In the 1700s, there was a genius Japanese rice merchant named Munehisa Honma, known as the ‘the god of markets.’ Honma traded during the emergent rice market with the use of coupons which promised future delivery of the commodity.
This is an early example of futures trading, but this isn’t all Honma is known for. He is widely credited as the godfather of Japanese candlesticks and Heikin Ashi candles. Most traders, especially those in forex, are pretty familiar with ordinary candlesticks.
Heikin Ashi charting shares many similarities with its counterpart but has a few unique elements that we’ll explore further here.
What are Heikin Ashi candlesticks?
Heiken Ashi is simply a modified or average-weighted Japanese candlestick chart that uses a different formula for calculating prices. Let us first look at the four price points offered by regular candlesticks.
Heikin Ashi presents the same OCHL (open-close-high-low) information, except the mathematical calculation applied to it differs. The result of applying the Heikin Ashi formula is smoother-looking and less noisy price action. Below is an image demonstrating the differences between Heikin Ashi vs candlesticks.
The top section shows Heiken Ashi candles, while the bottom portion has regular candlesticks. While both charts look almost identical, there is a subtle but significant difference. Ordinary candlesticks are more intricate, showing every little candle pattern.
This is because they reflect the OCHL in its raw form without any smoothing or averaging factor. So, with Heikin Ashi charts, you’ll notice that they will have more green or red candles in spots where the regular candlesticks will have a mixture of random green and red candles. This representation offers ‘cleaner’ trends.
Heikin Ashi candlesticks are particularly useful in strong directional movements. When dealing with normal charts, you may have whipsaws or false signals. On the other hand, there is less of this noise with Heiken Ashi charts.
Of course, you can use Heikin-Ashi for various charting purposes like support and resistance, plotting trend lines, and so on.
Another distinction between Heikin Ashi vs candles is the price scale. A typical chart will only show the current price for an asset. On the other hand, some charting platforms will show two: the first depicts the present value, while the other is the average from the Heiken Ashi formula.
How to use Heikin Ashi candlesticks
When viewing a candles vs Heiken Ashi comparison, reading the two charts is identical as both show the open, close, high, and low prices. Traders utilize this data to compare it with the previous session and gain a sense of the likely dominant strength in the next period.
Similarly, a green-bodied candle with little to no wick signals a strong bullish force, while a red-bodied candle with little to no tail suggests strong bearish pressure.
Heikin Ashi candlesticks have one primary purpose: to stay in trends for longer as they persist. As previously mentioned, the candle structure with Heikin-Ashi is more uniform. A standard candlestick chart shows an array of formations, some of which are unnecessary.
For instance, you may get a mix of green and red candles during a retracement. This structure may give the impression that the trend is ultimately correcting itself.
However, a Heikin Ashi chart will typically show the same overall candle colour, suggesting that the movement may be poised to continue. A common occurrence is watching for a sequence of candles with no shadows or tails, indicating powerful trends.
We know that you gain massive profits when markets are trending nicely. The key is the patience to remain with them without being rattled by noise. Heikin Ashi candlesticks can help you avoid these scenarios.
Pros and cons of Heikin Ashi candlesticks
Like conventional Japanese candlesticks, these candles are readable, work across all time frames, combine with other technical tools, and, of course, are visually aesthetic. Yet, the primary benefit is their smoothing effect which filters market noise.
This quality reduces the appearance of unnecessary corrections so you can identify the true trend. However, this stripped-down feature is both a blessing and a curse. Heikin Ashi candlesticks are not detailed enough for price action traders analyzing intricate formations like Doji stars.
In simple terms, these charts are like a summary, while Japanese candles give more context and detail to market movements.
Another notable drawback is that Heikin-Ashi can only help traders spot trends after they happen. As mentioned previously, these charts work best with strong trends. In other scenarios where there is no trend but instead range, Heikin Ashi candlesticks are less valuable.
Also, because these charts are so trend-friendly, it can be harder for traders to analyze potential reversal situations.
Candlesticks, whether regular or Heikin Ashi, are the most versatile chart types for traders, which they can use interchangeably. Consider Heikin Ashi charting if you anticipate a parabolic-like movement. In other scenarios, ordinary charts are enough to do the job.