Mastering the Heikin-Ashi Formula: The Smarter Candlestick Approach

Trading can be noisy sometimes when you use a lot of indicators and or are unable to filter out trends. Now, imagine having a single tool that filters out market noise and gives a clear and transparent picture of price trends. 

This is what Heikin Ashi helps traders in. Unlike traditional candlestick charts, heikin ashi chart shows a clear picture of the setup of traders, making it easy for them to find the trends.

It is a unique kind of candlestick chart that is made by average in the price sheet of stock, which eventually smoothens the chart for traders. This makes it easy for traders to identify the overall price chain and capitalize on the long-term movements of the stock.

In contrast, traditional candlestick charts show every price fluctuation of the stock or security, sometimes confusing some traders in seeing the bigger picture. Heikin-Ashi filters out the minor price swings, giving traders a more focused and linear view of market direction. Traders who want to do momentum trading will benefit greatly from this. So keep on reading, let’s know more about Heikin-Ashi and how it can benefit. 

Heikin-Ashi Formula

Heikin-Ashi’s structure is not different from traditional candlestick. It also has open, high, low, and close, similar to traditional candles But the calculator method is different here. Here is the simple form of how the formula is used with Open, Close, High, and Low values:

• Close Price

The close price is calculated by averaging the current period’s open, high, low, and close prices, to create a balanced close price rather than focusing on a single value.

• Open Price

The open price is the midpoint between the previous Heikin-Ashi candlesticks’s open and close points, giving a smoother start for the news candle. 

• High Price

The high in Heikin-Ashi Candle is the highest value among the selected period or time frame, actual high, Heikin-Ashi open, and close.

• Low Price 

The low is the lowest value among the period’s actual low, Heikin-Ashi open, and close.

With all the above formulas, you must’ve understood that Heikin-Ashin candles are not formed on the trading price of the stock or security. Instead, they are made on average of previous candles. So the price of Heikin Ashi candles is not in line with the current price of the stock. now that we know the prices are not the same. It is important to know that traders use Heikin Ashi side-by-side with traditional candlestick. This makes it easy to track both types of candles. 

This eventually helps in keeping the real-time data about price and knowing the trends.

Now if we compare both charts, the momentum of price is clearly visible in Heikin-Ashi. Here, the downtrend is almost all dark (or red) candles unlike candlestick charts, where a few light (or green) candles are there too. Whereas the uptrend is full of light candles, but in candlesticks charts, the light candles are not continuous. 

So, checking trends on the Heikin-Ashi chart is said to be easier compared to candlestick charts. 

How to Use Heikin-Ashi for Trading

Heikin-Ashi charts are powerful tools for identifying trends and improving trade decisions. Here’s how traders can use them in their trading setup: 

1. Spotting Bullish and Bearish Trends

• Bullish Trends: Green Heikin-Ashi candles  (or white, depending on the chart) without any lower wick, are indicators of strong uptrend. No lower wick is an indicator that buying pressure is strong. 
• Bearish Trends: On the other hand, the red (or black) candles with no upper wicks are indicators of a strong downtrend. No upper wick is an indicator that selling pressure is strong without any resistance. 

2. Key Reversal Signals

• Key versus signals often are identified when a smaller candle just starts to form after a very strong trend. This shows that the buying or selling pressure that was there previously is now slowing down and if the color of the candle changes, this can signal a shift in market sentiments. 

3. Combining Heikin-Ashi with Other Indicators

• Heikin-Ashi works excellently when used in conjunction with moving average, RSI or MACD. These are some of the top technical indicators that help confirm strong trends and give additional insights and signals about entry and exits in trades.
• By using these techniques, traders can better identify trends and reversals with Heikin-Ashi.

Advantages of Heikin-Ashi 

Several benefits are offered by Hekin-Ashi charts that help trades spot trends and filter unnecessary market noises. 

1. Smoothing Out Market Noise
   Heikin Ashi’s smooth and out day, consolidated price range, and confused prize moments in an easier way. This is one of the biggest advantages of it. With the help of average price data similar to EMA, Heikin Ashi creates a more stable and easy-to-track candlestick pattern. This eventually helps traders on focusing a bigger picture rather than getting caught up in market consolidation and short-term volatility.
2. Identifying Strong Trends
   Heikin-Ashi charts are considered very reliable in identifying long-term trends. Unlike traditional candlestick charts, there are no mixed signals. Whereas, Heikin-Ash candlesticks, on the other hand, create clearer visuals of upward or downward trends. Long bodies without wicks, for instance, often indicate strong bullish or bearish trends.
3. Reducing False Signals
   Traditional candlestick charts often show false signals in terms of trend, causing traders to enter or exit trades hurriedly without any confirmation, ending up in losses. On the other hand, Heikin-Ashi reduces the chance of traders getting false signals by averaging in smoothening the chart. They only highlight important and meaningful price data and its changes.

These advantages make Heikin-Ashi a powerful tool for trend-following strategies.

Limitations of Heikin-Ashi

Heikin-Ashi charts are amazing for trend analysis, but they do come with certain limitations let’s know what they are: 

1. When Not to Use It

• Lagging Indicator: Heikin-Ashi candles solely depend on averaging price movements, this many times delays the correct signals. This lag may not be good for traders who want real-time updates and accurate data, especially intraday traders or scalpers who rely on quick price movements.
• Less Detail on Exact Price Levels: Heikin-Ashi smooths out price data, so the exact opening, closing, high, and low prices for the days are not immediately visible, it takes time to form the candles. Here, if a trader’s strategy depends on precise price points, such as for stop-loss or take-profit orders, Heikin-Ashi might not be of any help with the lack of details. 

2. Impact on Intraday Traders

• Reduced Precision: intraday traders react very quickly to market changes, and Heikin-Ashi’s smoothed candles can delay showing quick reversals and precise entry/exit points on the chart. since, it only reflects trends, other price action elements may be missed out, making it highly unreliable for intraday traders to respond swiftly.
• Not Ideal for Short-Term Volatility: Heikin-Ashi candles are designed to remove the market noise and show long-term and clear trends, this can result in a disadvantage for traders who want to capitalize on short-term movements. Intraday traders may miss opportunities due to the lag created by the smoothing effect.

Can I use Heikin-Ashi in Trading? 

Hacking Ashi is undoubtedly a good thing to use while trading to check trends. However, it is not reliable enough to use individually. One can use it as an add-on but not as a whole-sole study. You can use it in conjunction with demand and supply theory to take extra confirmation while trading. 

If everything in your theory is perfect and the trade setup is good for long trade then check Heikin Ashi, if the trend is up there too, then your setup is strong. vice versa for short trade setup.  

Conclusion 

Heikin-Ashi charts provide traders a distinct advantage by filtering out market noise and delivering a clearer picture of trends. While they are useful for detecting significant bullish or bearish swings, it is important to recognise that they are not perfect. It does not give real time market information. It can lag behind in market action and may not be appropriate for traders that require trading data for intraday or other quick trading strategies. 

But when Heikin Ashi is used with other technical indicators, it can be helpful in trading approaches. It works best when combined with additional strategies such as demand and supply strategy, price action to confirm signal and other technical indicators like EMA, MACD, and RSI.

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