Heikin Ashi is a Japanese term that literally means average pace or average speed. Some sources also mentioned that it means average bar. Whatever it means, this technique is used to further help the analysis of charts when you are using candlestick charts.
So, Heikin Ashi charts are quite similar to candlestick charts. They can be used together in order to increase each other’s efficiency and precision. But the main purpose of Heikin Ashi is to make the understanding and analysis of trends more straightforward. This is why traders will most likely use Heikin Ashi in the identification process of a trend.
This knowledge can be extremely helpful when you are so-to-speak riding a trend. It might also be interesting to note that the highest amount of profits is obtained while trading trends.
The Definition of Heikin Ashi
In simple terms, Heikin Ashi is just a chart made of candlesticks. It is pretty much similar to any other candlestick chart that is widely applied by all traders with various strategies of trading.
Of course Heikin Ashi has certain differences with an ordinary candlestick chart. Heikin Ashi was developed by a Japanese merchant and its main aim is to identify trends in the market.
Basically, what Heikin Ashi candlestick charts can do is to help you as a trader to see the trend easier. The fact is that with all the technical indicators, patterns, and candlestick charts that you have in the forex market or any other market, the generic form is never easy to specify and detect in the actual market.
Because in reality there is so much more noise in the market that acts as sort of like a clutter around the pattern that you are trying to detect. This is why generic shapes and patterns in definitions are so much different from the shapes and patterns that are actually found in the market.
There are many ways with the help of which you can remove the noise or at least decrease it around your pattern of choice so you can actually detect it.
This is usually obtained through experience. Once you become a seasoned trader, you can see through the noise in the market and pick up the pattern that is otherwise hidden from plain sight.
But there are other ways. For instance, Heikin Ashi is precisely developed and designed for this reason.
Heikin Ashi is specifically useful for removing the noise from around a trend and making it seem as clear as possible. so you can first of all detect its presence, and also be able to see how long it will potentially last, or whether it has reached its inevitable demise.
There are of course other similar candlestick charts that might be able to provide you with the same degree of information. For instance, this is true of the traditional Japanese candlestick pattern.
However, you need to know that Heikin Ashi and traditional Japanese candlestick charts are quite different from one another. For instance, in the case of Heikin Ashi charts, there is no extra space between the candles. They stick together quite well. So, even visually they are different from one another.
Now let us see how this candlestick chart can be formulated, calculated, and of course implemented in the market.
Formulation and Calculation of Heikin Ashi
Now that we know what Heikin Ashi charts can do and the type of information that they can provide for you, we must see how they can be calculated and placed on top of your chart so that you can start trading trends much better than before.
Although Heikin Ashi charts are made from candlesticks and they look very similar to candlestick charts, they are of course not the same type of chart – both in terms of calculation and the information that they can provide for traders.
Although please keep in mind that it is extremely difficult to differentiate between all the various types of chart that use candlesticks as their basis. This includes all the ordinary and normal candlesticks charts, in addition the traditional Japanese chart and of course Heikin Ashi charts.
In order to understand each different type of candlestick chart, you need to first fully understand who each candlestick is made of. That is the precise point of differentiation.
With Heikin Ashi charts, each candlestick not only has the data related to the price movements that are currently taking place on the chart, it will also carry with itself the same type of data from the past.
Of course, similar to any other candlestick, a Heikin Ashi candlestick consists of an open and close, in addition to a high and low. But the special point about Heikin Ashi candlesticks is how their open and close are calculated.
So this is how you can calculate the different parts of a Heikin Ashi candlestick:
Calculation of the Heikin Ashi candlestick OPEN
Open price of last candlestick + close price of last candlestick / 2
This is rather easy to understand, because every new candlestick in Heikin Ashi chart begins exactly from the middle of the previous candlestick.
Calculation of the Heikin Ashi candlestick CLOSE
Open + close + high + low / 4
The close of any Heikin Ashi candlestick is equal to the addition of all the values of open, close, high, and low for that Heikin Ashi candlestick divided by the number of values, which is of course 4.
Calculation of the Heikin Ashi candlestick HIGH
The high of any Heikin Ashi candlestick does not really require calculations. Because it is simply the highest point recorded for that candlestick. Therefore, the maximum price that is registered by the candlestick will be its high.
Calculation of the Heikin Ashi candlestick LOW
Similar to the high, the low of any Heikin Ashi candlestick also does not need any special formula for calculation. The low is simply the lowest recorded price for that candlestick.
How to Read the Signals Belonging to Heikin Ashi?
Reading the signals provided by the Heikin Ashi candlesticks are quite straightforward. Similar to any other candlestick, green ones are indicative of an uptrend. If a green candlestick does not have a lower wick or shadow, then it is indicative of a strong uptrend.
On the other hand, red candlesticks are indicative of a downtrend. Along similar lines, if a red candlestick does not show an upper wick or shadow, then it is taken to be a strong downtrend.
In addition, there are some candles that have really small bodies, but rather they have really long wicks or shadows. These candlesticks are the signs of a potential reversal in the trend.
Heikin Ashi candlesticks are similar to any other candlestick charts. However, they do have important differences. First of all, the difference is in the information that they can provide. They remove noise from around the trends in the market and make them easier to notice and identify by traders. On the other hand, the calculation of their different parts, including their open and close are also carried out differently from other candlesticks.