The forex market, and by extension of course all the other financial markets, are rife with confusion. One of the major sources of confusion are all the similar terms and phrases that are actually not the same and definitely not interchangeable. Among these are candlesticks and Heikin Ashi.
They literally have no similarity, do they!? Well, in this case, when we are talking about similarity, unlike many other cases, we are not talking about similarities in the names. We are talking about similarities that are deeper than that.
So what is the difference between a normal candlestick chart and a Heikin Ashi chart? Is one better than the other? In this article we are going to discuss these two types of charting approaches and find the answers to these questions.
What Is a Candlestick Chart?
A candlestick chart is basically an approach to charting and drawing up charts that involves doing so with the help of candlesticks. Almost literal candlesticks.
So, instead of lines or bars that are most usually involved in the drawing of the chart, in candlestick charts we have these so-called candles.
Naturally, each candlestick in the chart has a body and a wick. Similar to any other candle. However, the difference is that the candle that we use on the charts might have a wick sticking out of both sides of the body. These different parts of a candle are used in the interpretation of the chart.
This would be a basic definition of a candlestick chart in the forex market. How about the Heikin Ashi chart?
What Is a Heikin Ashi Chart?
As we saw, a candlestick is a special form of charting technique. A Heikin Ashi is also a similar form of chart. It means in the formation of these charts candlesticks are also implemented.
Even though both of them are based on candlesticks, Heikin Ashi charts and normal candlestick charts are not the same thing and they have many differences.
The most important difference can be seen in the assumption behind Heikin Ashi.
The idea behind this form of charting is that the best way to trade in almost any market is to identify market trends and trade based on them. This is something that is also known as riding a trend.
But of course there are difficulties associated with that type of trading. Identifying trends is never easy in the market. This is because there is always a certain amount of noise around the trend.
This noise is made from all the small ups and downs and fluctuations that occur around a trend. It acts as a kind of cover around the trend that makes it harder to see.
The way Heikin Ashi charts are formulated and calculated will help traders see trends clearer and without the noise surrounding the trend.
How Dependable Are Heikin Ashi Charts?
In all financial markets, including the foreign exchange market, there are no assurances. No matter how precise and accurate a technique or tools in the market might be, there is assurance that it will turn out exactly how you predicted it to turn out.
Of course, you can look at various factors related to the tool or technique that can tell you just how reliable they can be. For instance, in the case of Heikin Ashi charts, they have been around for hundreds of years. In fact, the first person to hypothesize them was a Japanese merchant who did so in order to analyze the rice market.
That’s right, the rice market! So you can see just how long these charts have been around.
Furthermore, it is quite important to see for what purpose you are going to use the charting technique in question. Sometimes the misuse of techniques can naturally result in unreliable results.
But as far as Heikin Ashi charts are concerned, they are considered very reliable for the identification of trends and their continuation. But to make things even more reliable, you can use other techniques along with Heikin Ashi to provide confirmation.
A Comparison of Heikin Ashi and Candlesticks
The main difference between candlestick charts and Heikin Ashi charts is twofold. First their purpose and second their variation.
- Purpose – candlestick charts can be implemented for many different purposes and show you different things in the market. But a Heikin Ashi chart is specifically used for the detection of trends in the market.
- Variation – while basically there is only one type of Heikin Ashi chart, there are many different types of candlestick charts each with its own unique characteristics.
Which One Is Better: Heikin Ashi vs. Candlesticks
There really is no right answer here. We cannot really say which type of charting is better than the other. The answer will ultimately depend on your own trading style and trading condition.
If you are the type of trader who would normally rely heavily on trend trading, then Heikin Ashi charts are a better choice for you. This is because Heikin Ashi charts make it so much easier to identify trends and see how long they can last.
On the other hand, if your trading strategy is more dependent on the variations in price movements, then you might want to opt for more traditional candlestick charts.
Pros and Cons of Heikin Ashi Charts
Perhaps taking a look at the strengths and weaknesses of Heikin Ashi charts can help you decide better on which type of charting is more suitable for you.
The biggest pro for Heikin Ashi charts is that they can provide you with an averaged out chart with regard to the trends that exist in the market. This means because you get an averaged out picture of the trend, it does not include all the smaller ups and downs and noises that would normally be seen around it.
So the chart that you get with the Heikin Ashi is so much smoother compared to other forms of charts that you might otherwise utilize in the market.
On the downside, however, the limited function of a Heikin Ashi chart can be regarded as its very own disadvantage. These types of charts are useful because there is a trend in the market. Whether the trend is a bullish one or a bearish one does not matter much.
However, if there is not an actual and fully formed trend in the market, Heikin Ashi charts cannot be useful. Of course, there are many instances in the market where we only see a sideways trend, which is when the trend does not move up or down.
Candlestick charts and Heikin Ashi charts are very similar to one another in that they both utilize candlestick in drawing the charts. But they have different purposes. Mainly, Heikin Ashi charts are used for the identification of trends. Another difference is that Heikin Ashi charts are smoother and do not include small price movements and fluctuations unlike ordinary candlestick charts.