TIPS & Information for using Heiken Ashi

Disclaimer:

I have not created any of this information. Some of it has been around for decades, some longer than
that. What I have done is put this document together with what I believe to be beneficial for us with our
particular trading strategy. All of this information can be looked up at different places via the internet.

Cheat Sheet: ULTIMATE GUIDE to Trading with Heiken Ashi Candles

The Heikin Ashi chart will resemble a typical Japanese Candlestick chart, however there are
nuances
that make reading the Heikin Ashi candles a bit different than the traditional candlestick
chart.

Each Heikin Ashi candle has an open, close, high and low. Therefore, there are four
segments of the
Heikin Ashi formula:

Open = [Open (previous bar) + Close (previous bar)]/2

The close of each Heikin Ashi bar equals to the average level between the four
parameters –
open, close, high, and low:

Close = (Open+High+Low+Close)/4

The highest point of a Heikin Ashi candle takes the actual high of the period. This
could be the highest shadow, the open, or the close.

High = Max Price Reached

The lowest point of a Heikin Ashi candle takes the actual low of the period. This
could be the lowest shadow, the open, or the close.

Low = Min Price Reached

The general idea behind the Heikin Ashi bars is that they smooth the price action. As a
result, much of the noise shown in traditional Japanese Candlesticks is eliminated with
Heikin Ashi charting. Now
let’s compare the price chart using a Japanese Candlestick chart and a Heikin Ashi chart:
 Trend detection is one of the main functions of this type of charting style. The Heikin Ashi
trading
style puts an emphasis on persistent trends. Small corrections and consolidations are left
behind and they are barely visible on the chart.

Many traders combine the smoothing benefits of the Heikin Ashi chart with a trailing stop
indicator to get the most of out a trending market condition.

Bullish Heikin Ashi trend is built primarily by bullish candles and is absent of lower
candlewicks.
When the price is shooting up, the price action creates very little to no lower shadows.

A strong bearish trend on the Heikin Ashi graph has very little to no upper candle shadows.

Heiken Ashi charting is very powerful when combined with price action analysis. Look
for the emergence of new trends, or for the reversal of already existing ones. Look for
support and resistance levels and important swing points, and keep in mind that
these could act as future turning points on the chart.

Some of the common patterns formed on the Heikin Ashi chart include - Doji Reversal
Candlestick, Triangle Patterns, and Rising Wedge and Falling Wedge Patterns
Using Heikin Ashi

If your goal is to catch longer and persistent trends, then using a Heikin
Ashi chart will help you toward that end. Trend detection is one of the main
functions of this type of charting style. The Heikin Ashi trading style puts
an emphasis on persistent trends. Small corrections and consolidations are
left behind and they are barely visible on the chart. You will notice that
when the direction changes on a Heikin Ashi graph, the price most likely
starts a new move. This helps to distinguish between the potential
beginning and the end of a currency pair trend.

Since chart noise is filtered, you basically see the naked trend. Using a
trailing stop is a good trade management tool to pursue in a trending
market. As a result, many traders combine the smoothing benefits of the
Heikin Ashi chart with a trailing stop indicator to get the most of out a
trending market condition.

Another way to use a Heiken Ashi graph is to look for chart patterns and
apply price action rules. In most cases this works the same way as with
traditional Japanese candlesticks. But you will find that Heiken Ashi
chart pattern breakouts are sometimes more reliable than traditional
candlestick charts.

Heikin Ashi Trends

As we have pointed out, the ease of trend identification is one of the major
benefits of using a Heikin Ashi chart. With a Heikin Ashi chart you can
confidently distinguish strong trends from unsustainable price action. Let’s
take a look at some examples of trends – both bullish and bearish – using
the Heikin Ashi price graph.

Bullish Heikin Ashi Trend

At first glance, the bullish Heikin Ashi trend looks like a normal Japanese
candlestick trend. However, you will notice that the Heikin Ashi trend is
built primarily by bullish candles and is absent of lower candlewicks. When
the price is shooting up, the price action creates very little to no lower
shadows.

Below you will see a strong bullish trend on a Heikin Ashi chart:
See the strong bullish trend that is marked in blue. Notice that there are
only a few lower candlewicks on the way up. This means that this bullish
trend is very strong.

Bearish Heikin Ashi Trend

The bearish Heikin Ashi trend has the same functions as the bullish one but
in the opposite direction. This means that it is built mainly by bearish
candles. Also, a strong bearish trend on the Heikin Ashi graph has very
little to no upper candle shadows. Now let’s see how the bearish Heikin
Ashi trend appears:
This time we have noted a bearish trend on a Heiken Ashi chart. The
decrease is marked with blue on the image above. See that the bearish price
action has no upper candle wicks. This indicates that the declining
momentum is very strong.

Heikin Ashi Patterns

Now we will discuss three patterns which are commonly found on a Heiken
Ashi chart.

Doji

The first pattern we will start with is the Doji reversal candlestick. The Doji
candle appears when the price closes at the same level where it opened. As
such, the candle has no body and it essentially looks like a dash. The Doji,
when it appears after a directional move, has a reversal potential and
indicates that the price action is stalling and might be poised to start
a counter trend move.
Above you see a Heikin Ashi chart, which shows three price swings –
bearish, bullish and bearish again. The first starts the bearish price swing
down. At the end of this price swing, we see a Doji candle. The direction
reverses afterwards. Then comes another Doji candle pattern at the top of
the bullish move. The price action reverses again to start a fresh bearish
move.

Triangles

Triangle patterns are commonly found on the Heikin Ashi chart as well.
The important point here is to follow the direction that the price action
breaks through. If the Heikin Ashi price action breaks the upper level of the
pattern, this signals that the increase will likely be extended. If the price
action breaks the lower level of the triangle, then we anticipate the price to
start a new bearish move.
On the chart above, you can see an Expanding Triangle pattern (blue). Then
the price action breaks the lower level of the triangle and completes the
minimum target of the pattern, based on the measured move calculation.

Wedges

The other pattern that is often found on the Heikin Ashi chart is the Wedge
pattern. There are two types of Wedge patterns – Rising Wedge and Falling
wedge.

It is important to mention that the Rising Wedge has bearish potential.

Contrary to this, the Falling Wedge has a bullish potential. Let’s take a look
at how a Wedge looks on the Heikin Ashi chart:
In the chart above, we have a Rising Wedge chart pattern. The price breaks
the lower level of the Wedge to start a fresh bearish move. The minimum
target gets reached within a couple of bearish price swings.

Heiken Ashi Chart Analysis Examples

Let’s take a look at a couple of trading examples which can help you better
understand trading with Heikin Ashi.
You see a bearish trend at the beginning of the chart. Suddenly, a Doji
candle appears and the price action reverses. You have a buying
opportunity when the price reverses after the Doji candle. The stop loss of
your trade should be located below the lowest point created at the time of
the reversal. The optimal place of the stop is shown with the red horizontal
line at the bottom of the chart.

A Doji candle after the down move on the Heikin Ashi chart implies that the
price action is likely to reverse or at least stall the downtrend. A big bullish
impulse appears afterwards. Then the price reverses. Notice that the
reversal resembles a bullish Flag pattern.

At the end of the flag we see the creation of another Doji candle. The price
action breaks the upper level of the Flag afterwards and shoots up again.
The scenario repeats afterwards. A new flag appears and a new breakout
occurs through the upper level. A third bullish impulse is created. On the
way up the price consolidates in a triangle. The upper level of the triangle
gets broken and the price resumes the bullish move.

The exit from the trade comes when the Heikin Ashi price action
creates Descending Tops on the chart. This pattern implies that the overall
bullish trend might be reversed.

Let’s now dissect another example of trading with Heiken Ashi candles:
The orange lines on the chart show a Head and Shoulders chart pattern.
Also note the magenta colored neckline plotted. Prior to the creation of the
second shoulder we see that the Heikin Ashi price action creates three
bearish candles with no upper shadow. This implies that the bullish trend
might be in jeopardy. There is a nice short trading opportunity on the chart
at the moment when the price action breaks the neck line to the downside.

The stop loss order of this trade should be placed above the second
shoulder of the pattern. This is shown with the red horizontal line on the
graph.

The price action enters a sharp bearish trend afterwards. The measured
move target was completed quickly, but you may not want to close the trade
when the price is still trending sharply in the bearish direction. Here it
would have proved to be better to hold the trade for further profit.

Suddenly, the price action decreases the intensity of the bearish move. The
sharp decrease turns gradually into a Falling Wedge chart pattern. The exit
from the trade should come at the moment when the Heikin Ashi price
action breaks the upper level of the Falling Wedge pattern.

Notice that both trades were completed using pure price action analysis and
nothing else. This is absolutely possible and usually the best method for
trading with a Heikin Ashi chart.

Conclusion

 Heikin Ashi is a unique chart type, which consists of candles with a

specific calculation.
 The Heikin Ashi Formula consists of four calculations, which respond
to Open, Close, High, and Low:
 Open = [Open (previous bar) + Close (previous bar)]/2
 Close = (Open+High+Low+Close)/4
 High = Max Price Reached
 Low = Min Price Reached
 Despite the different calculation, the Heikin Ashi bars look similar to
Japanese Candlesticks. The untrained eye might even mistake the two
charts for one another.
 The Heikin Ashi chart puts emphasis on the average price action and
in this manner on trends. This type of chart smoothes the price action
 and filters the chaotic peaks and troughs and the price action in
general.
 Benefits of using Heikin Ashi:
 The Heikin Ashi chart helps a trader to catch a bigger trend
rather than a small price move.
 The candles put emphasis on persistent tendencies rather than
small fluctuations.
 Since the Heikin Ashi show naked trends, they can easily be
pursued with a Trailing Stop order.
 There are two important aspects to keep in mind on a Heikin Ashi
chart:
 Bearish Trends – They are created almost exclusively by bearish
candles. Strong bearish trends tend to have no upper shadows
in the candles.
 Bullish Trends – They are created almost exclusively by bullish
candles. Strong bullish trends tend to have no lower shadows in
the candles.
 Some of the common patterns formed on the Heikin Ashi chart
include:
 Doji Reversal Candlestick
 Triangle Patterns
 Rising Wedge and Falling Wedge Patterns
 Every Heikin Ashi trading system should include price action rules:
 Look for Support and Resistance levels.
 Look for chart patterns for potential breakouts.
 Hop into emerging trends and exit on slowing trends.