Shine and Poverty of Heikin-Ashi candles

Hello, fellow traders! We‘ve worked through a lot of Forex trading strategies involving Heikin-Ashi candles. I think it’s time to take a closer look at this type of charts, their method of construction, the pros and cons compared to standard Japanese candles and clear on what currency pairs and time frames should Heikin-Ashi be applied.

Installation

In the latest versions of the Metatrader 4, Heikin-Ashi indicator is present by default. If you for some reason don‘t have it, you can download it from the link at the end of this post. Installation is standard.

Introduction

In this lesson, we will cover the topic of candles. Which is called the Heikin-Ashi candles.

This is a special type of candles that is somewhat different from our usual candles. Literally, their name translates from Japanese as “a band in the middle” or “strap in the middle.” We will look at what are their advantages and disadvantages over the Japanese candles. And in what cases, what time frames and currency pairs, they are best applied. The conditions under which their benefits are disclosed properly serve us to improve our sales results.

I want you to understand very well from this lesson the way that Heikin-Ashi candles are constructed. If you pay attention to the points of closing-opening highs and lows of Heikin-Ashi candles, they do not always correspond to the same simple candlesticks points on the graph.

How are the Heikin-Ashi candles built?

Let‘s take, for example, the chart on April 23 at 21:45 and circle candles at both the Heiken Ashi chart and normal candlesticks chart. I have lines around the same candle on both charts.

Let‘s understand how to construct the point of open and close, high and low Heiken Ashi candles. They are built on the basis of candlesticks. Although we do not see them. Our first point - it is the opening point. It is built as follows. We add up the points of open and close of the previous candle and divide by two. In this example, they were 141.34 and 141.41. Add up these values and divide by 2. We get 141, 35.

Now, we check to see if our result is correct on Heiken Ashi chart. Find the point of our candles opening that we circled and it is at the level of 141.37. We did not consider the third digit after the decimal point. Therefore, there are slightest variations within a single point. This is not so important. Now, we calculate the closing point. Closing point, of course, is based on our current candle. Finally, calculate and does not move as soon as the current candle closes. It is calculated as follows. We put the opening price and closing price of the candlestick and divide by four. The arithmetic average of all four points of our candles. And it turns out that we have 141,46. Look at the chart. Closing point indeed at 141, 33. Everything is right.

Now go to the high point of Heiken Ashi candles. It is calculated quite simply: all points of candlestick are compared. That is, opening, closing, the highest point, and which one has the greatest value is a high point. In this case, they match. The high point is at 141.54 in Japanese candles and 141,54 in Heiken Ashi. The highest point of the candle is used to calculate the high. For a low point, similarly. You find the lowest point of the candle and use it to construct the low point. But, our lowest candlestick point is above the opening price of the Heiken Ashi candle. So, here we don‘t have any tails. We don‘t have any lows below the opening price of the Heiken Ashi candle.

Thus, points to build Heiken Ashi candles are calculated. Naturally, all of this happens automatically. The indicator does everything for you. But, this is necessary to know, to understand, that if the price of the Heiken Ashi drew a tail, it doesn‘t necessarily mean that the price went there. It just shows us in what direction the trend was. This should be considered and understood.

What are the advantages and disadvantages of Heiken Ashi candles?

From a technique of Heikin-Ashi construction, we can conclude that we have full-bodied candles, that in most of the cases have tails in the same direction - in the direction of the current trend. And, the other side of the candles does not have tails. As in this area. We are dealing with a strong trend.

For example we can observe a “bearish” trend. Candles of one color, first. Tails are directed toward the trend. Long tails. On the opposite side, there are almost no tails. Only at just one or two candles. And the candles are full-bodied, with big bodies. This means that the trend is strong.

Similarly, for “bullish” trend. The candles are of the same color. In our case, white. Without tails on the opposite side. And with long tails in the direction of the trend. Changing the trend is generally characterized by candles that look like Doji - small body, long tails on either side of the candle. And, near the candles, you can already see the change in trend. But, of course, not always.

However, reversal Heiken Ashi candles, are usually shaped like “Doji”. Here’s a good example: small body, tails on both sides, and after that, we have changed the trend with a zigzag motion to a “bullish” trend.

As for trading. The fact is that the disadvantage of Heikin-Ashi candles is that they are late. Since they average prices, they show us the trend, making it possible to stay with it as long as possible, but the signals appear too late. Therefore, they are well-suited for the type of volatile pairs: GBP/JPY, EUR/JPY, CAD/JPY, on smaller timeframes, below H1. 1-hours are a maximum that Heiken Ashi can be traded on. They don‘t fit to trade on the H-4 and daily charts. Like any indicator, I don‘t recommend to use Heikin-Ashi candles alone.

Very often combine candles Heikin-Ashi with Stochastic Oscillator. Combining with him is very simple: we open a buy position when the Stochastic Oscillator comes out of the oversold zone, and at the same time, we see a reversal candle on the candles Heikin-Ashi. And at the same time at the same time coming out of the oversold zone, our Stochastic Oscillator. Here I put the arrow up in this place.

Accordingly, after that, we can buy. Similarly for sale. When Stochastic Oscillator goes out of the oversold zone, and a Doji candle is present on the chart, but not necessarily at the same time. In this case, the Stochastic Oscillator came out of overbought and a little earlier, and after a couple of candles, Heikin-Ashi Doji candle appeared. We can open sell order.

Of course, this is a very simple system. Then you need to add some more filtering, be accustomed. Calculate the stop loss and take profit, etc. In this case, I do not show a strategy, namely the principles of Heiken Ashi candles. We do not use them alone. Although there are traders who trade exclusively on the Heiken Ashi. They are very accustomed to the analysis of these candles, for them all these tails are important. They are used to Heiken Ashi candles to listen to the “pulse of the market,” and sell only on them. Without any external indicators. But, in general, I would advise beginners to combine Heiken Ashi candles with other indicators or elements of technical analysis. Elements of technical analysis work as well on Heiken Ashi candles. Support/resistance lines, shapes, different flags, triangles, etc. Everything is working. But, candles are built differently, do not forget about it.

Heiken Ashi candles give us an advantage that we are staying longer in the trend. Suitable for volatile intraday trade on pairs: EUR/JPY, CAD/JPY, GBP/JPY. And you must not forget about the method of calculating the estimates. And not higher timeframes than H1. Although, I saw some strategies using Heiken Ashi candles and H4, and even D1. But in general, I do not advise to trade on this type of candles above the H1.