How to Trade with Heikin Ashi Chart Pattern?

Heikin Ashi Candlestick

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 to as Heikin Ashi (HA).  This pattern is less noisy than the normal candle. In the 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. It includes this gap calculation in it and smoothly shows the average speed of market movements.

The common FAQ on Heikin Ashi

What is the Heikin Ashi Chart?

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.

How do you use Heiken Ashi indicator?

In HA we just trade with the color. Here, the theory is quite simple, the red candle indicates the market is going down while green shows the uptrend in the market. So accordingly we can take a position.

What is the difference between Heiken Ashi and candlestick?

HA candles are not like normal candles. It’s color-coded and a much noise-free version of the candlestick chart. If we check the HA chart side by side to the normal candle we can check it filters out the noise to a large extent. We will see more in the coming examples.

Calculation and Example

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 HA candle’s OHLC information is based on previous calculation.

Heikin Ashi Chart

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, HA open, HA 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.

(open+high+low+close)/4

How to Trade with Heikin Ashi Candlestick Chart Pattern:

If you understand the pattern clearly, you will find it easier than a normal candlestick chart pattern. There are a few points to remember that will make your analyzing process easier.

  • Firstly, you need to concentrate on the color of HA. The red color candle indicates the market trend is in a negative way, therefore, the selling pressure is higher. On the other side, the Green color candle shows a positive or bullish trend in a market, buyers’ demand is high here.
  • Secondly, by noticing the tailor shadow, one can get an overview of the current market trend. If the 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.
HA Candlestick

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 the 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.

How to Attach Heikin Ashi Chart to a Symbol?

To attach HA candles to any symbol on a trading platform like Zerodha Kite, simply click on Display and select Heikin Ashi. Check the image given below.

How to Attach Heikin Ashi Candlestick

Another Example

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 an Example of Lupin. Now, I am proving the same company’s chart after applying Heikin Ashi candlestick.

heikin ashi candlestick chart

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.

Key Points of the Heikin Ashi

Heikin Ashi
  • Green candles along with no shadows indicate a strong uptrend.
  • Green candles indicate an uptrend, here, one can add a long position and exit short positions.
  • Small body Candles surrounded by upper and lower shadows. This indicates a trend change.
  • Red candles indicate a downtrend. Here, one might want to add to one’s short position and exit long positions.
  • Red candles with no upper or lower shadows imply a strong downtrend.
  • Long down candles along with little upper shadow represent strong selling pressure and vice versa.
  • A long hollow Heikin-Ashi candlestick indicates strong buying pressure over a two day period. On the other side, the absence of a lower shadow also reflects strength.
  • Small Heikin-Ashi candlesticks with long upper and lower shadows mean indecision over the last two days. This often happens when a candlestick is filled and the other is hollow.
  • The Heikin-Ashi methods use a modified formula depends on two-period averages. This provides the chart with a smoother appearance. This is making it easier to spots trends and reversals, but at the same time obscures gaps and some price data.
  • One of the main advantages is that the chart is much “smoother” looking. It helps to more easily identify the trending direction.
Heikin Ashi

One of the most important points is if you use the Heikin Ashi Candlesticks with other indicators, the result will be more effective. Like here, I use the SuperTrend indicator to get more powerful signals. As you can see, during the buying trend, some of the HA candles appear red but as the SuperTrend (10,3) buying signal is on, it indicates an upcoming bullish market.

The Secret SuperTrend Settings

The default parameter of the SuperTrend in the Zerodha Kite is 7, 3. I have played a bit with these default settings. I doubled 7, i.e, 14 and I halved 3, i.e, 1.5. So I got a setting of 14, 1.5 in the SuperTrend indicator. I have checked this works like a charm when we use with Heikin Ashi chart. Check the image below.

Secret SuperTrend Settings

So, in simple words, by using the Supertrend indicator, you can avoid some false signals on Heikin Ashi.

Conclusion

These are some of the most important points of the 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 the candlestick chart is based on the previous trend of the market.

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Author: Ankita Sarkar

Ankita is a graduate in English language and she has also done her MBA from the Calcutta University. She has a high knack in the stock markets. She is a NISM certified Research Analyst. An experienced stock market content writer Ankita is also trading successfully on her own account.

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