When we trade Forex using price action to establish trade setups, we often talk about "looking directly at price" to make trading decisions.
Different price patterns are identified by looking closely at the open, close, high, and low of candlesticks.
But have you ever thought about how those parameters are calculated? Are traditional candles or bars ideal representations of price? Or is there a different type of candlestick which might be more ideally suited to price action trading?
That is what Heikin-Ashi charts can bring to your trading. In this guide, we will discuss what Heikin-Ashi candlesticks are and how you can use them to enhance the price action trading methods you are already using.
Heikin-Ashi candlesticks can replace the traditional candles you are using now. Their open, high, low, and close are calculated differently.
The simplest way to explain the intent and value of these candlesticks is to look at their name.
From Japanese, Heikin-Ashi translates to “average bar.”
Much as moving averages are calculated by incorporating data from previous candlesticks, Heikin-Ashi candlesticks work the same way.
The result? You get a “smoothed-out” version of a chart which filters out some of the meaningless whipsaws which might otherwise mislead you while you are trading.
To draw a Heikin-Ashi version of a normal candlestick, a Forex trading platform does the following calculations:
Or, if you are looking for Heikin-Ashi formula:
Most modern Forex trading platforms provide some option to display Heikin-Ashi charts. In MetaTrader 4 and MetaTrader 5, it is available in a form of a custom indicator bundled with the platform. It is called Heiken Ashi there and the candles are displayed on top of the normal chart — white & red in MT4 and blue & red in MT5 by default. For the desktop version of cTrader, there are third-party custom indicators for Heikin-Ashi available from third-party sources. Web version of cTrader features a native Heikin-Ashi chart style with blue and red candles by default. NinjaTrader supports a Heikin-Ashi chart style with green and red candles by default. Simple trading platforms, like AGEA's Streamster usually do not support any form of Heikin-Ashi at all.
Compared to your traditional candlesticks, Heikin-Ashi candles:
Here are some of the pain points in your trading which Heikin-Ashi may be able to help with:
Let’s go over some of the ways you can make use of Heikin-Ashi candles during price action trading.
Reading Heikin-Ashi charts is much the same as reading traditional charts. Blue candlesticks are bullish and red candlesticks are bearish (or you can set other colors if you prefer). Those with larger bodies are more strongly trending in their movement than those with smaller bodies.
Here are a few specific pointers for getting the most out of using these charts.
One of the best things about Heikin-Ashi charts is that trends are much easier to identify than they are with traditional charts.
Let's say that you are looking at a bullish trend. With regular charts, even though the majority of the candles should be bullish, you'll probably still see a number of bearish ones mixed in.
You might also notice significant whipsaws along the way, and periods of brief consolidation may stand out.
This can mislead you in the moment. Those whipsaws might convince you to close out your position prematurely when you could be riding out the trend. The brief phases of consolidation can do likewise.
With a Heikin-Ashi chart, that bullish trend should look significantly different.
You should see fewer contradictory red bars—perhaps even none.
Momentary episodes of consolidation may still appear, but they will be less distracting.
Simply put, if you are continuing to see blue candlesticks, most of them with large bodies, can generally feel confident staying in the trade.
Test it out!
Think of some trades you took in the recent past which had you in nice bullish or bearish trends which you closed out of early because of whipsaws or what falsely appeared as significant consolidation.
Try displaying those same charts with Heikin-Ashi candles. Go back to the start of them, and move them forward candlestick by candlestick.
What decision would you have made while trading if you had displayed this type of chart? Would you still have left the trade early?
You may very well find that the Heikin-Ashi candles would have told you to stay in, and that you would have been more profitable.
If you are looking at a Heikin-Ashi chart where you see red and blue bars alternating every few bars, and the bodies are small with the highs and lows protruding a ways, you can bet that you are not in a trend.
The market is likely consolidating, and there may be quite a bit of chop. As the bars get smaller, there might be an opportunity to trade a breakout, but if the highs and lows are all over the place, you probably want to sit it out until conditions smooth out a bit.
It can be challenging to figure out when you have reached a swing high or a swing low with a trend about to reverse, but it can be a bit easier when you display Heikin-Ashi charts.
Because candlestick colors do not shift as often during the course of a trend on Heikin-Ashi charts, a color change becomes more significant and easier to interpret.
So, say that you are in a trade during a bullish trend. Suddenly, you get a candlestick with a smaller body which is blue in color, followed by a similar one which is red.
This does not guarantee a reversal, but it may be a stronger sign of one than it would be on a traditional chart. So, you may want to think about exiting the trade.
A related scenario is one where you might be thinking of entering a trade.
Imagine, for example, that you are not currently in a trade, but you have just spotted a pinbar which appears well-formed, and that the market has been up-trending for some time.
This can be a confusing situation, because either of two things are possible:
1 - The pinbar may be forming a swing high, with a reversal and downtrend soon to follow.
2 - The pinbar is a brief hiccup, and the uptrend will continue. Such a pinbar is not in a good location for trading, but it is hard to know that until more candles have formed.
At this point, you can turn to moving average crossovers or other indicators to look for confluence.
At that point, whether you find it or not, you have a decision to make. And it can be very easy to get it wrong in either direction.
You might assume a reversal, enter the trade, and then get stopped out when the existing trend continues. Or, you might assume no reversal, sit out the trade, and then lose out on an opportunity when the reversal does take place.
Heikin-Ashi candlesticks may help to reduce some of the confusion and uncertainty of these moments and simplify decision-making.
If you have a bullish trend, and then you suddenly get a red pinbar on a Heikin-Ashi chart, that is a stronger signal to sell than if you were to get a blue one.
If you see that and you have some additional confluence, you might have a great setup in front of you, enabling you to get in on the new trend immediately at the reversal point.
One more thing you might be wondering is, “Should I use Heikin-Ashi charts by themselves from here on out, or will I lose valuable information without the regular charts?”
You could go either way. Averaging out price data does mean that you lose some information about what is going on. You are, in a sense, looking at a blurrier image.
But the assumption is that most of the “details” you are screening out are misleading distractions, and therefore should be blurred out.
In fact, if you decide to use both charts simultaneously, you could just end up confusing yourself with seemingly contradicting information at points.
This is the same issue with putting too many indicators on your chart and ending up with more noise than confluence.
Does that mean you shouldn't do it? Not necessarily, but it does mean that you should be aware that the drawbacks could outweigh the benefits of using both.
To figure out what is right for you, conduct backtests.
Remember, if you want finer detail in terms of information, you also always have the option of zooming in to a lower timeframe instead of switching to traditional charts.
This too is something to test. What works great for one trader may not suit another.
We have discussed the benefits of Heikin-Ashi charts, and how you can use these modified candlesticks to enhance your price action trading. But are there any disadvantages that you should be cognizant of?
As mentioned previously, if you do not have the actual market price displayed on your chart, you could get confused.
If you are looking at a traditional candle forming, the candle’s “close” will be in flux until it finishes forming. The “close” as you see it is the current price.
You might assume that such would also be the case for a Heikin-Ashi candle, but it is not. The averaging which is taking place behind the scenes mathematically means that the close you see for performing candle is not the market price.
How pronounced the difference is depends on what is taking place in the market. The gap is most dramatic during a powerful trend.
If you ignore the actual market price when you place a trade, this could lead to some serious mistakes.
Thankfully, the fix is quite simple. Just make sure that you have your chart set up to display the current market price. And remind yourself that the candle close is different.
Heikin-Ashi candlesticks can streamline your charts and simplify your trading. Just as Heikin-Ashi charts can smooth out how price is displayed, they should also be able to smooth out your analytical process and overall trading experience.
It takes some time to get used to using them, but once you do, you may discover that they make it much easier to interpret what is taking place in the market and make profitable trading decisions.
As with any change to your trading method, take the time to backtest and demo test trading on the Heikin-Ashi charts before you take them live. Best of luck, and continue browsing through our posts to keep learning more about price action.
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