Heikin-Ashi: A Better Candlestick

The Heikin-Ashi chart is constructed like a regular candlestick chart, except the formula for calculating each bar is different, as shown above. The time series is defined by the user, depending on the type of chart desired, such as daily, hourly, or five-minute intervals. The down days are represented by filled candles, while the up days are represented by empty candles. These can also be colored in by the chart platform, so up days are white or green, and down days are red or black, for example.

There are a few differences to note between the two types of charts, and they’re demonstrated by the charts above. Heikin-Ashi has a smoother look because it is essentially taking an average of the movement. There is a tendency with Heikin-Ashi for the candles to stay red during a downtrend and green during an uptrend, whereas normal candlesticks alternate color even if the price is moving dominantly in one direction.

The price scale is also of note. The current price shown on a normal candlestick chart will also be the current price of the asset, and that matches the closing price of the candlestick (or current price if the bar hasn’t closed). Because Heikin-Ashi is taking an average, the current price on the candle may not match the price at which the market is actually trading. For this reason, many charting platforms show two prices on the Y-axis: one for the calculation of the Heiken-Ashi and another for the current price of the asset.

Putting It to Use
These charts can apply to any market. Most charting platforms have Heikin-Ashi charts included as an option.

There are five primary signals that identify trends and buying opportunities:

Hollow or green candles with no lower “shadows” indicate a strong uptrend: Let your profits ride!
Hollow or green candles signify an uptrend: You might want to add to your long position and exit short positions.
Candles with a small body surrounded by upper and lower shadows indicate a trend change: Risk-loving traders might buy or sell here, while others will wait for confirmation before going long or short.
Filled or red candles indicate a downtrend: You might want to add to your short position and exit long positions.
Filled or red candles with no higher shadows identify a strong downtrend: Stay short until there’s a change in trend.
These signals may make locating trends or trading opportunities easier than with traditional candlesticks. The trends are not interrupted by false signals as often and are thus more easily spotted.