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Charting with Heikin-Ashi Candlesticks

Posted on June 9, 2009 by Adam

Looking for another tool to help you get an edge in your trading? Heikin-Ashi candlesticks may be your thing. This Japanese methodology (the name translates to “average bar”) helps you to identify trends and determine when they have changed.

Unlike traditional indicators, which are used to supplement traditional candle charts, Heikin-Ashi candlestick charts can be used on their own. You interpret them as you would a candlestick chart, but the open and closing prices are computed differently.

For Heikin-Ashi charts, the opening price is always located at the midpoint of the previous candle. The closing price is equivalent to the average price over the time period. The high and low prices are the same.

The nice thing about Heikin-Ashi candles is that they can tell you how strong a trend is. During a strong uptrend, the candles will remain green, and will remain red in a downtrend. If the candle changes color, it indicates weakness in the trend. This eliminates some of the whipsaw action found in traditional charting.

Here are some general rules of thumb when trading with Heikin-Ashi candles:

• During strong uptrends, look for candles with no lower shadow. During strong downtrends, look for candles without upper shadows. This is a good indication that the buyers or sellers are becoming aggressive!
• When you see a change in color near a support or resistance level, it is usually a good time to exit positions, as the trend may be changing in response to the support/resistance.
• Candles with small bodies and long shadows are also indicators of changing trend. When combined with support/resistance levels, these can be good entry points.
• When the candles move very little during a given time period, it is a good indication that prices are consolidating ahead of another move in the direction of the prevailing trend.

A traditional candle chart is often choppy and can lead to whipsaws.

Heikin-Ashi candles can eliminate some of the choppiness and show trendling behavior more clearly.

Heikin-Ashi candles can be used over any timeframe, but I usually use them for day trading, as they help me get a beat on intraday momentum.

I wouldn’t get too caught up with trying to figure out exactly what they mean. With practice, they will help you to visualize the aggression (or lack thereof) of market participants.