The Heikin Ashi chart is a technique used for seeing the price action with more clarity and less “noise.” Mainly because its calculation comes from the average pace of prices. Therefore, providing the opportunity to spot market trends clearly and eventually better predict the future prices.
Best of all?
The Heikin Ashi is reliable in the sense where it allows the traders to better translate the trends on candlestick charts. And help you to find good entry points through the displays of potential reversals or breakout. When applying the Heikin Ashi in crypto trading, it helps users to critically analyze the intense market volatility into valuable information. That’s also because it helps define and highlight the state of the market with objectivity and provides a solid base to establish an investment commitment.
In fact, if the Heikin Ashi patterns (such as wedges, triangles, and doji) are used in conjunction with the knowledge of the state of a trend, the results are quite impressive.
Here are the main concepts that will help you understand the Heikin Ashi candles. Perhaps, also some useful trading strategies using the Heikin Ashi to help you make your first pot of gold.
What Is Heikin Ashi Chart in Technical Analysis?
Yes, Heikin Ashi sounds like Japanese. In fact, it is and it’s one of the oldest technique developed in the 1700s to represent and visualize the market price data. Whereas the Heikin Ashi chart is a form of a graph that displays derivations of high, low, open, and closing prices of a cryptocurrency for a specific time frame. The main difference that differs Heikin Ashi from the rest is it is used in how candlesticks are calculated and plotted on a chart. While the Heikin Ashi calculation of the OHLC prices will be detailed throughout this guide.
Besides the Heikin Ashi chart, crypto traders’ most popular chart types include the line chart, bar chart, and the candlestick chart.
Understanding the Purpose of Heikin Ashi
While Heikin Ashi is excellent to spot trends, Heikin Ashi must still be used in conjunction with other elements to unlock its potential. These elements include the price action (Heikin Ashi Patterns) and each of the candles’ behavior within the overall context.
It turns out that Heikin Ashi candles by themselves don’t offer an edge. Therefore, they must be analyzed in the context of the general market trend.
Nevertheless, here are some aspects to give you an idea to fully comprehend the concept.
First of all, you need to know a Heikin Ashi candle has a body and an upper with or without a lower shadow (wick).
A Heikin Ashi with a green body with no lower wick represents a strong uptrend. However, suppose a lower wick starts to present. In that case, the upward momentum is likely to decrease. And it is possible to signal a price reversal or at least a correction in the price of any crypto assets.
On the other hand, a Heikin Ashi candle with a red body with no upper wick represents a strong downtrend. Notwithstanding, just as in the previous scenario, if an upper wick shows up, then it is likely that the downward momentum is decreasing. Subsequently, a corrective movement or reversal could present shortly.
So, what if there’s a group of red candles?
If that happens, it represents a downtrend, and a group of green candles represents an uptrend. See the example below on the 30-minute time frame for Bitcoin against the US dollar, where both scenarios are presented.
The size of the Heikin Ashi wick can signal possible shifts in momentum. As a general rule, small Heikin Ashi wicks followed by wide-ranging wicks signal that the buying (selling) pressure starts to build up.
In this case, as a crypto trader, you should look for a potential trend reversal. In the example below, we can see how the size of the lower wicks started to change. Notice how the Heikin Ashi candlestick A has a significantly larger wick than the previous Heikin Ashi candle wicks. That’ll alert you of a possible reversal coming later.
Although you may already understand what is it about.
But, wait! There’s more!
Heikin Ashi Patterns
Before learning how to use Heikin Ashi, as we’ll show a step-by-step guide, you must first understand the patterns. Ideally, combining trends with patterns presented by the price action can put the trader’s probabilities in favor. Thus, some of the most reliable “patterns” are shown below.
Before you get confused about what is a Doji candle, here’s a guide to deciphering the mystery.
Generally, a Doji formation is when the price closes at the same (or relatively close) to the ‘Open Price’. The Heikin Ashi Doji mainly represents a lack of follow-through in the direction of the trend. So when this formation forms, it is likely that a reversal from the previous movement could come.
Therefore, it is important to only trade this reversal pattern in conjunction with the overall market trend. Below is an example of the BTCUSD 30-minute time frame where the Doji is identified.
Several types of triangles represent a pause within the overall trend and could evolve into a continuation or a reversal. Of course, the long or short entry depends entirely on where the pattern is formed within the overall trend.
The triangle usually converges towards a middle point in its structure. While the break out defines where the momentum is likely to keep going.
In the example above, a triangle formation is presented on the daily chart of BTCUSD; see how after the price broke the upper limit (black arrow), it continued its uptrend defined by consecutive green Heikin Ashi candles.
Other common price formations are the wedges, which are classified as rising and falling wedges. The first one has a bearish connotation because it represents the lack of follow-through to the upside, so a corrective or reversal movement could likely come soon—for example, BTCUSD 1h chart.
Meanwhile, the falling wedge has a bullish connotation, and it has more chances of being successful if the underlying trend is robust to the upside. See the example below:
How Heikin Ashi Candles Different From Regular Candlesticks?
In case you’re asking how Heikin Ashi differentiate from the rest, here’s the answer:
At first glance, the Heikin Ashi candles and the regular candles are indeed similar. However, on a closer examination, the Heikin Ashi chart presents a smooth price action where trends tend to be more consistent than the regular candlestick charts. That shows a significant advantage of Heikin Ashi vs. a standard candle.
How to Spot Heikin Ashi candles?
In the example below, a Bitcoin chart against the US dollar (BTCUSD) in a 10-minute time frame shows how on the Heikin Ashi chart, the price presents blocks of consecutive red candles. Meanwhile, the traditional chart shows more alternation on its candles, sometimes red, sometimes green.
Practically, this smooth action on the Heikin Ashi Candles allows the traders to read in the market better. That’s because when any given asset is trending, the action is presented with blocks of green or red candles, for an uptrend and a downtrend, respectively. To simply put it in conclusion, it makes your life easier to identify when a market is trending or not.
Above all, with this information and some price action patterns (Heikin Patterns), the investor can build a trading plan to enter the market.
When Should You Use Heikin Ashi Candles?
Heikin Ashi candles should be used with trend following strategies. Ideally, crypto traders should use the candles in trending markets. When a cryptocurrency moves in a well-established trend, the candles will show all chart patterns and trends more clearly.
The Calculation of Heikin Ashi
The Heikin Ashi candles’ values with the Open, High, Low, and Close prices are calculated based on the average price. In fact, the name Heikin Ashi in Japanese means Average Pace. So in the markets, this kind of charting represents the prices’ average pace.
The Heikin Ashi calculation of the prices is based on the following formulas:
O = 1/2 * (Oprev + Cprev)
C = 1/4 * (O+C+H+L)
H = Max [High, Open, Close]
L = Min (Low, Open, Close]
- O= Open,
- H= High,
- L= Low,
- C= Close.
By comparison, the standard candlestick chart has a much more straightforward calculation. The open, high, low, and close values are all taken as the cryptocurrency price changes over time. Another difference in the Heikin Ashi vs. candles calculation is those past candlesticks have no material impact on the formation of current candlesticks.
How to Use Heikin Ashi In Crypto Trading?
Essentially, it is vital to choose a market with enough volatility and liquidity so the trades can be placed. Of course, this works perfectly on the Forex market.
As the traditional market gets more matured, the room for profitability gets limited. Hence, many traders are turning their heads to cryptocurrencies. Today, the cryptocurrency market is one of the most exciting markets. Despite the volatility, liquidity, and several brokers offering attractive investment vehicles to participate in this market, there are plenty of opportunities to profit from this market.
So, if you want to filter out some good trading opportunities, here’s how:
Determining the Bullish or Bearish Chart
It is important to identify the momentum in the market to place trades in favor of that momentum. In other words, apply a trend following approach.
Here the multiple time frame analysis plays a vital role because it will help us identify that momentum. In the next chart of BTCUSD on the 12-hour chart, we can see the break out of a triangle pattern with a green candlestick. Additionally, we can see two areas that can act as resistance levels (Blue lines).
Check out this practical step-by-step guide on how to start trading with Heikin Ashi strategies:
- Determine the momentum based on a higher time frame chart. You can use the patterns presented by the price action like triangles or wedges to find breakout scenarios and play a possible continuation.
- Map the primary levels of support and resistance that could influence the motion of the prices.
- Look for Heikin Ashi to buy signals and sell signals in lower time frames where the direction of the trades favors the higher time frame momentum.
- Have a defined level where you can place your stop-loss order to control the risk of the trade.
Example of Heikin Ashi Chart Analysis
First, identify the momentum on the higher time frame, for this example, we can take as the reference the previous image, where they break out of the triangle in the 12-hour chart in the BTCUSD gives us clues about the direction of the momentum/ trend (big fat green candle).
After the momentum has been identified, the idea is to look for a continuation of the 12-hour green Heikin Ashi candle, so we zoom into the 2-hour chart to look for follow-through. Those continuations can be framed under any continuation pattern, could be a wedge or a triangle.
For this specific example, we have two possible entries after the break out of the triangles, the entries are the black dots, and the red lines are the stop-loss order where we anchor our risk.
It is also essential to highlight the two “resistance” levels. Bear in mind that if they don’t hold as resistance, they could fuel our long position because those are the pivot points where the short sellers are likely to have their stop-loss orders.
One option for the trailing stop is to trail based on the momentum of the higher time frame. In this case, when the candle closes below the previous one, this is the exit point (green dot).
The Pros and Cons to Trade With Heikin Ashi Candles
Everything comes with setbacks. Before you decided to try out this candle, here’s what you must know!
The main advantages include:
- It’s a chart representing a smoother action of the prices and allows to identify trends with clarity and eliminate the “noise” that usually presents in other types of charts.
- Given the clarity to identify the trends, there are many ways how the trader could trail the stop-loss order. That’s because the momentum of the trend is well defined based on the candles’ structure; big fat green candles with no lower wicks are a healthy signal for continuing the trend. Therefore the trailing stop system could act accordingly to that context.
- Nowadays, this type of charting is available on almost all trading platforms.
- Given the lack of noise in the charts, the price action patterns tend to be more reliable because the Heikin Ashi patterns exclude a significant part of the noise present in the markets.
- The analysis of Heikin Ashi charts is suitable for any time frame, could be yearly charts or 1-minute charts. It doesn’t matter because it’s a consistent way of expressing the prices.
While things may be in your favor, but what if we tell you that the limitations are quite significant as well?
The truth is, sometimes, with the “classic charts” of candles or bars, some reversals can be spotted before any signal is given on the Heikin Ashi candles. This happens because the latter is created based on average prices, so in a certain way has a lagging factor in its structure. However, this is a minor disadvantage because you can perfectly play continuations and take advantage of the current trend.
So, what can you do to overcome the limitations?
Mistakes to Avoid
One of the main mistakes many novice traders tend to make when using Heikin Ashi candles is the lack of multiple time frame analysis. That is because traders focus only on one-time frame that could be in the middle of a sideways movement.
Think about it, if you’re the trader that does that. It means when you try to play with the trend-following approaches, it’ll significantly decrease your chances of profitability.
Therefore, the best way is to look at higher time frames where momentum is present (big fat candles) and then go to a lower time frame to play continuation in the direction of that momentum. Usually, this momentum plays on the higher time frames can be found using the Heikin Ashi strategy. For example, look at the continuation of a triangle break daily, but the timing on that continuation could be taken on the hourly chart.
Trading on the right side of the cryptocurrency market can be much easier if traders switch from the classical candlestick chart to the Heikin Ashi chart. Overall, the Heikin Ashi’s versatility is great to spot potential trading opportunities with your favorite cryptocurrency. However, it’s still best if you practice it in advance before trading with real funds.
*This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.