How to Use Heikin-Ashi Candlesticks in Your Trading Strategy

KEY TAKEAWAYS

• Heikin-Ashi is a candlestick pattern technique that aims to reduce some of the market noise, creating a chart that highlights trend direction better than typical candlestick charts.

• The downside to Heikin-Ashi is that some price data is lost with averaging, which could affect risk.

• Long down candles with little upper shadow represent strong selling pressure, while long up candles with small or no lower shadows signal strong buying pressure.

Introduction

Heikin-Ashi Candlesticks are an offshoot from Japanese candlesticks. Heikin-Ashi Candlesticks use the open-close data from the prior period and the open-high-low-close data from the current period to create a combo candlestick. The resulting candlestick filters out some noise in an effort to better capture the trend. In Japanese, Heikin means “average” and Ashi means “pace” (EUDict.com). Taken together, Heikin-Ashi represents the average pace of prices. Heikin-Ashi Candlesticks are not used like normal candlesticks. Dozens of bullish or bearish reversal patterns consisting of 1-3 candlesticks are not to be found. Instead, these candlesticks can be used to identify trending periods, potential reversal points and classic technical analysis patterns.

Calculation

Heikin-Ashi Candlesticks are based on price data from the current open-high-low-close, the current Heikin-Ashi values, and the prior Heikin-Ashi values. Yes, it is a bit complicated. In the formula below, a “(0)” denotes the current period. A “(-1)” denotes the prior period. “HA” refers to Heikin-Ashi. Let's take each data point one at a time.

1. The Heikin-Ashi Close is simply an average of the open, 
high, low and close for the current period. 

<b>HA-Close = (Open(0) + High(0) + Low(0) + Close(0)) / 4</b>

2. The Heikin-Ashi Open is the average of the prior Heikin-Ashi 
candlestick open plus the close of the prior Heikin-Ashi candlestick. 

<b>HA-Open = (HA-Open(-1) + HA-Close(-1)) / 2</b> 

3. The Heikin-Ashi High is the maximum of three data points: 
the current period's high, the current Heikin-Ashi 
candlestick open or the current Heikin-Ashi candlestick close. 

<b>HA-High = Maximum of the High(0), HA-Open(0) or HA-Close(0) </b>

4. The Heikin-Ashi low is the minimum of three data points: 
the current period's low, the current Heikin-Ashi 
candlestick open or the current Heikin-Ashi candlestick close.

<b>HA-Low = Minimum of the Low(0), HA-Open(0) or HA-Close(0) </b>

Before moving to a spreadsheet example, note that we have a chicken and egg dilemma. We need our first Heikin-Ashi candlestick before we can calculate future Heikin-Ashi candlesticks. Therefore, the first calculation simply uses data from the current open, high, low and close. The first Heikin-Ashi close equals the average of the open, high, low and close ((O+H+L+C)/4). The first Heikin-Ashi open equals the average of the open and close ((O+C)/2). The first Heikin-Ashi high equals the high and the first Heikin-Ashi low equals the low. Even though this first Heikin-Ashi candlestick is somewhat artificial, the effects will dissipate over time (usually 7-10 periods). StockCharts.com starts its Heikin-Ashi calculations before the first price date visible on each chart. Therefore, the effects of this first calculation will have already dissipated. The chart above shows examples of two normal candlesticks converting into one Heikin-Ashi Candlestick.

Interpretation

Heikin-Ashi Candlesticks are very similar to normal candlesticks, but differ in some key features. A Heikin-Ashi candlestick is hollow when the HA-Close is above the HA-Open; conversely, Heikin-Ashi candlesticks are filled when the HA-Close is below the HA-Open. This is similar to normal candlesticks, which are filled when the close is below the open and hollow when the close is above the open.

While traditional candlestick patterns do not exist with Heikin-Ashi candlesticks, chartists can derive valuable information from these charts. A long hollow Heikin-Ashi candlestick shows strong buying pressure over a two day period. The absence of a lower shadow also reflects strength. A long, filled Heikin-Ashi candlestick shows strong selling pressure over a two day period. The absence of an upper shadow also reflects selling pressure. Small Heikin-Ashi candlesticks or those with long upper and lower shadows show indecision over the last two days. This often occurs when one candlestick is filled and the other is hollow.

The chart below shows QQQ with Heikin-Ashi candlesticks over a four-month period. The blue arrows show indecisive Heikin-Ashi Candlesticks that formed with two normal candlesticks of opposite color. Indecision can sometimes foreshadow a trend reversal. The red arrows show a strong decline marked by a series of Heikin-Ashi candlesticks without upper shadows. This means the Heikin-Ashi Open marked the high and the remaining data points were lower. The green arrow shows a strong advance marked by a series of Heikin-Ashi candlesticks without lower shadows. This means the Heikin-Ashi open marked the low and the remaining data points were higher.

Doji and Spinning Tops

As with normal candlesticks, Heikin-Ashi doji and spinning tops can be used to foreshadow reversals. A Heikin-Ashi doji or Heikin-Ashi spinning top looks just the same as a normal doji or spinning top. A doji is a small candlestick with an open and close that are virtually equal. There are small upper and lower shadows to denote little price movement.

Spinning tops have small bodies (open-close range) and long upper/lower shadows (high-low range). Despite a lot of movement from high to low, prices finish near their opening point for little change. This shows indecision that can foreshadow a reversal.

When using Heikin-Ashi candlesticks, a doji or spinning top in a downtrend should not immediately be considered bullish. It just shows indecision within the downtrend. Indecision is the first step to changing direction. Confirmation of a directional change (trend reversal) is required though. Once chartists spot a doji or spinning top in a downtrend, it is time to set a resistance level upon which to base a trend reversal.

The example below shows Caterpillar (CAT) with a spinning top forming in late May (1). The trend is clearly down so a resistance level is set to define a reversal breakout (confirmation). CAT did break this resistance level a few days later, but the breakout failed - a reminder that not all signals are perfect. The downtrend extended and CAT then formed two doji in mid-June. A resistance level was marked after the doji and CAT broke resistance to confirm a reversal.

Prices extended higher until the stock stalled around 110 in July. Two doji and an indecisive candlestick formed in mid-July (3). Also, notice that a clear support level was established. CAT broke support in late July to start a strong downtrend and confirm the trend reversal. A spinning top formed during this downtrend (4), but there was no upside follow through or reversal. Confirmation of a trend reversal is important.

Classic Chart Patterns

Classic chart patterns and trend lines can also be used on Heikin-Ashi charts. In contrast to normal candlesticks, Heikin-Ashi Candlesticks are more likely to trend with strings of consecutive filled candlesticks and strings of consecutive hollow (white) candlesticks. The chart below shows Apache (APA) falling with a string of filled candlesticks in late October. The Heikin-Ashi candlesticks formed a falling wedge and APA broke resistance with a surge in early November. A triangle consolidation then took shape as the stock consolidated in November. The upside breakout signaled a continuation of the bigger uptrend.

The next chart shows Monsanto (MON) with a classic correction in June 2011. The Heikin-Ashi Candlesticks were more than adequate to identify this correction and subsequent breakout. Notice how a falling channel formed as the stock retraced around 61.80% of the prior decline. The big breakout in late June signaled an end to this correction and resumption of the advance.

Conclusion

Heikin-Ashi Candlesticks provide chartists with a versatile tool that can filter noise, foreshadow reversals and identify classic chart patterns. In fact, all aspects of classical technical analysis can be applied to these charts. Chartists can use Heikin-Ashi Candlesticks to identify support and resistance, draw trend lines or measure retracements. Volume indicators and momentum oscillators also work well. Click here for a live Heikin-Ashi chart.

SharpCharts

SharpCharts users can find Heikin-Ashi under “Chart Attributes” and “Type”. These candlesticks can be black and white or in color. Checking the “color prices” box will show red candlesticks for periods that closed lower and black candlesticks for periods that closed higher. A red filled candlestick means the close was below the open (filled) and the close was lower than the prior close (red). A black hollow candlestick means the close was above the open (hollow) and the close was higher than the prior close (black). The chart below shows both candlestick types side-by-side. Sorry, dual colors are not a charting option. The chart was created by cutting and pasting from one chart to the other.

KEY STRATEGY

Heikin-Ashi, also sometimes spelled Heiken-Ashi, means "average bar" in Japanese. The Heikin-Ashi technique can be used in conjunction with candlestick charts when trading securities to spot market trends and predict future prices. It's useful for making candlestick charts more readable and trends easier to analyze. For example, traders can use Heikin-Ashi charts to know when to stay in trades while a trend persists but get out when the trend pauses or reverses. Most profits are generated when markets are trending, so predicting trends correctly is necessary.

KEY TAKEAWAYS

• The Heikin-Ashi technique is used with candlestick charts to help traders identify and analyze trends.

• There are five primary signals used in Heikin-Ashi charts.

• Heikin-Ashi charts can be used in any market.

The Heikin-Ashi Formula

Normal candlestick charts are composed of a series of open-high-low-close (OHLC) candles set apart by a time series. The Heikin-Ashi technique shares some characteristics with standard candlestick charts but uses a modified formula of close-open-high-low (COHL):

Close=14 (Open+High+Low+Close)(The average price of the current bar)Open=12 (Open of Prev. Bar+Close of Prev. Bar)(The midpoint of the previous bar)High=Max[High, Open, Close]Low=Min[Low, Open, Close]​Close=41​ (Open+High+Low+Close)(The average price of the current bar)Open=21​ (Open of Prev. Bar+Close of Prev. Bar)(The midpoint of the previous bar)High=Max[High, Open, Close]Low=Min[Low, Open, Close]​

Constructing the Chart

The Heikin-Ashi chart is constructed like a regular candlestick chart, except the formula for calculating each bar is different. The time series is defined by the user, depending on the type of chart desired, such as daily, hourly, or five-minute intervals. The down days are represented by filled candles, while the up days are represented by empty candles. These can also be colored in by the chart platform, so up days are white or green, and down days are red or black, for example.

There are a few differences to note between the two types of charts, and they're demonstrated by the charts above. Heikin-Ashi has a smoother look because it is essentially taking an average of the movement. There is a tendency with Heikin-Ashi for the candles to stay red during a downtrend and green during an uptrend, whereas normal candlesticks alternate color even if the price is moving dominantly in one direction. 

The price scale is also of note. The current price shown on a normal candlestick chart will also be the current price of the asset, and that matches the closing price of the candlestick (or current price if the bar hasn't closed). Because Heikin-Ashi is taking an average, the current price on the candle may not match the price at which the market is actually trading. For this reason, many charting platforms show two prices on the Y-axis: one for the calculation of the Heiken-Ashi and another for the current price of the asset.

Putting It to Use

These charts can apply to any market. Most charting platforms have Heikin-Ashi charts included as an option. 

There are five primary signals that identify trends and buying opportunities:

1. Hollow or green candles with no lower "shadows" indicate a strong uptrend: Let your profits ride!

2. Hollow or green candles signify an uptrend: You might want to add to your long position and exit short positions.

3. Candles with a small body surrounded by upper and lower shadows indicate a trend change: Risk-loving traders might buy or sell here, while others will wait for confirmation before going long or short.

4. Filled or red candles indicate a downtrend: You might want to add to your short position and exit long positions.

5. Filled or red candles with no higher shadows identify a strong downtrend: Stay short until there's a change in trend.

These signals may make locating trends or trading opportunities easier than with traditional candlesticks. The trends are not interrupted by false signals as often and are thus more easily spotted. 

Heikin-Ashi charts can be used for analysis and making trading decisions. On the left, there are long red candles, and at the start of the decline, the lower wicks are quite small. As the price continues to drop, the lower wicks get longer, indicating that the price dropped but was then pushed back up. Buying pressure is starting to build. This is followed by a strong move to the upside. 

The upward move is strong and doesn't give major indications of a reversal until there are several small candles in a row, with shadows on either side. This shows indecision. Traders can look at the bigger picture to help determine whether they should go long or short. 

The charts can also be used to keep a trader in a trade after a trend begins. It's usually best to stay in a trade until the Heikin-Ashi candles change color. A change in color doesn't always mean the end of a trend—it could just be a pause.

Is Heikin-Ashi Reliable?

Heikin-Ashi uses averages, which may not match the prices the market is trading at. The technique smooths out trends on a chart to give a better trend indicator but should be used with technical analysis to find entry and exit points.

Do Traders Use Heikin-Ashi?

Heikin-Ashi is a trading tool used by some traders in conjunction with technical analysis to assist in identifying trends.

Which Indicator Works Best With Heikin-Ashi?

Trading is preference-based, so the indicators that work best with Heikin-Ashi are the ones you are most familiar with and practiced with. Moving averages, Bollinger bands, and the Relative Strength Index are examples of indicators that can be used with Heikin-Ashi.