Heikin-Ashi : How to Trade it ?

 

The previous post Heikin-Ashi gives the reader an overview of what the candle is and how better it is than a normal candlestick. This post explains about how to interpret the Heikin-Ashi candle and how to use the interpretation effectively in differentiating trending and trading regions.

Heikin-Ashi candle has the same properties as of the normal candlestick, i.e. a body, lower and higher shadows, OHLC etc., The fact that this candle is derived from previous candles and their OHLC values gives ample weightage to trust the behavior of this candle better than a regular candlestick.

There are five primary patterns to observe in the Heikin-Ashi Candlestick chart.

1. Green Candles with no lower “shadows” or a minimal shadow compared to the body of the candle indicate a stronger uptrend, which means that you can let your long positions ride on the profits.

2. The green candles with long higher shadows signify the strength of the market and remember the trader to add to long positions.

3. As in the case of normal candlesticks, Dojis are also formed in the Heikin-Ashi charts. A candle with a very small body and long upper and lower shadows indicate a trend change. (Fig 2). Those who like to take risk can always buy or sell at this point while Defensive traders do wait for confirmation.

 

4. The red long candles indicate a strong down trend, whereas green long candles indicate a stronger uptrend.

In Brief,

1) Bullish candle with an upper wick indicates a strong up trend
2) Bearish candle with a lower wick indicates a strong down trend
3) Bullish candle with a lower wick indicates a weak up trend
4) Bearish candle with an upper wick indicates a weak down trend.
5) A candle shorter than the previous candle indicates a slow down in the trend
6) A short candle with upper and lower wicks indicates a change in the trend.

The main advantage of Heikin-Ashi candlestick is that it doesn’t give you a false signal or avoids you from getting trapped in false breakouts. Moreover, the Candles also helps you to let your profits learn and doesn’t let you to exit early from your position. Heikin-Ashi candles, if used effectively, will help a trader to maximize his profits and also minimize his trades because the three phases of the market – Bull Phase, Bear Phase and Trend Changing phase are always marked and can be observed easily without the help of any other indicators.

Adding more positions is a fantastic way to take advantage of a long trend that develops and the Heiken Ashi candles can really help you do this. This is perhaps their greatest asset if used with proper money management. Obviously not every trend lasts a long time but if you can catch the long, several hundred pip moves (or most of them) and have multiple positions opened along the way you can really start to see you balance increasing.

That said, Advanced users of Heikin-Ashi correlate it with normal candlesticks and certain oscillators to know the exact nature of the market and take their trend in the right direction. Customization of Heikin-Ashi candles is possible in all ways and this will be discussed in the next weekly meeting.

All the possible interpretations of Heikin-Ashi Candles can be observed in the below chart

  Image courtesy: Chartschool.

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