Heikin Ashi: Meaning, Calculation, Interpretation and More

In this article, we will discuss

• What is a Heikin Ashi Candlestick Chart?
• Decoding the Heikin Ashi Candle Formula
• Interpreting Heikin Ashi Candlesticks
• Tips to Use Heikin Ashi Charts in Your Trades
• Heikin Ashi vs Traditional Candle Charts
• Benefits of Heikin Ashi Charts
• Downsides of Heikin Ashi Charts
• Conclusion

Are you a trader in the stock or securities market? In that case, you may be familiar with traditional candlesticks, which display four key price levels — namely, the open, high, low and close prices. These price points, abbreviated as OHLC, give you a clear idea of how the price of a stock or security moves during a trading session. 

While this can be incredibly useful, it is not always enough. For instance, the broad trend of a stock’s price may be bullish but there may be several minor fluctuations in the opposite direction. So, despite an overarching bullish trend, you may find bearish candles in the conventional candlestick chart. This can be a hindrance to ascertaining the overall trend.

With Heikin Ashi candles, you can overcome this challenge and better understand how the price of a stock or security is moving.

What is a Heikin Ashi Candlestick Chart?

A Heikin Ashi (HA) chart plots the price of a security using four key price points — much like a typical traditional candlestick chart. The phrase ‘Heikin Ashi’ in Japanese translates to ‘average bar’ in English. This name stems from the fact that, unlike a conventional candle chart, a HA chart uses average or smoothed-out prices to plot each candle. As a result, the noise of minor price trends is filtered out, making the broader trend more obvious.

The history of Heikin Ashi price charts can be traced back to the 1700s when they were developed by Japanese trader Munehisa Homma. Over the centuries, as trading techniques became more advanced and trading software was developed, these price charts were incorporated into modern trading. Today, you can access Heikin Ashi candle charts as well as other advanced tools like Renko and Point & Figure charts on leading trading platforms like the Samco trading app.

Decoding the Heikin Ashi Candle Formula

To better understand how the HA chart smooths out the price action, you need to study the Heikin Ashi candle formula. Like traditional candles, HA candles also plot the open, high, low and close prices for each trading session considered. However, these prices are not raw data. Instead, they are averaged out using the Heikin Ashi calculation shown below:

• Heikin Ashi Close (HA Close)

The HA close is the average price of the current candle or bar. Its formula is:

HA Close = (Current Open + Current High + Current Low + Current Close) ÷ 4

• Heikin Ashi Open (HA Open)

The formula for the HA open accounts for the previous period and is essentially the middle point of the previous bar. Its formula is:

HA Open = (Previous HA Open + Previous HA Close) ÷ 2

• Heikin Ashi High (HA High)

This price point is the maximum of the current high, HA open and HA close. Its formula is:

HA High = Max (Current High, HA Open, HA Close) 

• Heikin Ashi Low (HA Low)

This price point is the minimum of the current low, HA open and HA close. Its formula is:

HA Low = Min (Current Low, HA Open, HA Close) 

As the formulas shown above reveal, a Heikin Ashi candle plots the prices differently from a traditional candle. This makes HA charts a fine addition to your conventional candlestick charts. Together, they can give you a bird’s eye view of the broader primary trend as well as a close-up look into the nuances of minor price movements. 

Interpreting Heikin Ashi Candlesticks

To make the most of Heikin Ashi charts, you need to know more than just the Heikin Ashi candle formula. It’s important to also be aware of how to interpret these candles on the HA chart. The following pointers can help you understand how to read HA candles. 

• Bullish Candle

A hollow candle is formed when the HA close is higher than the HA open. This candle may also be represented as a green or white bar.

• Bearish Candle

A solid or filled candle is formed if the HA close is lower than the HA open. This candle may also be represented as a red or black bar. 

• Bullish Trend

A series of long green candles may indicate a strong upward price trend. Small or no lower shadows indicate high buying pressure. 

• Bearish Trend

Long red candles in quick succession may indicate a strong downward trend instead. Here, if the Heikin Ashi candles have small or no upper shadows, it may further confirm high selling pressure. 

• Price Reversal

Like conventional candle charts, HA charts can also contain specific patterns that indicate price reversals. Some such Heikin Ashi candle patterns include Doji candles or transition candles that change from hollow to solid (or vice versa). 

• Price Consolidation

If you notice short candles on a HA chart, it may be a sign of indecision or consolidation in the market. This is especially true if the short bodies are coupled with long shadows. Such candles indicate that neither buyers nor sellers are exclusively dominating the market. 

• Trend Strength

If you notice a consistent series of green candles without any red candle interrupting it (or vice versa), it may be a sign of a strong trend. The longer the uninterrupted series, the stronger the trend. Additionally, the longer the body of a HA candle, the stronger the price momentum may be.

Tips to Use Heikin Ashi Charts in Your Trades

In addition to knowing how you interpret Heikin Ashi charts, you also need to be clear about how these patterns can help you formulate trading strategies. The tips outlined below will guide you. 

• Spot Trend Reversals

Colour changes in the Heikin Ashi candles may indicate potential main trend reversals. A switch from green to red could be a bearish reversal, while the opposite may signal a bullish reversal.

• Confirm with Other Indicators

Combine your HA charts with other technical indicators like moving averages, MACD, RSI and the like to confirm trends and validate potential entry and exit points for your trades. 

• Use for Swing Trading

Heikin Ashi charts can be particularly useful for swing trading because they filter out market noise and highlight long-term trends. 

• Set Stop-Loss Levels

Use the highs and lows of Heikin Ashi bars to set your stop-loss levels for short and long positions respectively. 

• Use Multiple Time Frames

Analyse HA charts across different time frames to get a more holistic view of the market trend and make better trading decisions. 

Heikin Ashi vs Traditional Candle Charts

Heikin Ashi charts differ from traditional charts in many ways. The fundamental difference lies in how the price points are calculated. Because of this, HA candles tend to remain green during a strong uptrend or red during a strong downtrend. On the other hand, traditional candles may take on a colour that is opposite to the prevailing trend if that day’s price moves in the opposite direction. For example, you may notice a red candle during a prevailing bullish trend (or vice versa).

In addition to this, there are several other differences between traditional candlestick charts and Heikin Ashi charts, as tabulated below:

Benefits of Heikin Ashi Charts

• Smoothens price action
• Clarifies overall trends
• Reduces market noise
• Highlights main trend reversals
• Helps you stay in a trend longer

Downsides of Heikin Ashi Charts

• Delayed signal generation for short-term fluctuations
• May miss minor trends
• Less detailed than conventional candles
• Requires additional confirmation from other indicators
• Limited backtesting accuracy because of price smoothening

Conclusion

Heikin Ashi candles can be highly useful if you want to capitalise on the prevailing primary trend over the medium term or long term. They can also be useful if you are keen on leveraging possible main trend reversals. For a more comprehensive view of the markets, you can combine HA charts with regular candle charts and plan your trades accordingly.

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