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How To Read Price Action Using Heikin-Ashi Charts (Heikin Ashi Candles Explained For Beginners) - YouTube
Channel: The Secret Mindset
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Have you ever heard of the phrase âthe trend
is your friendâ when trading or investingâ?
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Sure you have.
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Of course, most profits are generated when
markets are trending, but, I have to disagree
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with this quote.
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The correct phrase is âthe trend is your
friend, if it can be foundâ.
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If you cannot tell if a market is trending
or not, the trend has no use to you, you cannot
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profit from it.
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There are many ways that can help you to spot
a trend, and one of the best approaches is
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with Heikin-Ashi candlesticks.
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So, today weâll talk about Heikin-Ashi charts,
youâll discover the importance of adding
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them into your trading arsenal and youâll
learn how to use them to stay on the right
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side of the market.
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Before we continue, if youâre new here,
make sure you subscribe, turn on the notifications
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and leave us a like to show your support.
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So, Heikin-Ashi is a Japanese technique based
on the candlestick theory but taking it to
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a higher level for trend determination.
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Heiken means average and ashi means pace,
taken together Heikin-Ashi represents the
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average pace of prices.
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A Heikin-Ashi chart look like the classic
candlestick chart.
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But the method of calculating and plotting
the candlesticks on the Heikin-Ashi chart
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is different from the regular candlestick
chart.
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On the candlestick charts, each candlestick
is independent and has no relationship with
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the previous or next candlesticks.
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But Heikin-Ashi candlesticks are different
and each candlestick is calculated and plotted
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using some information from the previous candlestick:
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1.
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Open price:
The open price in a Heikin-Ashi candlestick,
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is the average of the open and close price
of the previous candlestick.
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2.
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Close price:
The close price in a Heikin-Ashi candlestick,
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is the average of the open, close, high and
low prices.
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3.
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High price:
The high price in a Heikin-Ashi candlestick,
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is chosen from one of the high, open and close
price of which has the highest value.
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4.
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Low price:
The low price in a Heikin-Ashi candlestick
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is chosen from one of the low, open and close
price of which has the lowest value.
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The major difference between Heikin-Ashi and
regular candlestick chart is the way up candles
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and down candles are formed.
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In order for an up candle to form on a traditional
candlestick chart, the closing price must
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be above the opening price; a down candle
forms when the closing price is below the
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opening price.
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In a Heikin-Ashi chart, an up candle forms
when the price closes above the midpoint of
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the prior candle and a down candle forms when
price closes below the midpoint of the prior
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candle.
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This important difference is why Heikin-Ashi
charts make it easier to spot the current
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trend.
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So candlesticks in a Heikin-Ashi chart are
related to each other, because the open price
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of each candlestick is calculated using the
previous candlestickâs close and open prices.
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Also the high and low prices of each candlestick
is determined by the previous candlestick.
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So a Heikin-Ashi chart is slower than a candlestick
chart and its signals are delayed.
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They work somehow like a moving average.
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When reading these candlestick charts, there
are a few important things to pay attention
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to.
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The size of the candlestick, the relative
direction of the candlestick, and even the
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color of the candlestick (red versus green)
can all help traders draw conclusions about
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what trends may be occurring.
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The charts themselves can be easily adjusted
depending on the desired timeframe used by
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each trader.
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Five minute, fifteen minute, hourly, and daily
Heikin-Ashi candlesticks are all among the
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most commonly used.
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When the market is bullish, Heikin-Ashi candlesticks
have big bodies and long upper shadows, but
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no lower shadow.
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Pay attention at the big uptrend in this chart.
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As you see, almost all of the candlesticks
have big bodies, long upper shadows and no
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lower shadow.
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At first glance, the bullish Heikin-Ashi trend
looks like a normal Japanese candlestick trend.
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However, you will notice that the Heikin-Ashi
trend is built primarily by bullish candles
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and is absent of lower candlewicks.
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When the price is shooting up, the price action
creates very little to no lower shadows.
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When the market is bearish, Heikin-Ashi candlesticks
have big bodies and long lower shadows, but
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no upper shadow.
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So here is a big downtrend and as you see,
almost all of the candlesticks have big bodies,
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long lower shadows and no upper shadow.
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This indicates that the declining momentum
is very strong.
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Reversal candlesticks in the Heikin-Ashi charts
look like regular doji candlesticks.
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They have no or very small bodies but long
upper and lower shadows.
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The doji, when it appears after a directional
move, has a reversal potential and indicates
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that the price action is stalling and might
be poised to start a counter trend move.
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So, in short how do you analyze a Heikin-Ashi
chart?
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Itâs simple.
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When prices are trending up, Heikin-Ashi bars
have no lower shadow.
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When prices are trending down, Heikin-Ashi
bars have no upper shadow.
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Doji bars with both lower and upper shadows
are possible turning points and can also appear
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during choppy price action.
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Now, Heikin-Ashi chart is much smoother looking
in terms of price action.
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Easier to identify trend and profit from it.
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But the problem is that Heikin-Ashi candles
do not show true prices.
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Yes, we derive these candlesticks from true
prices, but we need to treat it as more of
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an indicator than a price chart itself.
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So, thatâs why itâs very important to
highlight the pros and the cons of using Heikin-Ashi
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.
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There are a few benefits to the Heikin-Ashi
chart that can be seen immediately.
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The first is the smoothness.
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The Heikin-Ashi chart creates a much smoother
flow of price movement without the gaps and
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choppy movements typical price action can
make.
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Heikin-Ashi indicator compared to the regular
price chart slows down the speed of the market,
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eliminating unnecessary false signals.
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Also, itâs easy to read trends: both the
size, direction, and color of a Heikin-Ashi
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candlestick will tell you a lot about the
trend in a short amount of time.
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This is extremely valuable for day traders
who need to make quick decisions.
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Another advantage of Heikin-Ashi is the fact
that it will allow you to stay in the trade
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without being nervous or making any unnecessary
moves.
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Also, the adaptability is another benefit.
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The âtrading periodâ on Heikin-Ashi charts
can be easily adjusted to reflect different
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time periods.
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Some traders will look at 15 minute and daily
charts side by side in order to develop a
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more comprehensive analysis.
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These charts can also be applied in many different
markets including stocks, forex, indexes,
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and various others.
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However, a Heikin-Ashi chart has some disadvantages:
Every indicator that is based on slowing down
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the signals does its best on trends only.
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Heikin-Ashi smoothed signals donât let you
to notice the reversal in time.
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Any Heikin-Ashi strategy should take into
consideration that lagging indicators not
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only dismiss useless signals to open the trade
but also provide you with a late signal for
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closing the trade.
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That is why you will often see the market
slowly destroying your profit and later on,
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you will understand that the trend has already
changed.
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In other words, donât rely too much on Heikin-Ashi
when you want to take your profits.
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Another important drawback is the fact that
this indicator does not fit short-term and
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scalping strategies.
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Iâve talked with many traders that used
Heikin-Ashi on the 1-min or 5-min chart, trying
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to scalp the market, and all of them were
disappointed.
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So, short term trading could be inefficient
when using Heikin-Ashi .
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Now, developing a Heikin-Ashi trading strategy
is surprisingly easy.
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These charts rarely contradict other technical
indicators, rather, they simply amplify the
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trend to make it easier to identify.
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When used correctly, Heikin-Ashi charts are
incredibly reliable.
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If your goal is to catch longer and persistent
trends, then using a Heikin-Ashi chart will
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help you toward that end.
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A simple way to use Heikin-Ashi is to add
them to a h4 or daily chart and apply price
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action rules.
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On higher timeframes like the 4 h or d1, the
Heikin-Ashi trading style puts an emphasis
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on persistent trends.
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Small corrections and consolidations are left
behind and they are barely visible on the
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chart.
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You will notice that when the direction changes
on a Heikin-Ashi graph, the price most likely
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starts a new move.
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This helps to distinguish between the potential
beginning and the end of a trend.
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Since chart noise is filtered, you basically
see the naked trend.
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Heikin-Ashi charting is very powerful when
combined with price action analysis.
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Look for the emergence of new trends, or for
the reversal of already existing ones.
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Look for support and resistance levels and
important swing points, and keep in mind that
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these could act as future turning points on
the chart.
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Now, if you found value and learned something
new, make sure you subscribe to our channel,
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turn on the notifications so you donât miss
future uploads and leave us a like to show
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your support.
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Until next time
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