How To Trade with Heikin-Ashi Candlesticks

Traders have an array of indicators to look to when it comes to identifying setups, patterns, trends and reversals. These are all viewed on a price chart, which is arguably the most important piece of information a trader can have. Heikin-Ashi (HA) is a charting technique that is often overlooked, but offers valuable insights for those who know how to put this derivative of Japanese candlesticks charts to good use.

What is Heikin-Ashi?

Heikin-Ashi candlesticks are an offshoot of Japanese candlesticks, a form of charting developed in Japan by Munehisa Homma in the 1700s.

The purpose of HA charts is to filter noise and provide a clearer visual representation of the trend. For new traders the trend is easier to see, and for experienced traders the HA charts help keep them in trending trades and able to spot spot reversals, while still being able to see traditional chart pattern setups.

How Does It look?

Heikin-Ashi price bars are averaged, so each one won’t reflect the exact open, highs, lows and closes for that period like a normal candlestick would. HA candles are calculated using the following formulas:

HA Close = (Open + High + Low + Close) / 4
HA High = Maximum of High, Open, or Close
Low = Minimum of Low, Open, or Close
Open = (Open of previous bar + Close of previous bar) / 2

Figure 1 shows an uptrend on a AAPL candlestick daily chart, while Figure 2 shows the same chart in Heikin-Ashi. All charts created using StockCharts.com

Daily Apple Candlestick Chart
Figure 1. Daily Apple Candlestick Chart

There are several differences noticeable immediately on the Heikin-Ashi below relative to the candlestick chart above.

See also How to Read Stock Charts

Daily Apple Heikin-Ashi Chart
Figure 2. Daily Apple Heikin-Ashi Chart

The differences include:

  • The Heikin-Ashi chart appears smoother, making the short-term trend easier to see.
  • There are no gaps on the Heikin-Ashi charts since the current price bar uses the prior price bar in its calculation.
  • Heikin-Ashi charts don’t reflect the most recent price; because of averaging, the price on the right of the chart will be different than the last transaction price.
  • Many traditional candlestick chart patterns aren’t as effective on the Heikin-Ashi charts due to the averaging.

There are some similarities though:

  • Both are highly visual.
  • Some candlestick patterns are still relevant, such as Dojis, which show indecision.
  • Traditional chart patterns, such as head and shoulders and triangles, are tradable on both types of charts.
  • Big down bars with little or no upper shadow signify strong selling pressure.
  • Big up bars with little or no lower shadow signify strong buying pressure.

How to Interpret Heikin-Ashi

Heikin-Ashi charts help traders view trends and spot potential reversals. Therefore, they are most applicable to trend traders. The figures below show how to interpret bullish HA candles and bearish HA candles in context of uptrends or downtrends.

The HA candles change dramatically in appearance when a strong trending move is underway relative to pullbacks. Upward trending moves typically have long upward (in this case, white) candles with very little or no lower shadows.

The shadows are the thin lines that extend out from either side of the fat part of the candle – called the real body. These shadows represent the maximums and minimums of the Low, Open, Close and High (see formula above). When a strong uptrend is underway, and the buying is aggressive, the lower shadows (sticking out the bottom of the real bodies) will not typically appear.

During pullbacks or weak trending moves there are interspersed down (red) bars, as well as lots of bars with lower shadows. This doesn’t necessarily indicate a reversal, but it does mean the trend is in a corrective phase or slowing.

Heikin-Ashi Bullish Candlestick Interpretation
Figure 3. Heikin-Ashi Bullish Candlestick Interpretation

The same concepts apply to downtrends, except strong down trending moves will be composed of HA price bars with little or no upper shadows. The bars will also typically be long and moving lower (red in this case).

If there are up bars (white) interspersed, or lots of bars with upper shadows, the trend is either very weak or the price is in a corrective phase.

Heikin-Ashi Bearish Candlestick Interpretation
Figure 4. Heikin-Ashi Bearish Candlestick Interpretation

Typically during strong trending moves we see strong up bars with no lower shadows for an uptrend, and strong down bars with no upper shadows for a downtrend.

Just because one up candle, or a couple of candles with upper shadows, appear during a downtrend doesn’t mean the trend is reversing – it may just be pausing. The same is true for uptrends.

See also Trend Trading 101

To spot reversals or trend continuations there needs to be a breakout, or a major shift in price just like what is required with traditional charts.

Using what we know about strong trending moves and weak trending moves from above, combine it with other technical analysis concepts, such as trendline breaks, to spot reversals.

Combining Heikin-Ashi with Technical Analysis
Figure 5. Combining Heikin-Ashi with Traditional Technical Analysis to Spot Reversals

How to Trade Heikin Ashi

Like using other types of charts, trading on Heikin-Ashi charts requires finding an entry, a stop loss location to limit risk as well as a profitable exit point.

Since HA charts make it easier to spot trends and isolate pullbacks the charts are great for trending trading.

Figure 6 shows a downtrend. The trending moves are easily separated from the pullbacks due to the color changes. Due to the averaging, the pullbacks are also often easy to mark with trendlines. When the price breaks back below the trendline, it indicates the trend is continuing and a short trade can be initiated. A stop loss is placed just above the recent high and profit can be taken when an up bar occurs, or at a pre-determined profit target.

Active Trading with Heikin-Ashi
Figure 6. Active Trading with Heikin-Ashi

Getting in and out in this fashion isn’t for everyone. Longer-term traders can use one of the entries, but then stay in the trade for as long as the trend persists. Using long-term trendlines can aid in this regard. Stops are still utilized in a similar fashion when entering.

Longer-Term Trading with Heikin-Ashi
Figure 7. Longer-Term Trading with Heikin-Ashi

Chart patterns are also tradable. Figure 8 shows a triangle pattern which developed following a strong move higher.

Heikin-Ashi Chart Pattern Trading
Figure 8. Heikin-Ashi Chart Pattern Trading

The Bottom Line

Heikin-Ashi charts appeal to traders because trends are easier to spot and the way the bars are calculated creates a smoother appearance. Traditional forms of technical analysis and chart patterns can still be used and traded with HA. Long up bars with no lower shadows, or long down bars with no upper shadows signify strong up and down trends respectively.

HA charts won’t show the current price on the y-axis due to averaging. Also, many traditional candlesticks patterns will lose relevance due to the smoothing.

Trading on Heikin-Ashi charts is similar to trading on other charts. Focus on trading in the direction of the overall trend. Use HA price bar characteristics to determine trend strength, when the trend is slowing down and apply other technical analysis concepts (such as trendlines) to isolate major price reversals. Apply stop loss orders to trades, and use slowdowns in the trend as exit points, or wait for a major reversal if a longer-term trader. Pre-determined profit targets can also be used.

Cory Mitchell