Heiken-Ashi is a Japanese term that means ‘Average Bar’. It is a useful technique that you can use with your normal candle stick analysis to trade reversal or continuation trades. In other words, it can provide confidence to your trading set up and make charts more readable.
Heikin-Ashi candlesticks use open-close data from the prior period, and open-high-low-close data from the current period to create a candlestick. The result is noise cancellation with an improved ability to capture the trend.
You can clearly see that Heiken-Ashi chart is much smoother looking in terms of price action. Easier to identify trend and profit from it. But the problem is that these Heiken-Ashi candles do not show true prices. Yes we derive these candlesticks from true prices, but we need to treat it as more of an indicator than a price chart itself.
How do you analyze a Heiken-Ashi chart?
It is simple.
- When prices are trending up, Heiken-Ashi bars have no lower shadow.
- When prices are trending down, Heiken-Ashi bars have no upper shadow.
- Doji-like bars with both lower and upper shadows are possible turning points.
- The doji bars also appear in Choppy price action.
How to find Reversal setups using Heiken-Ashi candlesticks?
You can treat finding trade reversal points using Heiken-ashi charts as a multi-step process. First of all find the dojis which will highlight reversal zones or continuation setups. Below is a Heiken-Ashi 15 min chart of $AMZN with various zones identified.
Now if you take the circles zones above and lay them on the normal candlestick chart. The corresponding circles show some interesting setups that we can use to our advantage.
- On Mar 13th, AMZN opened up with a Gap and gave us a bull flag formation in 15 min chart. The Heiken-ashi for the same period shows candlesticks with no bottom shadows (meaning that the trend is up).
- Same day we got dojis in Heiken-ashi in midday, but the normal candle sticks showed buying pressure with long bottom wicks (Continuation pattern). However, it got resistance just a little while after that with another set of dojis which ended up being a reversal.
- On March 14th, we got dojis in Heiken-ashi followed by candlesticks with no top wicks or shadows, which meant trend is down. Normal candlesticks showed bearish trend bars.
- March 15th, we got dojis midday in Heiken-ashi. Whereas in normal chart we got a bearish trend candle at the day’s top at that time, but with no follow through. That meant no downwards pressure, and we could have gone long at couple of ticks above the next bullish candle. Here is the setup you can look for to take this kind of a trade. Very Powerful, and I have had a good history with it on my Swing trading service at Momotrades.
You can also use these Heiken-Ashi charts to let your profits run until you see doji candles to give you an idea that the current trend is now slowing down. Here is a Day chart for $AMZN with 15 min candlesticks from March 15th showing both normal and Heikin-Ashi candles. Read it and see how it could have been traded to maximize profits.
Of course no trading approach is error proof. Therefore always a good practice to combine it with rest of your analysis and get confirmation. Hope you find this article useful.