What is Heikin Ashi?

Heikin Ashi is a Japanese trading chart that is very similar to candlestick charts. Their most notable similarity is the colour of candlesticks which indicate the price movement direction. Also, both of them have patterns that can help traders predict future prices. However, there are some differences and between the candlestick chart and Heikin Ashi charts. Heikin Ashi charts use average price movements, and they have a smoother appearance. You cannot see the accurate opening and closing prices on Heikin Ashi charts for a specific time period because they use average bars.

Heikin Ashi was created in the 1700s by Munehisa Homma who was also the creator of the candlestick charts. HA is a technical indicator, and it helps a trader make sure of confirmation of trend direction. They can even show us the current trends in the market. That is why many swing traders or investors use HA charts.

How to calculate Heikin Ashi

Since Heikin Ashi charts calculate average values, they make price activities look smoother. Each Heikin Ashi (HA) chart calculates open (HAO), close (HAC), high (HAH) and low (HAL) prices. The acronyms are made of the first letter of each word. Here you can see the formulas to calculate each of them:

Close = (open + high + low + close) / 4

Open = (open of precious bar + close of previous bar) / 2

High=The highest value of a recent high, open, or close.

Low=The lowest value of the recent low, open or close.

As you can see, each one has a specific formula, and that is why you cannot see the opening or closing prices at any time period. This makes some problems for day traders because they really need to know it to make a successful trade. That is the reason they just use the HA chart as an indicator. As we said before, swing traders or long-term investors do not really need the exact opening or closing prices, especially when their positions are going to stay open for weeks.

Based on the above formula, it is obvious that each candle is calculated with a delay. Therefore the signals that HA provides have a lagging nature. Heikin Ashi charts work better concerning trading volatile assets because they eliminate noises, false breakouts and false entry point signals. But the main problem is that they do not usually provide a good signal on low volatile markets. In addition, since the low number of provided signals are lagging, they are not reliable.

Benefits of using Heikin Ashi

Although HA does not show us the exact prices, it has great benefits for us. The smooth shape of them helps us recognize the trends without any difficulty. Their colours are like the candlestick charts, and the green bars show an increase in the price of an asset. However, the red bars indicate that the price is falling. You are free to choose other colours, but by default, they are green and red.

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The candlestick bars have many ups and downs, and they are continuously changing colours. The Heikin Ashi charts use the same bars, but these bars do not change their colours very fast, and they keep colour for a longer period since they use average values. This will help traders, and they can be easily aware of the confirmation of trends.

How to use Heikin Ashi charts

You can use these charts in different markets, and most trading platforms offer them to you. When using these charts, you may encounter five main signals that help you find trends or buying opportunities. First, green candles that have no shadows show you a powerful uptrend. Second, green candles are a sign of uptrends. You can open a long position, increase its size, or close your short positions to maximize profits. Third, the candles with a small body and two shadows in both directions show you that trend will change. You can either start your trades based on your predictions or wait for trend confirmation. Fourth, red candles show a downtrend, and you should close long positions and add to your short positions. And finally, the fifth item is related to red candles that have no higher shadows. They show you a powerful downtrend.

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Such signals help you find trends and make trading easier for traders compared to candlesticks. They also provide you less false signals, and they can be recognized easier. These charts help traders stay in a trend. It is recommended to stay in a trend until the colour of HA candles changes. But be careful, since a colour change does not always mean that the trend is going to change.

Conclusion

We cannot say that one chart is better than the other for a specific reason and each of them offers you their own benefits. Some people may like Heikin Ashi charts because of their abilities to help you identify trends, or some others may prefer candlestick charts and different details. You can choose either of them based on your style of trading and strategies.