If you’re looking for a really simple Heiken Ashi strategy, you’ve come to the right place. In this article, we’ll explain how Heiken Ashi candles work and why they can be so helpful for spotting trends. Plus, we’ll go through a simple strategy that you might be able to incorporate into your own trading.
Heiken Ashi Strategy
In Japanese, “heiken” means “average” and “ashi” means “pace”. This is a great basis for understanding how these candles work. Unlike normal trading chart candlesticks which simply show the raw price data as it unfolds, Heiken or Heikin Ashi candles use two mathematical formulae that essentially produce a kind of average price for the open and close price. The end result is a chart that’s much smoother and easier on the eye. It can also be much easier to spot trends because a lot of the price action which isn’t helpful for this purpose tends to get filtered out.
Heiken Ashi formula
Here is how Heiken Ashi candles are generated.
- The top of the wick or shadow is the highest of either the previous high, open or close.
- The bottom of the wick or shadow is the lowest of either the previous low, open or close.
- The open price is the open and close price added together and divided by two.
- The close price is the open, high, low, and close prices all added together and then divided by four.
As well as the smoother appearance, another obvious difference in comparison to a chart with traditional candlesticks is that on a Heiken Ashi chart, the new candle opens at the midpoint of the previous candle.
Heiken Ashi strategy patterns
Now that we know how the individual candles are generated, let’s take a look at a common Heiken Ashi feature.
Probably the most obvious and distinctive one on a Heiken Ashi chart is that during a strong trend, there tends to be no wick or shadow at all on the opposing side of the candle. So, for example, in a strong bearish trend, the candles have no wick at the top. And vice-versa of course – during a strong bullish trend, the candles have no wick at the bottom.
Let’s take a look at this on a chart. This is EUR/USD on a daily chart.
Now let’s take a look at the bullish movement at the beginning.
You can see that the body of the first candle, a Doji candle, is completely engulfed by the bullish candle that followed it. The body of the second candle is several times bigger and has no shadow. This can often indicate a strong bullish trend.
The next three candles underline this get progressively bigger, showing even stronger bullish momentum. However, the fifth is significantly smaller, and the sixth is smaller still. Here we can see that the trend has slowed down. The penultimate candle is pretty small and wicks start to appear on both sides. And the final candle shows us that, come the end of the day, the market didn’t really commit to a clear direction.
Bearish trend
And now let’s take a look at the bearish trend on the right of the chart.
Once again, after the Doji candle, a huge bearish candle appears. Its body is several times larger than the Doji candle before it.
This could be a clear sign of a strong bearish trend. And sure enough, it is. It even keeps gathering momentum towards the end – look at the size of the penultimate two candles versus those in the middle. And all but one of them has absolutely no top wick.
The candle which does have a wick brings up a good point. While it’s certainly true that Heiken Ashi candles don’t tend to have wicks on the opposing side during a trend, this is a guideline, not a rule.
In conclusion
Keep an eye out for big candles right after a Doji candle. They could signify a change in market momentum and the start of a new trend. This could be something as simple as a retracement from the previous swing high or swing low. You could use other technical indicators to help you identify supporting evidence for this. An obvious example would be support and resistance levels you’ve drawn on your chart at a higher time frame. You could also add a couple of Moving Averages to see if the market is in a bullish or bearish trend, which you could then use to confirm your entry.
Heiken Ashi swing trading
We’re big fans of Arty and his YouTube channel The Moving Average. It’s got some great ideas for profitable trading, and his Heiken Ashi strategy video on the Dow Jones index is no exception. Check it out below.
Key points
An excellent point that Arty makes in his video is that because Heiken Ashi candles don’t display raw price data, you really shouldn’t use them for scalping. That’s because, in scalping, small prices can mean everything. With Heiken Ashi candles, there could be a huge difference in what the candle is showing compared to what the price is actually doing. This could cause you to enter the market at a really bad time and get stopped out.
In order to filter out this deviation and be sure that you’re seeing the real picture of what the price is doing, another key recommendation is that you don’t use this strategy on anything lower than the 1-hour chart. 4-hour or the daily chart is probably the sweet spot.
In his strategy, Arty uses a 1:2 risk-to-reward ratio. This means that a trade stands to gain 2 dollars for every dollar that’s at risk. He doesn’t make any recommendation as to how much of your account you should risk, but in another strategy of his we looked at, he suggested risking no more than 1% of your account per trade. This is in accordance with good risk management practice.
Another key point when determining your entry point into the market is the size of the candle, as Arty mentions. After the Doji candle, make sure the next candle is a really large one, a real momentum-shifting candle, and then wait for it to close before taking a position. Otherwise, you risk entering the market when there isn’t actually a trend. This could cause you to get stuck in a period of consolidation, or worse, get stopped out.
In conclusion
Finally, and the most important point with any trading strategy: test it first on a demo account before doing it on a live one. There’s no point risking real money on a strategy if you can’t even prove that it’s profitable on a demo account. Have fun, and good luck!