Heikin Ashi

Heikin Ashi translates to “average bar” in Japanese. The formula averages out the price movements of a typical candlestick chart. Because the Heikin Ashi is taking an average of the price movements, this chart type tends to show trends and trend reversals more clearly than standard candlestick charts.

Heikin Ashi is useful for short-term trading strategies, whether day trading or swing trading. It can be used in any market, including forex, stocks, commodities and indices. This chart type and indicator can help a trader to spot trends and stay in winning trades. However, before using it, traders must understand how it works, as the averaging of prices can also produce pitfalls.

Heikin Ashi is a variation of a candlestick chart​ that is calculated in a different way. A traditional candlestick chart shows the opening and closing prices as the thick part of the candle (real body), and the high and low as the upper and lower shadows. These are the exact open, high, low, and close values for the asset during that timeframe. There is no manipulation of the data.

The Heikin Ashi also has a thick part called the “real body” and upper and lower shadows. The values used to create the open, high, low, and close (OHCL) for the Heikin Ashi candle are not OHLC values that the underlying asset had. The Heikin Ashi candles are instead based on average prices of both the current and prior timeframe. This is what makes Heikin Ashi charts smoother.

Below is an example of a chart of the same asset using both Heikin Ashi and standard candlesticks.

Let’s look at how the Heiken Ashi (HA) chart is created. There are four distinct calculations for the open, close, high, and low of each Heikin Ashi candle.

The HA close is the average of the actual high, low, open, and close price for the time period for the asset.

While Heikin Ashi is a chart type, it is also a technical indicator as it is taking actual price levels of the underlying asset then converting those prices based on the Heikin Ashi formula.

Heikin Ashi price values will vary from those on a candlestick chart. The current price on a candlestick chart represents the most recent transaction or bid price, but the current price on a Heikin Ashi chart is the current calculation of the HA close price. These numbers can sometimes be drastically different.

Traders typically use Heiken Ashi to help to smooth out price data and see trading patterns​ such as trends and reversals better. However, the prices seen on the chart are often not tradable as the actual price of an asset could be different. It is a good idea to keep an eye on the actual price as well as the Heikin Ashi indicator to get the best of both worlds: real-time data as well as confirmation and analysis.

Short-term trend reversal patterns occur when the Heikin Ashi chart turns from red to green or green to red. Larger reversal patterns can be more reliable. Heikin Ashi reversal patterns are the same as candlestick reversal chart patterns, such as head and shoulders​, rounded bottoms, and triple and double tops and bottoms.

When a reversal pattern occurs, it can be traded just like a candlestick version. Alternatively, you could use a moving average exit, such as the one described earlier, and exit when the price travels through a moving average (such as the 50-period) in the opposite direction of the trade. Here is a head and shoulders reversal on a four-hour USD/CAD chart.

Candlestick charts work well when adding a Heikin Ashi indicator to the chart. The Heikin Ashi indicator drops below zero when the HA chart turns red or starts moving down. The indicator moves above zero when the HA chart turns green or starts rising. Our Next Generation platform offers the Heiken Ashi indicator to combine with candlestick charts, or any other chart that you prefer. Register for a live account here to test the capabilities of web-based trading​.

We also offer MetaTrader 4 software through our platform, which comes with a wide range of technical and customised indicators for each trading strategy. By default, MT4 does not offer Heikin Ashi charts or indicators; however, there are thousands of user-created indicators available for download within the platform. Open an MT4 account now to get started.

When installing these products, please keep in mind that they were created by other MT4 users and not users from our own platform, and have therefore not been vetted for reliability, accuracy, or profitability.

Heikin Ashi charts and indicators can smooth-out price fluctuations, which makes trends easier to spot and trade. However, when a Heikin Ashi trade signal occurs, the actual price may be quite different to what the latest HA close is showing. This could make some trade signals obsolete. For example, if a Heikin Ashi signal says to buy a stock at $5, but the price gapped higher and is already trading at $7. The difference between the trade signal and actual price may be too large and thus negate the profitability of a potential trade.

Since HA charts are based on average price movements, it also makes them hard to use for setting stop-loss​ levels. In the strategy examples, a trailing stop-loss was used with the moving average, or a change in colour on the HA chart. These can work but the risk is unknown at the start of the trade. To control the risk with a fixed stop-loss level, referring to a normal candlestick chart is required. This way, the stop-loss can be set based on the price levels and patterns the price actually made, not an HA average, which distorts where the price has actually been.

Similar to any other technical indicator, traders need to understand how Heikin Ashi works, along with its benefits and pitfalls, before being able to utilise it effectively in trading.