Heiken Ashi candlesticks are similar to the typical Japanese candlesticks that you normally see in charting packages; however, they have a few basic differences. Also called Heikin Ashi candlesticks, they are used to interpret market trends.
What is the difference between Japanese candlesticks and Heiken Ashi Candlesticks?
Unlike regular Japanese candlesticks, which show the open price, close price, high and low price; heiken ashi candlesticks use a simple average formula to chart the trend of prices.
Although not entirely important because most of the charting packages will calculate and show the candlesticks for you, here is the method for calculating a heiken ashi candlestick.
Take the average of the open, high, low and close to get the heiken ashi close.
Close = (Open Price + High + Low +Close) / 4
Take the average of the open and close prices of the previous candlestick to get the heiken ashi open.
Open = (Average of Open Price and Close Price of the previous bar)
To get the heiken ashi high and low, take the maximum and minimum values, respectively of either the high, low, open or close.
High = (Maximum value of the (High, Open, Close))
Low = (Minimum value of the (Low, Open, Close))
When sellers are in control, the candlestick will be red. When buyers are in control, the candlestick will be green.As the power shifts from sellers, or bears, to buyers, or bulls, the composition of the candlestick will change.
A bearish trend consists of several red heiken ashi candlesticks with long upper wicks and no bottom wick. When the bearish trend is strongest, the candlestick will have a very long wick.
A bullish trend consists of several green heiken ashi candlesticks with long bottom wicks and no upper wick. When the bullish trend is strongest the candlestick will have a very long wick.
Once the trend begins to change or taper off, the candlesticks will begin to look like normal Japanese candlesticks with maybe both an upper and lower wick. A common trend reversal alert is a doji, with a small body and upper and bottom wicks.
Traders like the heiken ashi charts for their simplicity. It is easy to see who is in charge when you see several of the same color candlesticks in a row. Also when the wicks begin to get smaller and taper off, you will know that momentum is slowing in either direction. Heiken ashi candlesticks also eliminate excessive market noise because of the smoothing.