Because the candles tend to leave behind smaller corrections and consolidations, this means that when the direction changes on a Heikin Ashi graph, its likely a larger trend change. The ability to filter out the noise of a trend has a major effect on how you can exit a trade.
For example, the chart below shows an uptrend that eventually formed a couple of long wicks at the top. After those candles, the next three were red, while the second and third had no wick whatsoever on the top.
This shows that the color change quickly identified the change in trend as the market dropped from there.
The more candles you see without a wick going against the trend, the more likely the trend is to continue.
If you see a large majority of bullish candles without a lower wick, this shows just how much bullish momentum there is in the market.
This allows you to be more confident in the trend, and therefore hang onto a profitable trade, the very essence of what makes a profitable trader. Obviously, the same thing applies to a downtrend that features multiple red candles without a wick on the top. Looking at the chart below, the uptrend that is marked by the white arrow shows multiple white candles without any lower shadows.
In fact, when the market does start to show wicks on the bottom of the candles, there is a red one, and then another few smaller white candles. This was the last gasp of the uptrend, before rolling over. The lack of range on the last few candles, as well as lower wicks, showed things were changing.
The Heikin Ashi candles allow trading of patterns and candle shapes like any other type of charting. However, one particular candlestick that seems to carry more weight than in other forms is the doji.
The doji candlestick is when the market opens and closes at the same (or at least close to) price. This is particularly interesting and telling on a Heikin Ashi chart when it appears at the top or bottom of a trend. This is because the averaging formula will take into account what has been going on, and if the candles start to slow down, this clearly means that the momentum is dropping.
Take a look at the uptrend in the CHF/JPY 4 hour chart below.
The blue rectangle shows where the market runs out of steam, as there are multiple dojis. Notice that the next candle with any length to it at all is a red one, showing that the momentum is rolling over. Shortly afterwards, the market started a downtrend. This is quite common with the Heikin Ashi indicator, as it takes out so much noise.
It should also be noted that the very nature of the candles seem to form a lot of flags. The same chart from the previous example, zoomed out a bit, formed a couple of flags as marked on the chart.
This is a perfect example of how the Heikin Ashi indicator lays out the trend. The shape of the flag shows that there is a pullback after initially surging to the upside. You can see that the trend accelerated at this point and went much higher.
Let’s think about this: The smoothing mechanism of the Heikin Ashi system shows the nature and average of the trend, not all of the noise that may not have made it clear that a flag was setting up.
This allows the trader to look at the trend and ignore the individual noisy moves. It is a great way to see the overall move, and not get caught up in the minutiae, making it easy to trail right along with the trend, if and when it forms.