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The Heikin-Ashi indicator: Advantages and disadvantages

Identifying market trends is one of the most important techniques in trading. However, volatility can make it difficult to spot a trend. During such times, traders use various methods and indicators to help in their decision-making process, and the Heikin-Ashi indicator is a beginner’s top choice for this. The main advantage of the Heikin-Ashi formula is that it helps traders find trends more easily and can be used to predict future price movements. In this article, we show you how it works.

Contents:

  • What is Heikin-Ashi?
  • Major features of the Heikin-Ashi indicator
  • Trading with Heikin-Ashi
  • Conclusion

Interact with the underlined words and green dots to get additional details and explanations.

What is Heikin-Ashi?

Heikin-Ashi is a Japanese indicator that produces candlestick patterns showing the momentum or strength of a trend in the market. In Japanese, “heikin” means balanced or in the middle, and “ashi” means foot or line between. The Heikin-Ashi indicator can be used in conjunction with classic candlesticks and oscillators to see current trends in the market and predict future prices. In a way, this indicator is a tool for easily reading candlestick charts and predicting trends.

The shape depicted on a Heikin-Ashi chart does look similar to that on a candlestick chart, but there are special algorithms and formulas that make this chart different in terms of technical analysis. The Heikin-Ashi indicator is also a beginner’s favorite because it’s relatively easy to use.

A Heikin-Ashi chart consists of close-open-high-low candles, but the calculation elements are much more complex than classic candlesticks. Heikin-Ashi is usually slower than ordinary candlesticks, with its signal tending to lag behind real time, like the Moving Average indicator. This could be considered a drawback for some, but it can certainly be used to one’s advantage, especially if applied in a volatile market.

Based on optimal candlestick logic, the Heikin-Ashi indicator visually averages out and softens fluctuations in the market, simplifies analysis and can indicate the best time to enter the market.

However, the Heikin-Ashi formula is only suitable for signaling entry, exit and hold positions, and cannot be used as a single reference for taking these positions. To determine an entry point, you should combine this chart with other indicators, such as moving averages and relative strength index.

The Heikin-Ashi indicator is available on Olymp Trade, where you can apply it to your screen in just two mouse clicks.

Heikin-Ashi on Olymp Trade — the official Olymp Trade Blog
Fig. 1. Accessing the Heikin-Ashi indicator on Olymp Trade

We recommend being able to read other charts so that you can combine the results of your technical analysis and make informed investment decisions.

Major features of the Heikin-Ashi indicator

Just like everything else, this indicator has its advantages and disadvantages. To save you the trouble of only finding them out through use, we’ve listed the major ones here. Let’s go through them.

Advantages of Heikin-Ashi

✅ Eliminates noise

Heikin-Ashi makes it easier for traders to detect movement because it uses moving averages. Reading price trends on candlesticks can be troublesome for new traders because there is a lot of noise or visual stimulus that interferes with the analysis.

✅ Visibly clear

Heikin-Ashi changes the appearance of ordinary candlesticks to clearly show the strength of a market trend and the area that is in a state of trend or consolidation.

✅ Versatile

Heikin-Ashi can be integrated into any available technical analysis system.

✅ Helps confirm entry positions

Heikin-Ashi makes the entry point of a trade more clear. When using the indicator, we can read the graph more easily and predict a good entry point just from looking at the color.

✅ Helps confirm hold and exit positions

As Heikin-Ashi candles show a trend’s strength via the size of the candle bodies formed on the chart, it also helps us decide when to hold onto an asset or exit the market. When candle bodies are bigger, it shows that the trend is strengthening, so we can hold our position. When candle bodies shrink, it is a signal that the trend is starting to weaken, giving us an opportunity to exit the market.

Disadvantages of Heikin-Ashi

❎ Delayed

The Heikin-Ashi indicator provides a delayed signal. Even so, this delay is not an absolute weakness, because it significantly reduces the number of false signals and can prevent false opens.

❎ Limited

The Heikin-Ashi chart is only suitable for long-term trading because it uses moving-average candles. The larger the timeframe we use, the more valid the market momentum detected. If you use a timeframe that is too small, detecting momentum in the market will be much more difficult. Therefore, this chart is not suitable for traders using scalping techniques.

Trading with Heikin-Ashi

The Heikin-Ashi indicator is widely used in trading. Let’s discuss how to do that properly.

How to use Heikin-Ashi

Heikin-Ashi candles can help you determine when to enter or exit a trade according to market trends.

If a green candlestick has no lower shadow or tail below it, it indicates that the market is in a strong bullish state.

A strong bullish pattern on a Heikin-Ashi chart – Olymp Trade – 19.07.2022
Fig. 2. A strong bullish pattern on a Heikin-Ashi chart
A strong bullish pattern on a Heikin-Ashi chart – Olymp Trade – 19.07.2022
Fig. 3. A strong bearish pattern on a Heikin-Ashi chart

A strong bearish trend is shown when the candle is red with no upper shadow or tail above it.

When a bearish trend is reversing, green candles on the Heikin-Ashi chart have a long upper shadow.

Fig. 4. A bullish trend, consolidation and bearish trend on a Heikin-Ashi chart

Meanwhile, a bullish reversal signal is formed when red candles have a long lower shadow.

When the market is in a state of indecision or consolidation, candles on the Heikin-Ashi chart can be red or green with varying shadow sizes.

Conclusion

Heikin-Ashi is the best indicator for novice traders because it helps to read price trends in the market easily. With the help of the Heikin-Ashi chart, you can discern the strength of a trend or momentum that is happening in the market. Traders only need to observe the size of the candle body and the color of the candle to understand whether they are better off opening, holding or exiting their position.

However, the Heikin-Ashi indicator is not a magic bullet. You’ll get the most out of using Heikin-Ashi alongside the Bollinger Bands and Moving Average indicators. Once you’re comfortable using these trading tools, you can either put your knowledge to the test or continue mastering trendlines. Join the platform and take advantage of the multiple trading tools available for use. Become a force to be reckoned with on the markets with Olymp Trade!

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Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.