Heikin Ashi, The Underrated Secret From Japan

Nope, it is not the name of some mystic fighting technique coming out of Japan, just some modified candles. Don’t let the word “just” fool you, because these sweet candles can bring a lot to the table. At first glance, Heikin Ashi candles look much like normal candlesticks, but their calculation is different than the one used in traditional Japanese candlesticks which just display Open, High, Low and Close prices. Let’s dig deeper.

How To Use Heikin Ashi Candles

Do not worry, I will not go into the mathematical territory and explain the formula used, instead, I am just going to tell you that Heikin Ashi candles are drawn on the chart by relating to the previous candles and their main advantage is noise cancellation. Yes, noise, the thing that makes us close early trade because we’re afraid that price will reverse; they offer a much smoother representation of price action.

If you don’t believe me, just scroll down and look at the pictures to see the difference between a traditional candlestick chart and a Heikin Ashi one. Trends become much easier to spot early and the simplicity of using this type of candles is outstanding: as soon as you have a closed bullish candle, you can open a Buy/Call trade or a Sell/Put trade after a closed bearish Heikin Ashi candle.

Here are two pictures that clearly show the difference between a traditional Japanese candle chart and a Heikin Ashi chart:

 
You can notice that in the second picture, the representation of the price is smoother and the color of the candles keeps us in the trade for a longer period. More than that, it also keeps us out of a bad trade. The best way to use Heikin Ashi is to trade in the direction indicated by their color and once that color changes, close early the trade and even take the opposite direction. Like any other tool, Heikin Ashi needs confirmation from other market factors like Support and Resistance or an indicator that shows overbought and oversold levels.

Trading FX, CFD, Crypto And BO With Heikin Ashi

Basically the only difference is that for FX and CFD you will open Buys and Sells and for BO you will use Calls and Puts. Of course, this is not a complete trading system, just another type of candlestick that acts as an indicator. And just how is the case with all indicators, they must be used in conjunction with one another so that you get accurate signals.

It can be a good idea to close an FX/CFD trade if the Heikin Ashi candles change colors, or at least to take some profit off the table (close only part of the position if the trading platform allows it). As for BO, it may be good to use “close early” (this feature can have different names on different platforms) if the candle changes color. But these are just suggestions and all trading decisions should be taken according to a meticulously pre-planned strategy/system.

Why Heikin Ashi Candles Sucks?

Sometimes, because they use averages in the calculation, Heikin Ashi candles can be a bit late, but this also keeps us from getting out too early so I don’t really see it as a big disadvantage. One thing that bothered me when I first started using this type of candles was the fact that I couldn’t see candlestick patterns like the Hikkake, the Shooting Star or any of the traditional patterns. I got used to it pretty quickly but maybe hardcore candlestick pattern users will find it bothersome. To avoid that, just use two charts, one with Heikin Ashi and another with traditional candlesticks. Problem solved!

Why Heikin Ashi Candles Don’t Suck?

Using this type of candlesticks is one of the best ways to smooth out price movement and eliminate some of the emotions in trading. As long as Heikin Ashi candles don’t change color, you know your trade is going the right direction. Because the candles are interconnected through mathematical calculations, they offer a much clearer view of price action and are not just a standalone representation of price like traditional candlesticks. Another advantage is the fact that most charting packages already have Heikin Ashi as a default indicator so you don’t have to look for them online. One last thing: how can something with such a cool name, suck? Heikin Ashi candles are in the same league as Ninjas and Samurais – they definitely don’t suck!

Wrapping It Up

The most important thing one must learn is not how to use them because that is easy: blue candle – Buy/Call; red candle – Sell/Put, but to trust them and follow their signals even if a traditional candlestick chart shows indecision or even reversal candles. However, I cannot iterate enough: you need to use these candles in conjunction with price action analysis, or other indicators/tools. Just blindly following the color change won’t get you rich… unless you are a very lucky guy.