Heikin Ashi

Heikin Ashi, or “average bar” is a candlestick charting technique developed by Japanese traders, with the aim of smoothing out classic candlesticks, to assist in trading financial instruments.

Heiken Ashi charts are essentially weighted candlesticks, which inform the trader concerning the strength and weakness of trends.

A traditional candlestick is composed of four individual pieces of information, namely 1) the price at which the candle opened, 2) the highest point reached during the formation of the candle, 3) the lowest point reached during candle formation, and 4) the price at which it closed.

This is known as open-high-low-close (OHLC) where every candlestick is an individual, unrelated entity, i.e. the current candle’s statistics have no relevance to the previous candlestick’s OHLC or future candlesticks.

However, Heikin Ashi bars are calculated using previous candles’ information. This formula is as follows:

Open = Sum of the Open of previous bar and its Close, divided by 2

High = Max of the High, Open, or Close

Low = Min of the Low, Open, or Close

Close = Sum of the Open, High, Low, Close, divided by 4

Consequently, every new candlestick on a Heiken Ashi chart will be a) related to previous bars, and b) have an impact on the next candlestick.

However, these can often look misleading for a lot of traders.

How to Trade Using Heikin Ashi

This is where Heiken Ashi comes in – its weighted formula makes this form of charting slower and therefore less prone to small, relatively insignificant movements in the markets.

Heikin Ashi charting can be particularly helpful for making candlestick charts more readable.

Some traders prefer to use traditional candlestick charts overlaid by Heiken Ashi, others prefer just to exclusively focus on Heiken Ashi.

There are disadvantages however. Due to the way Heiken Ashi is calculated, it is a lagging indicator, and is unable to pick up rapid reversals, often signaling such reversals rather late, therefore of less use to scalpers, who need to read the market’s constant fluctuations.