In the chart above, the blue oval shows a shooting star. This bar has no lower shadow, and its body is about three times smaller than the upper shadow/tail.
High Wave
High waves are bars with long and roughly equal upper and lower shadows. They can be of any color. Such patterns, like Doji, indicate the balance of buyers and sellers and may be the first signal of a bullish or bearish trend movement that is coming to its end.
This will open the indicator settings. To add it to the chart with default parameters, click "OK". Most of the parameters are the same as for other indicators. I talked about them in detail in "Bollinger Bands Indicator in Forex Explained".
There is a downtrend after a strong and long uptrend, and the lower tail is much larger than the upper one (blue circle). This can be an indirect signal for a trend reversal. Note that a few bars before, the situation was pointing to a reversal, but the trend continued for some time. In Heiken-Ashi scalping, such situations aren’t rare. So, when trading, you should set stop losses close to the position’s opening level and strictly follow your money management strategy.
Step 4. Enter a buy position at the opening of the next candle after the Doji (blue line).
The image above shows all the listed Heiken-Ashi patterns, and you can use it as a cheat sheet. Black candles are the same as red candles while empty candles stand for green candles.
Now let's take a closer look at each pattern.
Heiken-Ashi Doji
This forms when the opening and closing prices are almost the same. At this moment, bulls and bears are equally strong, showing uncertainty in the market. Therefore, when Doji appears at the top of an uptrend, prepare to open a short position, and at the bottom of a bearish trend, open a long trade. To maximize reliability, combine Doji with an oscillator, such as Stochastic.
For comparison, here is what the Heikin-Ashi candles look like in the online terminal. Comparing this Heikin Ashi chart and MT4, you can see that Japanese candlesticks have been completely replaced on the price chart.
How Does Heiken-Ashi Work?
It is followed by a long Doji (black oval). Two reversal patterns in a row rarely happen. At the same time, they give enough confidence to go for an aggressive market entry.
With the figure above the Heikin Ashi chart shows an example of different patterns.
Triangles
This is the most common pattern in Heiken-Ashi. The borders are akin to support and resistance levels. If the upper border is broken during the previous uptrend, open a long position since the uptrend will continue. If the price breaks the lower border, expect a reversal, and open a short position. The opposite is true with a bearish trend.
Japanese Candlesticks
Heikin-Ashi Candles
Long shadows
Short shadows
The body starts near the close of the previous bar.
The body starts approximately in the middle of the previous bar.
The bars show the real price situation.
Due to smoothing, the bars are formed with a slight lag, reflecting the trend rather than the exact price movement.
At first glance, Heikin-Ashi technique vs a normal candlestick chart is the same. But if you look closely, you will notice one crucial difference - smoothed bars have lower wicks, and the max may not reach the actual extremum of the candlestick. At the same time, the body of each Heikin-Ashi bar starts near the middle point of the former bar.
There is one more thing: because of smoothing, the Heikin-Ashi indications have a slight lag. To illustrate, I compared the two candlestick charts - the Heikin-Ashi technique on the left and the Japanese candlesticks on the right.
The Heikin Ashi chart shows an example of a high wave. Its shadows are many times larger than the body and are approximately the same in length.
Heikin-Ashi Trends
In terms of Heikin-Ashi vs. candle, it’s easier to detect a trend direction with Heikin-Ashi while also getting better trading results. Experienced traders look at several factors at once:
The body’s length and its change over time;
The ratio between the body’s size and shadows;
Whether the bullish or bearish movement is predominant;
The direction of price movement.
Below, I will give step-by-step instructions on how to identify trends (bullish and bearish) with these signs.
Bullish Heikin-Ashi Trend
The bullish trend direction matches the following conditions:
The price momentum is going up.
There are mostly green candles that look like upward bars on the chart.
If the bars’ bodies increase over time, the bullish movement intensifies and vice versa. Small bodies signify the trend is ending soon.
With a strong, stable upward movement, Heiken-Ashi candlesticks form small or no lower shadows.
As the next candle opens the selling pressure rises, and it is a good time to enter a sell trade (blue line). Set stop loss at the nearby Heikin Ashi high (red line). Also, if the local maximum is far from the opening price, set the stop to a level lower.
The colored circles point to the areas with the biggest differences. You can clearly see the lag in the first red circle. The Japanese candlestick has already formed a long red body, while the HA candlestick is still green. Later on, we will cover how to find such differences and what to do with them.
How to Read Heiken-Ashi Candles
Knowing the Heikin-Ashi technique secrets, you can determine both the current bullish or bearish trend and its starting and ending points. If there is a minimal shadow (or no shadow at all)with a steady rise or fall in prices, it’s an important sign.
This signal indicates the trend’s strength and that it will continue in the near future. So, with a steady bearish movement, you can see a drop in the upper shadow, and with a stable bullish - in the lower shadow.
The bar’s open level is an indirect sign of a stable movement in a certain direction. In this case, it is in the middle of the previous bar. The third piece of evidence supporting the price direction is the candles’ color. If such Heikin-Ashi candlestick charts mostly show rising bars (green candles in the online terminal), the trend is bullish. If there are falling bars (red candles), it’s bearish.
An indirect indication of the trend’s strength is the ratio of the bar sizes. If each new candle’s body is larger than the previous one, the trend’s strength increases. If the bars are progressively getting smaller, especially together with increasing shadows, expect the movement in the current price direction to end soon.
On the right, you will see the updated Heikin-Ashi candlestick chart, similar to the one drawn in the LiteFinance terminal.
Heiken-Ashi Candles Models
When trading Heiken-Ashi, candlestick patterns are often used to determine the right time to enter the market. In this article, I’ll describe the most popular patterns with the most accurate Heiken-Ashi signals: