contrary, it will make the chart easier to understand and show smoothed candles of the Heiken-Ashi indicator.
For comparison, here is what the Heikin-Ashi candles look like in the online terminal. Comparing this chart and MT4, you can see that Japanese candlesticks have been completely replaced on the price chart.
How Does Heiken-Ashi Work?
Heikin-Ashi smoothing is performed by averaging four parameters of Japanese candlesticks: open, close, max, and min.
Each of these four parameters is formed as follows:
Open - (open of previous bar + close of the previous bar)/2.
Close - (open + high + low + close of the current bar)/4.
Max (or High) - the highest value of the current period’s high, or the current period’s Heikin-Ashi open or close.
Min (or Low) - the lowest value of the current period’s low, or the current period’s Heikin-Ashi open or close.
Now you know how to calculate Heikin-Ashi bars. Therefore, you understand that the extremum of HA-bars can vary in both directions compared to the Japanese candlestick in the same positions. Beginners often overlook this fact and place stops at the extremes of Heikin-Ashi bars.
The body of an HA candle has the same value as the Japanese ones and indicates the current balance of power in the market. A white or green bar means a bullish market, and a black or red bar points to a bearish market.
Japanese Candlesticks vs. Heikin-Ashi Candles
Japanese Candlesticks
|
Heikin-Ashi
—|—
Long shadows
|
Short shadows
The body starts near the close of the previous bar.
|
The body starts approximately in the middle of the previous bar.
The bars show the real price situation.
|
Due to smoothing, the bars are formed with a slight lag, reflecting the trend rather than the exact price movement.
At first glance, Heikin-Ashi vs candle charts are the same. But if you look closely, you will notice one crucial difference - smoothed bars have shorter shadows, and the max may not reach the actual extremum of the candlestick. At the same time, the body of each Heikin-Ashi bar starts near the middle point of the previous bar.
There is one more thing: because of smoothing, the Heikin-Ashi indications have a slight lag. To illustrate, I compared the two charts - the Heikin-Ashi on the left and the Japanese candlesticks on the right.
The colored circles point to the areas with the biggest differences. You can clearly see the lag in the first red circle. The Japanese candlestick has already formed a long red body, while the HA candlestick is still green. Later on, we will cover how to find such differences and what to do with them.
How to Read Heiken-Ashi Candles
Knowing the Heikin-Ashi secrets, you can determine both the current trend’s direction and its starting and ending points. If there is a minimal shadow (or no shadow at all)with a steady rise or fall in prices, it’s an important sign.
This signal indicates the trend’s strength and that it will continue in the near future. So, with a steady bearish movement, you can see a drop in the upper shadow, and with a stable bullish - in the lower shadow.
The bar’s open level is an indirect sign of a stable movement in a certain direction. In this case, it is in the middle of the previous bar. The third piece of evidence supporting the price direction is the candles’ color. If such Heikin-Ashi charts mostly show rising bars (green in the online terminal), the trend is bullish. If there are falling bars (red), it’s bearish.
An indirect indication of the trend’s strength is the ratio of the bar sizes. If each new candle’s body is larger than the previous one, the trend’s strength increases. If the bars are progressively getting smaller, especially together with increasing shadows, expect the movement in the current direction to end soon.
The image above shows a trend. Note that almost all bars have small lower shadows. It also meets another condition - the forming bars predominantly have the same color. When the trend’s strength increases, candlestick bodies become larger, and before and during short-term corrections, they become smaller.
In trend trading, most traders enter the market after a series of identical bars. For example, three Heiken-Ashi candles of the same color and direction can be the conditions for opening a position.
Additional indicators can be used as another way of determining the right time to enter the market. Most of them work well both for Heiken- Ashi and a traditional chart. For example, during a reverse, the touch or crossover of the Bollinger Band can be used as a signal. I’ve covered this in more detail in the article “[Forex Bollinger Bands Indicator][4].”
Regardless of the method, it’s important to remember that bars are calculated with a formula. Therefore, their bodies and extremums don’t reflect real price values. Now, let’s take a look at the Heikin-Ashi formula!
Heikin-Ashi Formula - Heiken-Ashi Candle Calculation
To draw the HA-bar, the indicator needs to define four candlestick parameters:
Here are the Heikin-Ashi calculation formulas:
The HA-Open for the first candlestick is a regular bar’s opening price. For the second candlestick,
HA-Open = (HA-Open (-1) + HA-Close (-1)) / 2,
where “-1” is the values of the previous bar.
HA-Close = (Open (0) + High (0) + Low (0) + Close (0)) / 4.
Here, “0” denotes the current bar, and if there’s no “HA” prefix, the calculation is based on its actual values.
HA-High = Maximum of the High (0), HA-Open (0) or HA-Close (0)
HA-Low = Minimum of the Low (0), HA-Open (0) or HA-Close (0)
The picture above shows where to take the values of bullish and bearish bars. Remember that for bullish candlesticks, the max is at the top and the min is at the bottom, while for bearish candles, it’s the other way around. So, reading depends on the price’s direction.
How to Calculate Heikin-Ashi in Excel
For a full understanding, I prepared an Excel calculator that you can download [here][5].
After clicking on the link, click on the arrow-shaped icon in the upper right corner.
The design of the calculator is very simple - the purple cells on the left side of the table need to be filled in with:
Important! Delete the existing values before entering your own.
The blue cells show where the values are automatically calculated when you fill in the purple cells, so you don’t need to enter anything.
On the right, you will see the updated Heikin-Ashi candlestick chart, similar to the one drawn in the [LiteForex terminal][6].
Heiken-Ashi Candles Models
When trading Heiken-Ashi, candlestick patterns are often used to determine the right time to enter the market. In this article, I’ll describe the most popular patterns with the most accurate Heiken-Ashi signals:
Doji;
Cross;
Hammer;
Falling star;
High wave.
The image above shows all the listed Heiken-Ashi patterns, and you can use it as a cheat sheet.
Now let’s take a closer look at each pattern.
Heiken-Ashi Doji
This forms when the opening and closing prices are almost the same. At this moment, bulls and bears are equally strong, showing uncertainty in the market. Therefore, when Doji appears at the top of an uptrend, prepare to open a short position, and at the bottom of a bearish trend, open a long trade. To maximize reliability, combine Doji with an oscillator, such as [Stochastic][7].
On the [EURJPY][8] chart, Doji candlesticks are marked with a blue oval. Note that the body is very small and looks like a narrow strip.
Cross
The Harami Cross (or, simply, the Cross) belongs to powerful reverse patterns. It helps determine a trend’s end and the beginning of a new one. This pattern consists of two candlesticks. The first has a fairly large body, and the second is small, similar to Doji. At the same time, the second bar shouldn’t exceed the first one.
Above is an example of a cross. Please note that the second candlestick has a small body and is located within the range of the previous one.
Hammer
The Hammer, also sometimes called the Hanging Man, is a pattern with small bodies, small or no upper shadows, and long lower shadows. During an uptrend, the pattern is referred to as the Hanging Man. During a downtrend, it’s called the Hammer. In technical analysis, these patterns signify overbought or oversold conditions. Therefore, they indicate that a trend reversal is highly probable. Unlike Japanese candlesticks, HA Hammer can only be red/black, regardless of where it’s formed relative to the trend.
In the chart above, the Hammer is marked with a blue oval. It has no upper shadow, and the lower one is elongated. After the pattern is formed, the bearish trend changes to the bullish one.
Shooting Star
This pattern looks like a shooting star or comet, hence the name. It appears at the top of a bullish trend and signals a downward reversal very soon. Remember a few simple rules to identify it accurately:
As with the Hammer, the HA shooting star is only bullish green/white, even though it usually forms just before a bearish reversal.
In the chart above, the blue oval shows a shooting star. This bar has no lower shadow, and its body is about three times smaller than the upper tail.
High Wave
High waves are bars with long and roughly equal upper and lower tails. They can be of any color. Such patterns, like Doji, indicate the balance of buyers and sellers and may be the first signal the trend movement is coming to an end.
The chart shows an example of a high wave. Its shadows are many times larger than the body and are approximately the same in length.
Heikin-Ashi Trends
In terms of Heikin-Ashi vs. candle, it’s easier to detect a trend with Heikin-Ashi while also getting better trading results. Experienced traders look at several factors at once:
The body’s length and its change over time;
The ratio between the body’s size and shadows;
Whether the bullish or bearish movement is predominant;
The direction of price movement.
Below, I will give step-by-step instructions on how to identify bullish and bearish trends with these signs.
Bullish Heikin-Ashi Trend
The bullish trend matches the following conditions:
The price is going up.
There are mostly green upward bars on the chart.
If the bars’ bodies increase over time, the bullish movement intensifies and vice versa. Small bodies signify the trend is ending soon.
With a strong, stable upward movement, Heiken-Ashi candles form small or no lower shadows.
The [XAU/USD][9] chart shows a bullish trend. At first, there are almost no lower tails (indicated by the green arrow). Before the upward movement ends, this changes and nearly every bar shows a lower shadow.
Bearish Heikin-Ashi Trend
The bearish trend follows these rules:
The price is going down.
The chart is filled with red falling bars.
If the bars’ bodies increase over time, the bearish movement increases, and vice versa. Small bodies signify that the trend is ending soon.
In a strong, stable downtrend, candles have small or no upper shadows.
There is a strong downward trend at first (marked with a red arrow). Bars form without upper tails, and the narrowing begins just before a short-term correction. The next stage (marked with a blue arrow) shows an even more drastic narrowing that ends with the Doji.
Heiken-Ashi patterns
There are other patterns that help predict market behavior in the near future. Most often, Heiken-Ashi forms the so-called expanding triangles and wedges. Let’s take a look at them.
The figure above shows examples of Heikin-Ashi patterns.
Triangles
This is the most common pattern in Heiken-Ashi. The borders are akin to support and resistance levels. If the upper border is broken during the previous uptrend, open a long position since the uptrend will continue. If the price breaks the lower border, expect a reversal, and open a short position. The opposite is true with a bearish trend.
On the [S&P500][10] chart, purple lines show the triangle boundaries. Later on, the price breaks the upper border (green circle). At this point, you can open a long position (green line).
Wedges
This pattern is also often seen on the Heiken-Ashi chart and looks like a narrowing triangle. There are two types:
A falling wedge is marked with purple lines. Therefore, expect an upward reversal. Our predictions are confirmed when the price breaks the upper border (green circle). At this point, you can open a buy trade (green line).
Heikin-Ashi Candlesticks Trend Analysis Example
Let’s master the trend analysis using Heikin-Ashi on the [BTC/USD][6] chart.
After a long-term bearish movement, there is a high wave (blue oval). As described above, this is a reversal pattern. So, we can expect an uptrend.
The next bar is rising, and its body is larger than the previous high. Therefore, our next step is to open a sale (blue line). Set the stop loss is at the nearest local minimum (red line).
After a short-term upward movement, the price goes down. But we don’t see any signals of a reversal, and the bar itself doesn’t have a large range (purple circle). Instead of closing, monitor the market because the drop in the Heikin-Ashi chart may be a short-term correction.
Pay attention to the area marked with a red circle. Here, almost every candlestick has a noticeable lower tail. This could be a sign of the upward movement ending.
A bit later, there is a powerful reversal signal - a Double Doji (green oval). Two consecutive bars have a small body and long upper and lower shadows. At the red bar’s close, exit the market with a profit (green line).
How to Use the Heiken-Ashi Indicator in Forex Trading
Now, let’s look at Heiken-Ashi Forex trading. Any currency pairs that show a long-term trend movement can be profitable instruments.
To use it in the LiteForex [online terminal][11], click on the candlestick icon and select “Heiken-Ashi”. In MetaTrader, the process is about the same. Let me tell you more about adding an indicator to MT4.
The goal of Heiken-Ashi trading is to identify long-term, stable trends and search for chart patterns on HA-bars. Due to lesser price noise on the Heikin-Ashi charts, it’s much easier than on Japanese candlesticks. At the same time, remember that stop loss and take profit shouldn’t be placed based on the HA candles’ extremum. For this, I recommend using classic bars or Japanese candlesticks.
Heikin-Ashi Trading Strategy
Let’s examine the first Heiken-Ashi strategy, which involves a step-by- step market analysis:
Determine stable directional movement;
Detect a change in the movement direction;
Confirm a reversal using patterns;
Open a position;
Set a stop loss;
Set a take profit.
Let’s take a closer look at the strategy using the [GBP/USD][12] currency pair.
Step 1. Identify the downtrend. Use the signs from the “Bearish Heikin- Ashi Trend” section. Here, there are more red bars that formed with small or no upper tails.
Step 2. We see an upward bar (purple oval). Take a closer look at the nearby bars to detect a reversal signal.
Step 3. Detect Price Action patterns or reversal patterns using technical analysis. The first reversal pattern is the last red Hammer bar (black oval).
It is followed by a long Doji (black oval). Two reversal patterns in a row rarely happen. At the same time, they give enough confidence to go for an aggressive market entry.
Step 4. Enter a buy position at the opening of the next candle after the Doji (blue line).
Step 5. Set a stop loss at the nearest local minimum of the Japanese candlestick. Optionally, set a trailing stop if it fits your risk management system.
Step 6. In the classic Heiken-Ashi strategy, exit the market at the close of the first downward candlestick. In our case, the first red bar is also a sign of a trend reversal. The tails are long compared to the body on either side, which indicates a battle between bulls and bears. So, after the bar closes, exit the market with a good profit.
Heiken-Ashi Scalping Strategy
Smoothing makes the chart appear uniform, which is why Heikin-Ashi is great for scalping.
Heiken-Ashi’s scalping strategy involves a very simple analysis. In particular, if the next bar forms in the desired direction by the Price Action signal, it’s enough to enter. Let’s look at the example of the [AUD/USD][13] currency pair.
There is a downtrend after a long uptrend, and the lower tail is much larger than the upper one (blue circle). This can be an indirect signal for a trend reversal. Note that a few bars before, the situation was pointing to a reversal, but the trend continued for some time. In Heiken-Ashi scalping, such situations aren’t rare. So, when trading, you should set stop losses close to the position’s opening level and strictly follow your money management strategy.
As the next candle opens, enter a sell trade (blue line). Set stop loss at the nearby high (red line). Also, if the local maximum is far from the opening price, set the stop to a level lower.
As the trend develops, the HA-candles’ bodies slowly increase and gradually decrease before the downward movement ends. At last, we can see a Doji. Taking this signal into account, exit the market with a profit at the opening of the next candle.
Ichimoku and Heiken-Аshi
The strategy for swing trading Heiken-Ashi is a combination of the Ichimoku charting method and the HA candlestick analysis. If you’re not familiar with Ichimoku, I recommend reading the “[Ichimoku Cloud Indicator in Forex Explained][14]” article. This indicator is self- sufficient for trading and offers a set of signals for successful trading. Heiken-Ashi only helps to filter out useless price noise and eliminate false signals. Together, these instruments work well on any currency pair. The optimal timeframe is H4 or similar ones. For successful trading, I suggest using the Ichimoku Kinko Hyo indicator standard settings 9, 26, 52.
Conditions for opening a buy trade are:
The bar exists from the Kumo cloud and closes above it.
Tenkan Sen exceeds Kijun Sen.
Chico Span is above the price chart in an upward trend.
Senkou Span A exceeds Senkou Span B.
The Heiken-Ashi candle is green.
Conditions for opening a sell trade are:
The bar exits the Kumo cloud down and closes below it.
Tenkan Sen drops below Kijun Sen.
Chico Span is below the price chart in a downtrend.
Senkou Span A is below Senkou Span B.
The Heiken-Ashi candle is red.
Stop loss is usually set at the nearest local minimum of the Japanese candlestick. Since this Heiken-Ashi strategy involves trend following, consider a trailing stop.
The exit from the market takes place in two cases:
Let’s take [EUR/JPY][8] as an example.
Pay attention to the blue oval on the chart. The bar is above the Kumo cloud. Tenkan Sen (yellow curve) exceeds Kijun Sen (purple curve).
Chico Span (blue line) is above the bar and directed upwards. To show that the Chico Span lows are rising, I connected them with a black line. Senkou Span A (green curve) exceeds Senkou Span B (red curve). The Heiken-Ashi candle is green.
Since all conditions for a buy trade are met, open a position at the close of the bar marked with a blue oval (blue line). Set a stop loss at the closest low of the Japanese candlestick and a trailing stop with an offset (distance between the entry level and the stop loss).
After a price rollback by a specified amount, a trailing stop is triggered. As a result, the long position is closed with a profit.
How to use Heikin-Ashi Indicator With MT4
The Heiken-Ashi MT4 indicator is the standard set, so you don’t need to download it.
To add the indicator to the chart, open the View tab in the MT4 main menu. Select “Indicators” - “Custom” - “Heiken Ashi”.
This will open the indicator settings. To add it to the chart with default parameters, click “OK”. Most of the parameters are the same as for other indicators. I talked about them in detail in “[Bollinger Bands Indicator in Forex Explained][4]“.
Now, let’s see how to use the Heiken-Ashi indicator. By default, it’s shown over Japanese candlesticks like in the image above. This isn’t very convenient since the indicator overlaps with the usual bars, not replacing them like in the [online terminal][2].
Because of this, I recommend installing lines instead of candles.
Another peculiarity is setting green for bullish bars. If you use a black background, there is no need to change anything. With a white background, growing candles will merge. However, even with the right settings, I think the Heikin-Ashi charting tool becomes less informative. Because of it, I prefer using the [LiteForex terminal][6].
Benefits and Limitations
Let’s consider the pros and cons of Heiken-Ashi:
Pros
|
Cons
—|—
The chart becomes clearer visually. The amount of market noise is much lower.
|
Due to its design, candles reflect the market with a slight lag.
Easy to use
|
The number of candlestick patterns and Price Action signals is inferior to Japanese candlesticks.
Indicators based on Heiken-Ashi give less false signals.
|
Signals may lag more than on Japanese candlesticks.
It makes it easy to trade on small timeframes, so it is great for scalping.
|
HA candles can be used in almost any trading system.
|
Heikin-Ashi vs Renko
In the image above, you can see that Renko fully realizes the goal of filtering out market noise. Renko bricks don’t show patterns like Japanese candlesticks or take time into account. They react exclusively to price changes in points for a certain period of time. The market picture is often visually different from Heiken-Ashi candles because Renko doesn’t consider sideways movements. On the Renko chart, there are no black ovals for the market flat.
Renko’s huge disadvantage is that most indicators won’t show an accurate picture.
Find more information about Renko charts [here][15].
Comparing the market noise filtering, Heikin-Ashi is a perfect balance of Renko and Japanese candlesticks. However, the ability to use Heikin- Ashi charts with indicators is a big plus.
Summary
Japanese traders have made a big contribution to stock trading. Heikin- Ashi is a prime example that even a very handy tool like candlesticks can be improved.
If your trading system often provides false signals due to market noise, Heiken-Ashi can be a solution. At the same time, don’t forget that smoothed candles are not an all-encompassing technical analysis tool. It should only be used with candlestick pattern analysis and additional indicators. In the article, we analyzed Ichimoku’s example, but I recommend experimenting on your own and trying Heikin-Ashi trading strategies with other ones that you’re familiar with. Consider including the ones already described in the [LiteForex][16] blog! Subscribe and receive plenty of useful information first-hand from the best analysts and traders.
That’s all.
Take care of yourself and your money!
Yours faithfully,
Michael @Hypov
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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