Now that you’re familiar with the three most popular chart types, it’s time we pushed ourselves and took it one step further.
There’s another type of chart that you should know about that uses a totally different technique to display price action.
From the name of this article it is probably obvious what it is called so, let’s say it together on 3.
“Heikin Ashi”, also known as “Heikin-Ashi” or “Heiken Ashi” is a modified candlestick charting technique used to help filter market noise. Heikin Ashi rearranges how the price is displayed so traders can see more clearly whether to remain in a trade or exit.
Where does the name come from?
It comes from Japan.
In Japanese, Heikin means “average” and Ashi means “pace”. So together, Heikin Ashi means the “average pace of price”.
Here’s an example of a Heikin Ashi chart.
Don’t worry, it’s not because of the beer.
To the untrained eye, the chart looks like your typical Japanese Candlestick chart.
It has a body and an upper and/or lower shadow (or wick).
Do you think they look different?
Well, there’s actually a BIG difference between the two types of candlestick charts.
What’s see the difference between a Heikin Ashi candlestick and a traditional Japanese candlestick chart?
A picture is worth a thousand pips so let’s look at some actual charts.
The chart on the LEFT is the traditional Japanese candlestick chart, and the chart on the RIGHT is the Heikin Ashi chart.
As you can see from the chart on the right, directional moves are smoothed out in a way absent from the left chart.
You can see the candles on traditional Candlestick charts frequently change from green to red (up or down) which can make them difficult to interpret.
On the other hand, candles on the Heikin Ashi chart display more consecutive coloured candles, making it not only more readable but also easier for traders to identify past price movements.
You’ll notice that Heikin Ashi charts have a tendency for its candles to stay green during an uptrend and stay red during a downtrend.
This is in contrast to traditional Japanese candlesticks that alternate colour even if the price is moving strongly in one direction.
Let’s put the charts side by side again so you can see it better.
It is clear to see that the Heikin Ashi chart is much smoother looking in terms of price action. It reduces the noise on the chart, and allows traders to analyse trends more clearly.
Another thing that makes Heikin Ashi different from a traditional candlestick chart is how the price is displayed in terms of the open and the close.
Let’s zoom in at the Heikin Ashi chart so you can see what I am talking about.
If you look closely at the Heikin Ashi chart, you can see that each of the Heikin Ashi candlesticks start from the MIDDLE of the candlestick before it, and not from the level where the previous candlestick had closed.
Heikin Ashi candlesticks are this way due to the method used in how they are calculated.
Calculating your Heikin Ashi is easier than trying to calculate how many Heinekens you were in last weekend.
So open another one and let’s discuss the formula.
Heikin Ashi charts smooth price activity by calculating average values.
An HA chart calculates its own open (HAO), high (HAH), low (HAL) and close (HAC) using the actual open (O), high (H), low (L) and close (C) of the time frame (1 minute, 5 minute, 15 minute, etc.).
To calculate the values, traders use the following formula.
HAO = (Open of previous bar + Close of previous bar) / 2HAC = (Open + High + Low + Close) / 4HAH = Highest of High, Open, or CloseHAL = Lowest of Low, Open, or Close.
I know this is a lot of information to sink in (especially after I suggested you drink 4 beers throughout this blog) but as everything, it gets easier with time.
As always, if you have any questions about this blog any other one, leave a comment bellow or send me a private message via the Contact Us section.
Disclaimer: This article was not sponsored by any beer brand.