Heikin-Ashi Formula: A Better Candlestick

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Heikin-Ashi Formula: A Better Candlestick

In Japanese, Heikin-Ashi, often written Heiken-Ashi, means “average bar.” When trading securities, the Heikin-Ashi approach may be used in combination with candlestick charts to identify market patterns and forecast future prices. It’s beneficial for making candlestick charts more understandable and analyzing patterns simpler. For example, traders may use Heikin-Ashicharts to determine whether to remain in transactions while the trend continues but exit when it pauses or reverses. Most gains are made when markets are trending, thus properly anticipating trends is essential.

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 are applicable in every market.

Heikin-Ashi: A Better Candlestick

The Heikin-Ashi Formula

A typical candlestick chart is made up of a succession of open-high-low-close (OHLC) candles separated by a time period. The Heikin-Ashi approach is similar to normal candlestick charts in certain ways, but it employs a modified close-open-high-low (COHL) formula:

Close = 1 4 (Open + High + Low + Close) (Theaveragepriceofthecurrentbar)Open = 1 2 (OpenofPrevious.Bar + CloseofPrevious.Bar ) (Themidpointofthepreviousbar)High = Max[High,Open,Close ] startaligned &textClose=frac14text (Open+textHigh+textLow+textClose)&quad(textitThe average price of the current bar). &textOpen=frac12text (Open of Previous Bar+text Close of Previous Bar)&quad(textitThe previous bar’s midpoint) &textHigh=textMax[High, Open, Close]. & textLow=textMin[Low, Open, Close]endaligned ​​

Constructing the Chart

The Heikin-Ashi chart is built similarly to a standard candlestick chart, with the exception that the method for calculating each bar is different, as illustrated above. The user defines the time series based on the kind of chart needed, such as daily, hourly, or five-minute intervals. The low days are represented by full candles, and the good days by empty candles. The chart platform may also color them in, such that up days are white or green and down days are red or black, for example.

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Image by Sabrina Jiang © Investopedia2020

There are a few distinctions to be made between the two kinds of charts, which are shown by the examples above. Heikin-Ashi has a smoother appearance since it takes an average of the movement. Heikin-Ashi candles have a propensity to remain red during a decline and green during an upswing, while standard candlesticks alternate color even when the price is moving mostly in one direction.

It’s also worth noting the pricing range. The current price indicated on a standard candlestick chart is also the current price of the asset, and it corresponds to the candlestick’s closing price (or current price if the bar hasn’t closed). Because Heikin-Ashi uses an average, the current price on the candle may differ from the price at which the market is trading. As a result, many charting tools display two values on the Y-axis: one for calculating the Heiken-Ashi and another for the asset’s actual price.

Putting It to Use

These charts are applicable to any market. Heikin-Ashi charts are an option on most charting systems.

There are five major indicators that indicate trends and purchasing opportunities:

  1. A strong rise is indicated by hollow or green candles with no lower “shadows”: Allow your revenues to soar!
  2. An upswing is indicated by hollow or green candles: You may choose to increase your long position and leave your short position.
  3. Candles with a tiny body and above and lower shadows suggest a shift in trend: Traders that like taking risks may buy or sell here, while others may wait for confirmation before going long or short.
  4. Filled or red candles signal a downtrend: you should consider adding to your short position and exiting your long one.
  5. A significant downturn is identified by filled or crimson candles with no upper shadows: Stay short until the trend changes.
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These signals may make it simpler to identify trends or trading opportunities than regular candlesticks. Trends are less often interrupted by misleading signals and hence more readily identified.

Image by Sabrina Jiang © Investopedia2020

The chart above demonstrates how Heikin-Ashicharts may be used for analysis and trading choices. Long red candles are on the left, and the bottom wicks are relatively little at the start of the drop. As the price falls, the lower wicks get longer, showing that the price fell but was then pushed back up. Purchasing pressure is beginning to mount. This is followed by a robust upward rise.

The rising trend is strong, but there are no big signs of a reversal until there are numerous little candles in a row, with shadows on both sides. This demonstrates hesitation. Traders may use the larger picture to assist them decide whether to go long or short.

The charts may also be utilized to maintain a trader in a position after a trend has begun. Generally, it is advisable to continue in a trade until the Heikin-Ashicandles change color. A color shift does not necessarily indicate the conclusion of a trend; it might just be a halt.

Is Heikin-Ashi Reliable?

Heikin-Ashi use averages, which may or may not correspond to market values. The approach smoothes out trends on a chart to provide a stronger trend indicator, but it should be used in conjunction with technical analysis to identify entry and exit points.

Do Traders Use Heikin-Ashi?

Heikin-Ashi is a trading technique that some traders use in combination with technical analysis to aid with trend identification.

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Which Indicator Works Best With Heikin-Ashi?

Because trading is a personal choice, the indicators that perform best with Heikin-Ashi are the ones you are most comfortable with and have practiced with. Indicators that may be utilized with Heikin-Ashi include moving averages, Bollinger bands, and the Relative Strength Index.

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