(Article is republished courtesy of dear friend and Full Time Trader, John Benjamin)
Heikin Ashi Candles – An easier way to read candlesticks
Every trader would have at some point thought about trading the naked charts. Pure price action based off the candlestick charts. However, the concept of candlestick chart trading is riddled with tons of ‘recognizable’ complex chart patterns, which more often than not, should be read in context with the market and not just by the patterns that they represent.
For traders who want to understand the conventional candlesticks can take solace from Heikin Ashi Candlesticks, which offers a more simplistic approach to reading candlesticks patterns.
Heikin Ashi Candles – Brief Introduction
Make no mistake, Heikin Ashi candles is just an indicator and as such they tend to lag. Despite this short-coming, trading with Heikin Ashi candles is a more rewarding way to learn price action without having to deal with the more complex approach usually found with traditional candlesticks which are usually prone to market noise.
Developed in Japan, Heikin Ashi candles have been around for more than a 100 years and it was only in 2004 brought to the West. Despite their simple approach, Heikin Ashi Candles are yet to gain mainstream acceptance in the trading community.
Heikin Ashi – How it differs from Candlesticks
The Heikin Ashi candles are constructed in the same way as a traditional candlestick is formed. Meaning that it has the same components such as the wick and the body, and there are only three kinds of patterns to read price action. There are Red and Green bars, representing bearish and bullish price action respectively. Refer to Figure 1.
The structure of the Heikin Ashi Candles is based on the average of the open and close of the previous period or candle. While it is not essential to learn how the candles are formed, it makes sense to have a brief idea on how the HA Candles’ Open/High/Low/Close are constructed.
HA Open: Average of previous candle’s Open and Close
HA Close: Average of previous candle’s OHLC
HA High: Absolute High of previous candle’s OHC
HA Low: Absolute Low of previous candle’s OHC
As evident by the above calculation, Heikin-Ashi Candles tends to establish a strong relation to the current period based on the previous period (or candle) and thus displays a smoother version of the candlesticks.
Heikin Ashi – Good way to detect trends
For those who trade with the trend, Heikin Ashi candles offers a great visual representation due to their nature. Despite the lag, which is based on just one period, HA Candles when used along with other technical analysis such as Support/Resistance or even moving averages can present a clearer picture to the trader, as compared to the traditional candlesticks. And in its defense, while it might seem easier to take a signal off the doji or a hammer candle pattern, Heikin Ashi, due to its lagging nature can in fact confirm a trend reversal.
Benefits of trading with Heikin Ashi Candles
HA Candles reduce the noise, thus enabling you to see trends a lot more clearly.
Traditional candlesticks can often be misinterpreted, thus leading to wrong trades. HA candles tend to eliminate this by smoothing out the noise.
Due to the fact that there are only 3 distinct patterns, trading with Heikin Ashi Candles is usually much easier and beginner friendly.
Heikin Ashi candles are indicators and as such they lag. Thus you would only be able to see the correct candle only after it is closed. On the positive side, HA Candles eliminates false signals.
While Heikin Ashi candlesticks is not the ‘Holy Grail’ using these candlesticks can offer beginners a great way to observe the markets and perhaps get more meaning out of the price action as compared to using the traditional candlesticks. Every indicator’s edge is usually offset by one or more factors and Heikin Ashi candlesticks are no exception. While giving the trader the edge of eliminating market noise, the HA Candles tend to lag in nature. As always, reading the signals from HA Candlesticks and confirming the same with other technical indicators is always a good practice.
About the Author
John Benjamin is a full time forex trader and blogs at http://tradingspotsilver.com that offers trading basics, analysis and trade signals for the forex markets and commodity futures.