Apr 07 2023
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The Wyckoff Method | Everything you need to know
The Wyckoff method is a technical analysis approach that analyzes the markets based on supply and demand.
Trading Guides Technical Analysis
How to read Heikin-Ashi Candles | Differences Explained
By Stefano Treviso , Updated on: Apr 07 2023.
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:
- Open your trading platform and apply Heikin-Ashi candlesticks to your chart (if you don't have a trading platform, visit our broker centre to find one you like)
- Spot a clear uptrend and note the colour or type of candle being used (it can be empty candles, green candles, blue candles)
- Spot a clear downtrend and note the colour being used (it can be red candles, black candles, etc)
Now you know which colour coding your trading platform uses to represent Heikin-Ashi candlesticks.
Heikin-Ashi Candles Explained
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:
- Candles staying green during uptrends
- Candles staying red during downtrends
Also, the size of each candle tends to be associated with the strenght of the movement just like in regular candlesticks.
- A long green candle is an indicator of strong bullish forces
- A long red candle is an indicator of strong bearish forces
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?
- By buyers excercising a larger pressure over sellers and pushing prices up
- By sellers removing limit orders in expectations of prices climbing
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.
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Heikin-Ashi Formula and Calculation
Here is the formula used to calculate each Heikin-Ashi candle's value:
- Open: The previous bar's open price plus the previous bar's close price divided by two.
- Close: The current candle's open, close, high and low prices added and divided by four.
- High: The highest value amongst the open, close and high values of your current bar.
- Low: The lowest value amongst the open, close and low values of your current bar.
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:
Calculating Heikin-Ashi Candle Open Value
To calculate our Heikin-Ashi candle's open price we need to:
- Add together the previous bar's open price and the previous bar's closing price
- Divide the result by 2 (a simple average calculation). In case you're wondering why in the formula it's written like a fraction 1/2 you could also manually divide 1 by 2 which equals 0.5 and then multiply it by the number between the parenthesis which you obtained by adding the previous bar's open and closing prices, you'll arrive to the same result.
- The result is 13.5
Calculating Heikin-Ashi Candle Close Value
To calculate our Heikin-Ashi candle's close price we need to:
- Add together our current candle's open, close, high and low prices.
- Divide them by 4 (another simple average calculation).
- The result is 18.
Calculating Heikin-Ashi Candle High Value
To calculate our Heikin-Ashi candle's highest price we need to:
- Look at our current candle's open, close and high values.
- Choose the highest of those numbers, in this case, 20.
Calculating Heikin-Ashi Candle Low Value
To calculate our Heikin-Ashi candle's lowest price we need to:
- Look at our current candle's open, close and low values.
- Choose the lowest of those numbers, in this case, 16.
Plotting our Heikin-Ashi Candle in a Chart
After calculating manually each value, we obtained the following results in our Heikin-Ashi candle example:
- Open: 13.5
- Close: 18
- High: 20
- Low: 16
To visualize our new Heikin-Ashi data on a chart then we proceed to:
- Draw the body of the candle using the open and close values.
- Draw the wicks using the high and low values.
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 Vs. Regular Candlesticks
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 dependent on always having the previous candles data to calculate the current one.
Heikin-Ashi Chart Vs. Regular Candlesticks Chart
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.
Conclusion
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:
- Determining key support and resistance and levels
- Visually determining if the market is trending or not (drawing trend lines)
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.
