What is Heikin-Ashi Candles?
Heikin-Ashi is a weighted version of candlesticks, which is used in conjunction with candlestick charts to spot a stock’s trend. Heikin-Ashi is a Japanese term that means “average bar”. The Heikin-Ashi Candlesticks uses open and close data from the earlier interval and open, high, low, close data from the current interval to create a combo candlestick.
Traders use Heikin-Ashi candlestick charts to know when to stay in stock with the market trend and to exit the stock when the trend pauses or reverses.
Table of Contents
A normal candlestick chart follows the open-high-low-close (OHLC) candles, separated by time intervals. The Heikin-Ashi follows a modified method of close-open-high-low (COHL) but shares some characteristics with candlestick charts.
- Close= (Open+Close+Low+Close)/4
- Open= (Open of Prev. Bar+Close of Prev. Bar)/2
- High= Max[High, Open, Close]
- Low= Min[Low, Open, Close]
How Heiki-Ashi Candlesticks Works?
The Heikin-Ashi chart is almost like a normal candlestick chart, but the formula for calculating each candle is different, as displayed above. The time interval is set by the analysts, depending upon their need and type of chart they desired, like as daily, hourly, 30-minutes, or 5 minutes intervals.
As shown in the above chart the down intervals are represented by the red candles and the up intervals are represented by the green candles. Different charting platforms shows different colors for bullish and bearish candles.
How To Use Heikin-Ashi Candlesticks?
- The Heikin-Ashi charts indicate various things like, a long green Heikin-Ashi candle shows strong buying over the specified interval, and the absence of a lower shadow in the candle also shows strength.
- A long, red Heikin-Ashi candle shows strong selling over the specified interval. The absence of an upper shadow in the candle shows a strong weakness.
- Candlesticks with a very small body surrounded by bigger upper and lower shadows generally indicate a change in trend, risky traders may buy or sell after the signal, while some of them will wait for the confirmation before going buying or selling.
Heikin-Ashi Candlesticks is a very versatile tool for technical analysts, that can filter most of the noise, with the indication of reversals, and identify some classic chart patterns. In fact, most of the classic technical analysis indicators can be applied to these types of charts.
The day trader can use Heikin-Ashi Candlestick charts to identify the support and resistance of a stock, draw trend lines, or gauge the retracements. The Volume indicators and MACD and oscillator also work well with Heikin-Ashi candlestick charts.