Previously we discussed normal candlestick chart pattern in our site but today we will cover another variety of candlestick pattern that is Heikin Ashi Candlestick Chart Pattern, sometimes also referred as Heiken Ashi. This pattern is less noisy than the normal candle. In currency market due to its continuation, gap up and gap down come very often but in the commodity market and the stock market, this gap up-down comes regularly. Due to this gap, some indicator gets confused in normal candlestick. Heikin Ashi includes this gap calculation in it and smoothly shows the average speed of market movements.
First of all, you need to understand the term “Heikin Ashi” to make the concept clear. This is a Japanese word which means “Average Speed”. Therefore the pattern reflects the average status of the market speed. So, you can refer to this pattern as a modified candlestick chart pattern.
I have described earlier in our previous content that each normal candlestick consists of four main prices open, high, low, close. These prices are based on today’s calculation but Heikin Ashi candle’s OHLC information is based on previous calculation.
The Formula of OHLC in Heikin Ashi Chart Pattern:
- Opening Price- Mid-point of the open and close of the previous bar is the opening price of a Heikin Ashi candlestick.
(Open of the previous bar+Close of the previous bar)/2
- High Price- High is the maximum value of the three data points, the current period high, Heikin Ashi open, Heikin Ashi close.
(Max of Current period high, HA open, HA close)
- Low Price- Low is the minimum value of the three data points, the current period low, Heikin Ashi open, Heikin Ashi close.
(Min of Current period low, HA open, HA close)
- Closing Price- It is the average of OHLC for the current period.
How to Trade with Heikin Ashi Candlestick Chart Pattern:
If you understand the pattern clearly, you will find it easier than normal candlestick chart pattern. There are few points to remember that will make your analyzing process easier.
- Firstly, you need to concentrate on the colour of HA. Red colour candle indicates the market trend is in a negative way, therefore, the selling pressure is higher. On the other side, Green colour candle shows a positive or bullish trend in a market, buyers’ demand is high here.
So, the theory is quite simple, red candle indicates the market is going down while green shows the uptrend in the market.
- Secondly, by noticing the tail or shadow, one can get an overview of the current market trend. If red candle appears with no shadow on the top, it means the market is going down soon and forms a bearish trend. Oppositely, a green candle with no shadow at the bottom indicates an uptrend is coming soon and the market will go up.
You will also see some candles with shadows on both side of them that reflects there is some confusion going on or an average price movement is currently visible in the market.
- Thirdly, a Red candlestick with no shadows on the top means the price is below the average than yesterday. Green candlestick with no shadow at the bottom shows the price is above the average than yesterday.
- If you are familiar with candlestick chart pattern, you know that there are various types of candlesticks available in it but in Heikin, Ashi there are two types of candlesticks are there. These are Doji and Spinning Top candle.
Doji or Spinning Top candle comes with a reverse trend in the Heikin Ashi pattern.
I am giving an example of Lupin Limited by applying the Heikin Ashi chart pattern. A few days back I have written a write-up on Double Bottom Pattern with Example of Lupin. Now, I am proving the same company’s chart after applying Heikin Ashi candlestick.
The above chart is taken from Zerodha Kite. As you can see that the last candle is a green candle and there is no shadow at the bottom of the candle which means the market is in an up-trending process right now. You can also identify some Doji and Spinning Top just before the reversal points.
These are some of the most important points of Heikin Ashi candlestick chart pattern. By following this, you can easily monitor the market trend without facing the extra noise. One thing you must remember that normal candlestick forms by today’s current value while Heikin Ashi candlestick chart is based on the previous trend of the market.