Using the Heikin Ashi Indicator for Determining Market Trends

Using the Heikin Ashi Indicator for Determining Market Trends

In this Indicator Spotlight, we’re looking at Heikin Ashi candles (sometimes spelled Heiken Ashi). You may use the Heikin Ashi indicator to determine market trends, identifying short/long biases. Blue candles will show a rising trend, whereas magenta candles indicate a downtrend. To learn more, watch the video or continue reading below.

Dan Valcu’s Formula:

Heikin Ashi charts are created the same way as a normal candlestick charts, but use modified bar formulas. Specifically, each candle is calculated and plotted using some data from the previous candle.

Heikin Ashi indicator for NT8

The OHLC refers to the current bar and the ha-prefix corresponds to the modified Heikin Ashi indicator values. The value haOpen equals the midpoint of the previous body range, and the haClose equals the average price of the current bar. The haHigh, is the highest value of real high (H), modified open (haOpen), and modified close (haClose). The same applies for the low definition, i.e. the lowest value of real low (L), modified open (haOpen), and modified close (haClose).

How to use the Heikin Ashi indicator:

When the haClose is above haOpen, we will see a bullish output (blue candle). Conversely, if the haClose is below haOpen, we will see a bearish output (magenta candle).

Heikin-Ashi Trend Interpretation
Trend Interpretation

Strong up-trends are characterized by long blue bodies with minor lower shadows and conversely for down-trends with long magenta bodies with minor upper shadows. If the bodies decrease in size, one should anticipate a weaker Heikin Ashi indicator trend. A period of consolidation will generally have several small bodies with both long upper and lower shadows. A very small body with tall shadows may be a warning about a possible change of trend.

Smoothed Heikin Ashi

In general, a Heikin Ashi chart will see a smoother output when compared to a traditional candlestick chart and the bars may then be further smoothed with one of over 30 different moving averages.

Smoothed Heikin-Ashi
Smoothed Heikin Ashi

The chart above applies the default SMA for smoothing the Heikin Ashi indicator output. However, you can easily exchange it with the Holt EMA, ADXVMA, Adaptive Laguerre etc. via the indicator dialogue box.

Primary Bars and Paint Bars

Although the above output looks straightforward and easy to trade, overlaying the primary bars with black for down closes and transparent for up closes shows a different picture.

Smoothed Heikin-Ashi with primary bars
Smoothed output with primary bars

It is of course important to be aware of the true price levels in order to understand what’s going on for setting appropriate risk and stop loss levels. A more useful application is therefore simply to use the Heikin Ashi indicator paintbars to display the trend bias on the primary bars as displayed in the chart below.

Using the Heikin Ashi Indicator for Determining Market Trends
Paintbars displayed on primary bars

You may display the Heikin Ashi paintbars with all bar types. One may  for example display the trend via paintbars on range, volume or renko bars.

The Heikin Ashi candles may also be used in combination with other tools from our NinjaTrader 8 Indicator Library. For example, you may review the Know Sure Thing indicator from the momentum oscillators category. Also, you may review the Relative Ranges indicator to identify increasing / decreasing volatility. For example, consider running Opening Range Breakout strategies when cumulated relative ranges are above average and conversely, avoid entries when below. Additionally, you’ll want to make sure that positions are not going agains at key support / resistance levels. These are available from our Session Tools and Fibonacci Indicators categories, such as the Fibs from the Prior Week.

To review additional information on the library version of the Heikin Ashi indicator, check out the link below: