DEFINITION of Heikin-Ashi Technique
The Heikin-Ashi technique averages price data to create a Japanese candlestick chart that filters out market noise. Heikin-Ashi charts, developed by Munehisa Homma in the 1700s, share many characteristics with standard candlestick charts but differ because of the values used to create each bar. Instead of using the open-high-low-close (OHLC) bars like standard candlestick charts, the Heikin-Ashi technique uses a modified formula:
Heikin-Ashi Close = (Open+High+Low+Close)/4
Heikin-Ashi Open = [Open (previous bar) + Close (previous bar)]/2
Heikin-Ashi High = Max (High, Open or Close)
Heikin-Ashi Low = Min (Low, Open or Close)
BREAKING DOWN Heikin-Ashi Technique
The Heikin-Ashi technique is used by technical traders to identify a given trend more easily. Hollow white (or green) candles with no lower shadows are used to signal a strong uptrend, while filled black (or red) candles with no upper shadow are used to identify a strong downtrend. Reversal candlesticks using the Heikin-Ashi technique are similar to traditional candlestick reversal patterns; they have small bodies and long upper and lower shadows. There are no gaps in a Heikin-Ashi chart as the current bar is calculated using information from the previous bar.
This technique should be used in combination with standard candlestick charts or other indicators to provide a technical trader with additional information to make profitable trades.
Example of a Heikin-Ashi Chart
Benefits of the Heikin-Ashi Technique
Provides Clarity: Because the Heikin-Ashi technique smooths price information over two periods, it makes trends, price patterns, and reversal points easier to spot. Candles on a traditional candlestick chart frequently change from white to black, which can make them difficult to read. Heikin-Ashi charts typically have more consecutive colored candles, helping traders to identify past price movements easily.
Reduces False Signals: The Heikin-Ashi technique greatly reduces false trading signals in sideways and choppy markets to help traders avoid placing trades during these times. For example, instead of getting two false reversal candles before a trend commences, a trader who uses the Heikin-Ashi technique is likely only to receive the valid signal. (For more information, see: Trading Without Noise.)
Limitations of the Heikin-Ashi Technique
Slower to Form: As the Heikin-Ashi technique uses price information from two periods, a trade setup takes longer to develop. Usually, this is not an issue for swing traders who have time to let their trades play out. However, day traders who need to exploit quick price moves may find Heikin-Ashi charts are not responsive enough to be useful.
(To learn more, see: Heikin-Ashi: A Better Candlestick.)