Heikin-Ashi Candlesticks
What Are Heikin-Ashi Charts?
Heikin-Ashi Candlesticks are an offshoot from Japanese candlesticks. Heikin-Ashi Candlesticks use the open-close data from the prior period and the open-high-low-close data from the current period to create a combo candlestick. The resulting candlestick filters out some noise in an effort to better capture the trend.
In Japanese, Heikin means “average” and Ashi means “pace” (EUDict.com). Taken together, Heikin-Ashi represents the average pace of prices. Heikin-Ashi Candlesticks are not used like regular candlesticks. You won't find dozens of bullish or bearish reversal patterns consisting of one to three candlesticks. Instead, Heikin-Ashi candlesticks can be used to identify trending periods, potential reversal points, and classic chart patterns.
Calculating Heikin-Ashi
Heikin-Ashi Candlesticks are based on price data from the current open-high-low-close, current Heikin-Ashi values, and prior Heikin-Ashi values. Yes, it is a bit complicated. In the formula below, a “(0)” denotes the current period. A “(-1)” denotes the prior period. “HA” refers to Heikin-Ashi. Let's take each data point one at a time.
Before moving to a spreadsheet example, note that there's a chicken and egg dilemma. You need the first Heikin-Ashi candlestick before calculating future Heikin-Ashi candlesticks. Therefore, the first calculation uses data from the current open, high, low and close.
The first Heikin-Ashi close equals the average of the open, high, low and close ((O+H+L+C)/4). The first Heikin-Ashi open equals the average of the open and close ((O+C)/2). The first Heikin-Ashi high equals the high and the first Heikin-Ashi low equals the low. Even though this first Heikin-Ashi candlestick is somewhat artificial, the effects will dissipate over time (usually seven to 10 periods).
StockCharts.com starts its Heikin-Ashi calculations before the first price date, which is visible on each chart. Therefore, the effects of this first calculation will have already dissipated. The chart below shows examples of two normal candlesticks converting into one Heikin-Ashi Candlestick.
How To Read a Heikin-Ashi Chart
Heikin-Ashi Candlesticks are similar to regular candlesticks but differ in some key features. A Heikin-Ashi candlestick is hollow when the HA-close is above the HA-open; conversely, Heikin-Ashi candlesticks are filled when the HA-close is below the HA-open. This is similar to normal candlesticks, filled when the close is below the open and hollow when the close is above the open.
While traditional candlestick patterns don't exist with Heikin-Ashi candlesticks, chartists can derive valuable information from these charts. A long hollow Heikin-Ashi candlestick shows strong buying pressure over two days. The absence of a lower shadow also reflects strength.
A long, filled Heikin-Ashi candlestick shows strong selling pressure over two days. The absence of an upper shadow also reflects selling pressure. Small Heikin-Ashi candlesticks or those with long upper and lower shadows show indecision over the last two days. This often occurs when one candlestick is filled, and the other is hollow.
The chart below shows QQQ with Heikin-Ashi candlesticks over four months.
An indecisive market can sometimes foreshadow a trend reversal. The blue arrows show indecisive Heikin-Ashi Candlesticks formed with two normal candlesticks of opposite colors.
The red arrows show a strong decline marked by a series of Heikin-Ashi candlesticks without upper shadows. This means the Heikin-Ashi open marked the high, and the remaining data points were lower.
The green arrow shows a strong advance marked by a series of Heikin-Ashi candlesticks without lower shadows. The Heikin-Ashi open marked the low, and the remaining data points were higher.
Doji and Spinning Tops
As with normal candlesticks, Heikin-Ashi doji and spinning tops can be used to foreshadow reversals. A Heikin-Ashi doji or Heikin-Ashi spinning top looks similar to a traditional doji or spinning top (see image below).
Despite much movement from high to low, prices finish near their opening point for little change. This shows indecision that can foreshadow a reversal.
When using Heikin-Ashi candlesticks, a doji or spinning top in a downtrend should not immediately be considered bullish. It shows indecision within the downtrend. Indecision is the first indication of a change in trend direction. You need a confirmation of a directional change (trend reversal). For example, when you spot a doji or spinning top in a downtrend, set a resistance level to base a trend reversal.
The example below shows Caterpillar (CAT) with a spinning top forming in late May (1). The trend is down, so a resistance level is set to define a reversal breakout (confirmation). CAT broke this resistance level a few days later, but the breakout failed—a reminder that not all signals are perfect. The downtrend extended, and CAT then formed two dojis in mid-June. A resistance level was marked after the doji, and CAT broke resistance to confirm a reversal.
Prices extended higher until the stock stalled around 110 in July. Two doji and an indecisive candlestick formed in mid-July (3). Also, a clear support level was established. CAT broke support in late July to start a strong downtrend and confirm the trend reversal. A spinning top formed during this downtrend (4), but there was no upside follow-through or reversal. Confirmation of a trend reversal is important.
Classic Chart Patterns and Heikin-Ashi
Classic chart patterns and trend lines can also be used on Heikin-Ashi charts. In contrast to normal candlesticks, Heikin-Ashi Candlesticks are more likely to trend with strings of consecutive filled candlesticks and hollow (white) candlesticks.
The chart below shows Apache (APA) falling with a string of filled candlesticks in late October. The Heikin-Ashi candlesticks formed a falling wedge, and APA broke resistance with a surge in early November. As the stock consolidated in November, a triangle consolidation took shape. The upside breakout signaled a continuation of the bigger uptrend.
The next chart shows Monsanto (MON) with a classic correction in June 2011. The Heikin-Ashi Candlesticks were more than adequate to identify this correction and subsequent breakout. Notice how a falling channel formed as the stock retraced around 61.80% of the prior decline. The big breakout in late June signaled an end to this correction and resumption of the advance.
The Bottom Line
Heikin-Ashi Candlesticks are a versatile tool that can filter noise, foreshadow reversals, and identify classic chart patterns. In fact, all aspects of classical technical analysis can be applied to these charts. Chartists can use Heikin-Ashi Candlesticks to identify support and resistance, draw trend lines or measure retracements. Volume indicators and momentum oscillators also work well. Click here for a live Heikin-Ashi chart.
SharpCharts
In SharpCharts you can find Heikin-Ashi under Chart Attributes and Type. These candlesticks can be black and white or in color. Checking the color prices box will show red candlesticks for periods that closed lower and black candlesticks for periods that closed higher.
A red-filled candlestick means the close was below the open (filled) and the close was lower than the prior close (red). A black hollow candlestick means the close was above the open (hollow), and the close was higher than the prior close (black).
The chart below shows both candlestick types side-by-side. Sorry, dual colors are not a charting option. The chart was created by cutting and pasting from one chart to another.
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