Heikin – Ashi (HA): A Japanese Technical Strategy

Heikin – Ashi (HA) an often forgotten and very effective way to use Japanese candlestick chart.Before we start with Heikin Ashi let us get a background about candlestick chart. Candlestick charts are thought to be developed in 18^th century by Munehisa Homma, a Japanese rice trader. However, these were introduced to the western world by Steve Nison in his book, Japanese Candlestick Charting Techniques. It is indeed heartening to see how a technique developed in the 18^thcentury is still used by a large number of technical analysts today in the 21^st century. Not only is this technique utilized to a great extent, but it’s also very effective.So let’s dive into HA to understand it better.

Meaning of Heikin – Ashi (HA):

HA candles are simply a derivative of the work done by Homma in the 18^th century in Japan when he developed what we know today as candlestick charting. Heikin – Ashi when translated from Japanese means “Average Bar”.The goal of HA is to filter out noise/ volatility from the price and present the user a clearer visual representation of the trend. Therefore for a ‘new trader’ or an old hand, the trend is easier to identify in HA charts and will help them in trending trades. HA has been around for an awfully long time but is rarely used to their full potential

Pros and Cons of Heikin Ashi Candlesticks:

The best part about Heikin Ashi is there are only three types of candlesticks to remember, whereas traditional technical analysis uses more than 50 types of candlesticks. These candlesticks are visually understandable and narrow down volatility and detect a strong trend. These patterns show sign of exhaustion near turning points in the market, helping investors plan their exit.  Like everything, this technique comes with certain drawbacks. At times, HA candle prices lag and the confirmation comes in late, making the risk too high. Hence, scalpers would find it difficult to use HA as fast entry and exit is difficult with this method.

Trading with Heikin Ashi:

The major advantage of HA is that the charts look much smoother and this helps to easily identify the trending direction. Heikin Ashi charts are color coded like candlesticks, so as long as the price is rising; the candle will show up as green (or any other color one has chosen). On the other hand, when the price is falling, candlesticks will show up as red (or any other color one has chosen). The candlestick chart may flip-flop from green to red or red to green, Heikin Ashi charts tend to have longer stretches of green and red bars, better highlighting current trends.Heikin Ashi charts can be used in the same fashion as any other chart, such as to find chart patterns like triangle, cup & handle or other trade setups. Entry and exit points may vary slightly compared to using a candlestick chart, since the price on Heikin Ashi chart may be slightly different than on the candlestick chart.    

Using Heikin Ashi along with Stochastic oscillator:

Stochastic is an oscillator which we have used as it is common, widely used and easily comprehensible for any trader. As we already know, there are only three types of candles in HA and we even get exhaustion signs when the trend is about to reverse or about to take a pause. A buy and sell signal can be used depending upon the overbought or the oversold zone. Unlike normal candlesticks, it helps us to identify whether a trade should be taken or not, as during strong trend a few trades can be ignored. Along with this regular divergence, trades can also be taken, which shows an indicator can be combined with any charting method to get good trades.