How do you use Heikin Ashi?
Now that you’ve learned how to calculate Heikin Ashi candlesticks, let’s discuss how to use and read a Heikin Ashi candlestick chart.
The idea behind using a Heikin Ashi chart is that it filters market noise.
And since noise is filtered, you basically see the naked trend.
Because the Heikin Ashi candlesticks are calculated based on averages, the candlesticks will have smaller shadows (wicks) than a regular Japanese candlestick.
Just like with regular Japanese candlesticks, with a Heikin Ashi candlestick, the smaller (or shorter) the shadow (or wick), the stronger the trend.
Green candles with no lower shadow signal a strong UPTREND.
Red candles with no upper shadow signal a strong DOWNTREND.
Heikin Ashi charts are used by technical traders to IDENTIFY:
- Trend DIRECTION
- Trend STRENGTH
So If your goal is to catch trends and ride them as long as possible, then you may want to learn how to use a Heikin Ashi chart.
How to Use Heikin Ashi to Identify Trend Direction
A Heikin Ashi chart shows you the direction of a trend through its color-coded candles.
A green candle is telling you that trend is UP. A red candle is telling you that the trend is DOWN.
How to Use Heikin Ashi to Identify Trend Strength
A Heikin Ashi chart shows you the strength of the trend by observing the shadows (or wicks).
You’ll notice that for many of the green candles, there is no lower shadow or wick.
Vice versa for the red candles. Most do not have any upper shadows or wicks.
These candlesticks do not show a shadow in the OPPOSITE direction of the trend.
When there is no shadow, this means you’re in a strong trend.
So the main thing you want to look for on a Heikin Ashi chart to determine trend strength is shadowless or wickless candlesticks opposite the trend.
Candlesticks that have no shadow or wick on one end are also called “shaved candles“.
Depending on which end lacks a shadow, there’s a name for each type of shaved candle.
If there is no lower shadow/wick, also known as having “no tail”, the candle is called a “shaved bottom“.
“Shaved butt” would’ve been a better name in our opinion. ?
If there is no upper shadow/wick, also known as having “no head”, the candle is called a “shaved head“.
Technically, the color of the candle does NOT matter, as long a candle lacks a tail or head, but for the purposes of Heikin Ashi, we want to see shaved bottoms that are green and shaved heads that are red since we’re looking for trend strength.
