Heikin Ashi is a type of trading chart that originated in Japan, and it’s similar to candlestick charts in that the colour of the candlestick denotes the direction the price is moving.
The main difference between traditional candlestick charts and Heikin Ashi (HA) charts is that HA charts the average price moves, creating a smoother appearance. Because the HA price bars are averaged, they don’t show the exact open and close prices for a particular time period.
The Heikin Ashi Calculation
Heikin Ashi charts smooth price activity by calculating average values. An HA chart calculates its own open (HAO), high (HAH), low (HAL) and close (HAC) using the actual open (O), high (H), low (L) and close (C) of the time frame (1 minute, 5 minute, 15 minute, etc.).
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Calculation (Mathematical formula for Heikin Ashi)
- HAO = (Open of previous bar + Close of previous bar) / 2
- HAC = (Open + High + Low + Close) / 4
- HAH = Highest of High, Open, or Close
- HAL = Lowest of Low, Open, or Close
A mathematical formula is used for calculating each price bar on a Heikin Ashi chart. Because of this, you don’t know the exact price at which a given time period opened or closed. When day trading, this can be an issue, since knowing the exact price, especially when you’re trading off a chart, is important. For longer-term traders, this is less of an issue since the open and close of a price bar is not as important in trades that last weeks, months or years.
Advantages of Heikin Ashi on Candlestick Chart
While Heikin Ashi won’t show the exact price all the time, there are benefits to using Heikin Ashi charts. The main advantage is that the charts are much “smoother” looking, which helps to more easily identify the trending direction. Heikin Ashi Charts are also colour-coded, like candlesticks, so as long as the price is rising (based on the calculations) then the bars will show up as green (or another colour of your choosing). As long as the price is falling (based on the calculation) then the bars will show up as red (or another colour of your choosing).
While candlestick charts may flip-flop constantly from a green bar to a red bar to a green bar, Heikin Ashi charts tend to have longer stretches of green and red bars, which provides more clear highlighting and confirmation of current trends.