What is the Heikin-Ashi technique?
The Heikin-Ashi technique averages the price data to create a Japanese candlestick chart that filters out market noise.
Heikin-Ashi charts, developed by Munehisa Homma in the 1700s, share some characteristics with standard candlestick charts, but differ based on the values used to create each candle. Instead of using the open, high, low, and close like standard candlestick charts, the Heikin-Ashi technique uses a modified formula based on two-period averages. This gives the chart a smoother appearance, making it easier to spot trends and reversals, but also hides gaps and some price data.
- Heikin-Ashi is a candlestick pattern technique that aims to reduce some of the market noise, creating a chart that highlights the direction of the trend better than typical candlestick charts.
- The downside to Heikin-Ashi is that some price data is lost with the average, which could affect risk.
- Long down candles with little upper shadow represent strong selling pressure, while long up candles with little or no lower shadow indicate strong buying pressure.
Heikin-Ashi: a better candlestick
The formula for the Heikin-Ashi technique is:
Heikin-Ashi Close=4Open+High+Under+CloseHeikin-Ashi Open=twoIt has opened–1+HA Close–1Heikin-Ashi High School=Max (High,It has opened,HA Close)Heikin-Ashi bass=Min (Under,It has opened,HA Close)where:Open etc.=Current period valuesOpen–1 etc.=Values from the previous periodHA=Heikin-Ashi
How to calculate Heikin-Ashi
- Use a period to create the first Heikin-Ashi (HA) candle, using the formulas. For example, use the high, low, open, and close to create the first HA closing price. Use open and close to create the first open HA. The maximum of the period will be the first maximum of HA and the minimum will be the first minimum of HA.
- With the first HA calculated, it is now possible to continue calculating HA candles according to the formulas.
- To calculate the next close, use the open, high, low, and close for that period.
- To calculate the next open, use the previous open and the previous close.
- To calculate the next maximum, choose the maximum of the current period maximum or the HA open or close of the current period.
- To calculate the next low, choose the high of the low of the current period or the HA open or close of the current period.
- For steps five and six, remember that the opening and closing of HA are not the same as the opening and closing of the period. The opening and closing of HA were calculated in steps three and four.
What does Heikin-Ashi tell you?
Technical traders use the Heikin-Ashi technique to more easily identify a given trend. Hollow white (or green) candles with no lower shadows are used to signal a strong uptrend, while full black (or red) candles with no upper shadow are used to identify a strong downtrend.
Inverted candles using the Heikin-Ashi technique are similar to traditional candle reversal patterns; they have small bodies and long upper and lower shadows. There are no gaps in a Heikin-Ashi chart as the current candle is calculated using information from the previous candle.
Because the Heikin-Ashi technique smooths price information over two periods, it makes it easy to spot trends, price patterns, and reversal points. The candles on a traditional candlestick chart frequently flip up and down, which can make it difficult to interpret. Heikin-Ashi charts usually have more consecutive colored candles, which helps traders to easily identify past price movements.
The Heikin-Ashi technique reduces false trading signals in choppy and sideways markets to help traders avoid trading during these times. For example, instead of getting two false reversal candles before a trend begins, a trader using the Heikin-Ashi technique is likely to only receive the valid signal.
Heikin-Ashi vs. Renko Charts
Heikin-Ashi charts are constructed on the basis of two-period averages. Renko charts, on the other hand, are created by showing only movements of a certain size.
While a Renko chart has a time axis, the boxes or bricks are not governed by time, only by movement. While a new HA candle will form each period, a Renko chart will only produce a new brick / box when the price has moved a certain amount.
Limitations of the Heikin-Ashi technique
Since the Heikin-Ashi technique uses two-period price information, a trade setup takes longer to develop. This is generally not a problem for swing traders who have time to let their trades unfold. However, intraday traders who need to exploit rapid price movements may find that Heikin-Ashi charts are not responsive enough to be helpful.
The averaged data also conceals important price information. Daily closing prices are considered important by many traders, however the actual daily closing price is not seen on a Heikin-Ashi chart. The trader only sees the average closing value of HA. To control risk, it is important for the trader to know the actual price and not just the averaged HA values.
Another important element in technical analysis that is missing from Heikin-Ashi charts is price differences. Gaps are used by many traders to analyze price momentum, set stop-loss levels, or trigger entries.
Example of using Heikin-Ashi candlesticks
Hieken-Ashi charts can be applied to any market and most charting platforms now have them included as a functionality. There are five main signals that identify trends and buying opportunities:
- Hollow or green candles with no lower “shadows” indicate a strong uptrend: Let your profit go up!
- Hollow or green candles signify an uptrend – you may want to add to your long position and exit short positions.
- Candles with a small body surrounded by upper and lower shadows indicate a trend reversal: risk-loving traders can buy or sell here, while others will wait for confirmation before going long or short.
- Full or red candles indicate a downtrend – you may want to add to your short position and exit long positions.
- Higher red or full shadowless candles identify a strong downtrend – stay short until there is a trend reversal.
These signals can make it easier to spot trends or trading opportunities than with traditional candles. Trends are not interrupted by false signals as often and are therefore more easily detected.
The chart example above shows how Heikin-Ashi charts can be used for business decision making and analysis. On the left, there are long red candles, and at the beginning of the decline the lower wicks are quite small. As the price continues to decline, the lower wicks lengthen, indicating that the price declined but then rose again. Buying pressure is starting to mount. This is followed by a strong bullish move.
The bullish movement is strong and does not give great indications of a reversal, until there are several small candles in a row, with shadows on each side. This shows indecision. Traders can look at the big picture to help determine whether to go long or short.
Charts can also be used to keep a trader in a trade once a trend begins. It is generally best to stay in a trade until the Heikin-Ashi candles change color. However, a color change doesn’t always mean the end of a trend, it could just be a pause.