Candlestick charts -Heikin Ashi Explained

Heiki Ashi chart GBPUSD 5 minSo how does it look and what is a Heikin-Ashi chart ?

Heikin-Ashi chart looks like the candlestick chart, but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different from the candlestick chart.

The candles of a Heikin-Ashi chart are related to each other:  the open price of each candle is calculated using the previous candle close and open prices. Also the high and low price of each candle is affected by the previous candle. This makes a Heikin-Ashi chart slower than a candlestick chart and therefore the signals in a Heikin Ashi chart are delayed, when compared with a candle chart.

So is this ‘delay’ a good or  bad thing?

The slow signals on Heikin Ashi charts made this candles good indicators for volatile currency pairs like EURJPY  and GBPJPY – it can prevent us from rushing and making mistakes – entering or exiting a trade too soon or trading against the market. In addition, Heikin Ashi candles are easier to read when compared to the normal candlestick charts  because they don’t have too many different patterns.

Heikin Ashi Chart Patterns:

MT4 setup Heikin Ashi
MT4 setup Heikin Ashi

 

The charts that I’m using below to exemplify the Heiki Ashi chart patterns are using MT4 Trading software and the indicators available by default.

Go to the Indicators menu and under Custom option  you should find the Heikin Ashi indicator.

My personal preference is to set up  green for bullish candles and red for bearish candles.

If you normally have your charts configured as candlestick chart you may not see the Heikin Ashi properly so you may need to take some additional steps :

– try to change your chart to display Line Chart  and not Candlesticks or

– try to change the colors for the candlesticks to make them invisible (this depends on the background color of your chart)

As note, some traders may prefer another kind of Heikin Ashi which is called Smoothed Heikin Ashi. It is slower than the ordinary Heikin Ashi and eliminates a lot of noise. For me it is too slow and so I don’t use it. It works like a 10 or 20 moving average. You can download the MT4 indicator Smoothed Heikin Ashi from MQL4 community market and try it – see if it works for you.

Heikin Ashi Bullish Candles

Heikin Ashi Bullish Pattern
Heikin Ashi Bullish Pattern – Click on the chart to enlarge

In a bullish move, the  Heikin Ashi candles have big bodies and long upper shadows but no lower shadow. Look at the up trends in the above chart. As you see some of the green candles have big bodies, long upper shadows and no lower shadow.

When the trend gathers momentum, the bodies of  the Heikin Ashi candles are longer – see the circled candle-  eventually culminating with a candle with a extremely long upper shadow (sign of an upcoming reversal – see reversal pattern below).

Heikin Ashi Bearish Candles

Heikin-Ashi Bearish Pattern

In a bearish move the  Heikin Ashi candles have big bodies and long lower shadows but no upper shadow. Look at the downtrends in the above chart. As you see some of the red candles have big bodies, long lower shadows and no upper shadow.

Heikin Ashi Reversal Candles

The reversal pattern is quite easy to spot on a Heikin Ashi chart – it is the candle with a very long shadow that sticks out from the  other candles. In a bullish trend if you see the long upper shadow forming, it is a sign of reversal or at minimum a sign that the trend has lost its steam. On contrary, in a bearing move, the reversal is signaled by a long lower shadow.