Charting is a general approach to trading and also market analysis that is employed by a whole variety of traders in financial markets. According to common belief, there are three different types of charts in any market. These three being line charts, bar charts, and also candlestick charts. However, in this article we are going to discuss another form of chart that is called Heikin Ashi.
Heikin Ashi is another approach to drawing up charts. It used different types of visual elements in this regard. As the name suggests, Heikin Ashi chart types have their roots in the Japanese tradition of market analysis and charting. There is even a whole type of chart in the market known as traditional Japanese candlestick charts. So what is so special about Heikin Ashi?
A Look at Traditional Japanese Charts
The traditional Japanese candlestick charts are mainly used in order to detect a proper point of entry into a position. The reason they are good for this specific purpose is because at any moment they can present the trader with several potential points of reversal in the trend or a breakout from the trend.
This is important to know if you want to discuss Heikin Ashi charts. Because in most cases, traders would confuse all of these Japanese approaches to charting with each other. When in fact they are all different.
So it can be concluded that traditional Japanese charts are specifically useful for finding the entry points for new positions. Now the question has to be asked: what is the difference between the Japanese traditional charts and Heikin Ashi?
What Is a Heikin Ashi Chart?
There are of course many uses and functions that can be derived from the Heikin Ashi charts and techniques. But we can say that one of the main functions of Heikin Ashi is when we have used the Japanese traditional charts to enter into a position, Heikin Ashi can help us figure out whether it is time to come out of the position, or it is still premature to exit and the position must be kept open.
So this is what Heikin Ashi can help traders do. This form of charting can make the normal and ordinary candlesticks become easier to read. And when they become easier to read, it also becomes easier for traders to calculate if they should remain in a certain position and go along with the trade. Or it is time to exit the trade because of a potential upcoming reversal or break out from the trend.
So there is a lot of similarity between the ordinary candlestick charts and Heikin Ashi. But the advantage of Heikin Ashi is that it can help you decide with a much higher degree of certainty compared to ordinary candlestick charts.
A Closer Look at the Ideas Behind Heikin Ashi
What does Heikin Ashi mean anyway? Obviously it is a Japanese term that is made from two different words, the first meaning average and the second meaning speed. This is why it is believed that Heikin Ashi refers to the average speed of price change.
Similar to other candlestick tools and techniques, the main aim behind the use of Heikin Ashi is to provide a clearer image of the chart. You see, ordinarily the chart would be cluttered with all sorts of information that may or may not be useful at any one point during the process of trading.
This is why these candlestick tools are applied to the chart in order to make it less cluttered. And this is exactly what Heikin Ashi can do for you. It will remove unnecessary clutter from the chart so you can make a better decision with regard to your open positions.
In fact, this is where traders can make some of the biggest mistakes. If you panic and prematurely close your position you will have lost the opportunity to pocket a lot of the profits that presented themselves only after you closed your position too soon.
On the other hand, if you do not see the warning signs and keep your position open, it is exposed to all the threats and risks in the market and you can lose your profits and end your position in loss.
Who Can Benefit from Heikin Ashi?
Virtually any trader can benefit from applying Heikin Ashi. But due to their precise nature in helping to determine when the trader should exit a position or remain in one, they can be particularly useful for long term traders.
These traders for example can be those who have decided to trade with the position trading style or other trading strategies that are much longer term in their time frame approach.
When you are in the position for the long term, one of the factors that becomes really important for you is when you should exit the position or whether you should keep going because it would be beneficial for you.
In these cases, and with these types of trading strategies, Heikin Ashi can be quite beneficial for the traders.
How Can You Apply the Heikin Ashi Chart?
As we have mentioned above, the whole idea behind the use of Heikin Ashi approach to charting is that it can remove the clutter from the trend. But why is that important?
When a trend is cluttered, it is difficult for the trader to notice the reality behind a trade. So what a Heikin Ashi chart will do is remove this noise and allow you to see the trend clearly.
The most important thing you need to know about Heikin Ashi is that at the crux of their calculation lies averages.
It is precisely based on averages that Heikin Ashi charts are calculated and drawn. So what does it mean for the trader?
When averages are used in the calculation, it means the final chart that is made with the help of Heikin Ashi will have much less shadow in its candles compared to an ordinary candlestick chart.
Of course this doesn’t mean there are no shadows. Just that there are less shadows than you would have encountered otherwise. And in this way, you can actually rely on the shadows that remain under or above the candlesticks.
If there is a green candlestick which does not have any lower shadow, then that is a powerful indication of an upward trend. On the other hand, if there is a red candlestick that does not exhibit a shadow or wick on the upper side, then it means that the prevailing trend in the market is going to be a bearish one.
Therefore, the Heikin Ashi charting approach is implemented by traders to calculate two important factors about a trend. First of all, the direction of the trend, whether it is bullish or bearish. And second, the power of the trend. How powerful is it? And how long will it last?
Heikin Ashi is a charting approach that was developed by a Japanese businessman hundreds of years ago. This charting approach will allow traders to identify trends in the market with a high degree of certainty. This information can be used to decide when a position ought to be close or rather kept open.