Updated Jan 15 2021
Heikin-Ashi candles provide a simple method to incorporate averaging into price action analysis by making candlesticks themselves averaged. This causes candles to have a smoothened and continuous look making them them better to visualize trends.
Both traditional candlesticks and Heikin-Ashi candles are constructed using the open, close, high and low prices. The main difference between them is that Heikin-Ashi candles are an averaged version of traditional candlesticks that uses also the data of the previous bar to produce the current candle's open price.
In every platform the colour coding of Heikin-Ashi candles can change, so instead of providing you a standard approach do the following to find out which one is being used:
Now you know which colour coding your trading platform uses to represent Heikin-Ashi candlesticks.
Just like a simple moving average does, the main objective in a Heikin-Ashi candle is to smoothen out the price volatility we're used to see in traditional Japanese candlestick charts and this makes them a great tool to detect trends in an easier way.
A very common Heikin-Ashi behaviour is:
Also, the size of each candle tends to be associated with the strenght of the movement just like in regular candlesticks.
This behaviour is not something that can be particularly attributed to Heikin-Ashi candles. In traditional candlestick charts a long green candle also means strong bullish pressure, it's a matter of not memorising candle codes, patterns or styles but rather looking at them and asking yourself this question: How could a candle have becomed long and green?
Always remember, the best way to analyze a chart is by thinking and trying to make sense of the price action through logic. Candles don 't have behaviour themselves, they're merely a visual representation of the actions of buyers and sellers so what we really care about is how buyers and sellers are behaving. In the case of Heikin-Ashi candles they are an averaged representation of this behaviour.
Here is the formula used to calculate each Heikin-Ashi candle's value:
Here's a visual representation of the formula:
To create one Heikin-Ashi candle, we require trading data (Open, High, Low and Close) for two continuous bars as the formula creates an average of the previous bar's data to calculate the candle's open price.
Below are the sample numbers we'll use to manually calculate one Heikin-Ashi candle:
To calculate our Heikin-Ashi candle's open price we need to:
To calculate our Heikin-Ashi candle's close price we need to:
To calculate our Heikin-Ashi candle's highest price we need to:
To calculate our Heikin-Ashi candle's lowest price we need to:
After calculating manually each value, we obtained the following results in our Heikin-Ashi candle example:
To visualize our new Heikin-Ashi data on a chart then we proceed to:
A very interesting point to note about Heikin-Ashi candles is that sometimes, the low value or the high value can be located inside the body of the candle so there is no visual representation of it by looking at the chart.
In our example the lowest of the candle was $16 yet the open of the candle through the averaged calculation was $13.5, this will cause wicks to be hidden in many cases.
Heikin-Ashi candles provide a smooth averaged version of price action in a chart whereas traditional candlesticks include the noise of major price changes. Regular candelsticks present a raw version of the open, close high and low prices of a particular bar and Heikin-Ashi candles present an averaged version that is dependant on always having the previous candles data to calculate the current one.
The below chart is made of traditional candlesticks. Notice that when the asset's price reaches 41.000 (Y-Axis) at hour 10:00 (X-Axis) how a downtrend starts yet during the descent there are many green candlesticks on the way. This is exactly the problem with traditional candlestick charts. There is no way to reduce the noice and clearly see what is happening.
The below chart is made of Heikin-Ashi candlesticks. Notice in comparison to the traditional candlesticks chart the continuity of candles grouped by the same colour is much more uniform.
On a Heikin-Ashi chart it's far more easy to visualize when an asset's price is climbing or falling as all the continuous candles tend to have the same colour.
The alternation happens when there is a clear potential direction change.
To finalise our comparison here you have an animated overlay of Hekin-Ashi candles on top of traditional candlesticks. It will give you a good idea of the effect of changing between each candle's style.
Overall the structure of the chart is not that different, the main change lies on the continuity of same coloured candles when there is trending behaviour.
In a regular candlestick chart it's common to see both red and green candlesticks as the trend develops itself regardless if it's bullish or bearish. In Heikin-Ashi candle charts the colour of the candles tends to look more uniform depending on whether you're visualizing a bullish or bearish trend, there lies the power of averaging.
A very important point to remember about Heikin-Ashi candles is that traders should never make the mistake of entering a trade assuming that the last price of the candle is the current market price. Always remember that Heikin-Ashi candles are producing an averaged version of the open, close, high and low values, this means that you're never looking at the current bid and ask prices.
Heikin-Ashi candles are best used in combination with the most basic methods of price action analysis, which are:
Contrary to popular belief, there is nothing magic or special about Heikin-Ashi candles, they're merely an averaged version of traditional candlesticks which allow you to reduce the noise caused by volatility in your chart without using any external indicators.
Now that you've learned the basics go on and test Heikin-Ashi candles on your demo trading platform and have fun analysing!