Monday, May 20, 2024

Using Heikin Ashi to identify the trend strength and direction


Using the Heikin Ashi

Heikin Ashi is one of the candlestick charts like the famous ones that we know: line chart, bar chart, traditional Japanese candlestick charts. It looks very similar to the conventional Japanese candlesticks, but they work differently. The traditional ones help the traders know an excellent entry point, while the Heikin Ashi helps the traders when they are already in the trade it helps them see whether it is still worth it to stay in the trade or not.

Munehisa Homma is the rice merchant who discovered this technique a hundred years ago. Upon tracking the market’s price action, he knew how other market participants psychologically behave and used it. Using the Heikin Ashi technique loosens the market noises making the trader see the trend more evident and barer.

Heikin Ashi candlesticks

The Heikin Ashi candlestick calculation basis is the averages, and they have more minor shadows than the traditional Japanese candlesticks. The shorter the Heikin Ashi’s shadow, the more robust the trend. This same fact is valid with the conventional Japanese candlesticks. Let us elaborate further in this enumeration:

  • Uptrend. A strong uptrend looks like a green candle without a lower shadow.
  • Downtrend. A strong downtrend looks like a red candle without an upper shadow.

Technical analysis involves the maximized use of charts. Technical analysts use the Heikin Ashi charts when they look for the trend direction and strength. In this way, traders can ride these trends as long as they can. Let us elaborate more on this below.

Finding the trend direction with Heikin Ashi

Candles have colors for a reason. The color tells us which direction the trend is going. If the candle is color green, the trend is up. If it is color red, it is down.

Determining how strong a trend is with Heikin Ashi

If you want to determine how strong a trend is, better start monitoring the shadows. Most green candles have no lower shadows, and red candles do not have upper shadows. For additional information, shadows are also known as wicks.

Heikin Ashi will never display a shadow in the trend’s other side of the direction. Furthermore, a candle without a shadow also means that the trend is strong. So, if you decide to apply the Heikin Ashi technique when you trade, watch out for candlesticks with no shadows on the other side of the trend to know how strong the trend is. These types of candlesticks are also known as shaved candles.

We call shaved candles with no lower shadows or wicks “shaved bottom,” also known as candles with no tail. We can call shaved candles with no upper shadows “shave head,” which are also known as candles with no head.

Additional tip before ending this topic

Do not stress too much about the candle color and focus more on the shadows and observe whether they have a head or a tail. But of course, it does not hurt to pay some attention to the color since the candle colors in Heikin Ashi tell us how strong a trend is. Remember, shaved bottoms should be green, and shaved heads are usually red.