How do you make use of Heikin Ashi?
Let’s talk about how to use and understand a Heikin Ashi candlestick chart now that you’ve learnt how to calculate Heikin Ashi candlesticks.
The purpose of utilizing a Heikin Ashi chart is to filter out market noise.
Because the noise is filtered, you only see the bare trend.
Because Heikin Ashi candlesticks are calculated on averages, they will have lesser shadows (wicks) than a traditional Japanese candlestick.
As with regular Japanese candlesticks, the smaller (or shorter) the shadow (or wick) on a Heikin Ashi candlestick, the stronger the trend.
Green candles with no lower shadow signal a strong UPTREND.
Red candles with no upper shadow signal a strong DOWNTREND.
Technical traders utilize Heikin Ashi charts to IDENTIFY:
- DIRECTION OF THE TREND
- STRENGTH OF THE TREND
So, if you want to catch trends and ride them for as long as possible, you should understand how to use a Heikin Ashi chart.
How to Use Heikin Ashi to Identify Trend Direction
A Heikin Ashi chart, with its color-coded candles, displays the direction of a trend.
A green candle indicates that the trend is upward. A red candle indicates that the trend is DOWN.
How to Use Heikin Ashi to Identify Trend Strength
A Heikin Ashi chart measures the strength of a trend by examining the shadows (or wicks).
You’ll note that there is no lower shadow or wick on many of the green candles. For the red candles, the opposite is true. Most have no upper shadows or wicks.
These candlesticks do not cast a shadow in the trend’s OPPOSITE direction. When there is no shadow, it indicates that you are in a strong trend.
To gauge trend strength, the essential thing to look for on a Heikin Ashi chart is shadowless or wickless candlesticks opposite the trend. Candlesticks with no shadow or wick on one end are also referred to as “shaved candles.” Each sort of shaved candle has a different name depending on which end lacks a shadow.
Technically, the color of the candle is irrelevant as long as it lacks a tail or head, but for the purposes of Heikin Ashi, we want to see green shaved bottoms and red shaved heads because we’re searching for trend strength.
Next Lesson: How to Trade Using Heikin Ashi
