Heikin Ashi is a type of trading chart that originated in Japan (heikin ashi translates as average bar). Heikin Ashi charts are similar to candlestick and bar charts in that they show similar information (the open, high, low, and close of the time frame), but Heikin Ashi charts calculate the information differently. Heikin Ashi charts are usually displayed as candlestick charts (i.e. where the color of the candlestick denotes the direction), but they can just as easily be displayed as bar charts (i.e. where the location of the open and close denote the direction). Heikin Ashi charts are usually used in place of a standard candlestick or bar chart, but can also be displayed in addition to the standard chart (i.e. as an indicator). In the example chart, the standard candlestick chart is shown in the upper section, and the Heikin Ashi chart is shown in the lower section.
- Description: Heikin Ashi charts calculate their 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 (e.g. the open, high, low, and close, of each five minues).
HAO = (HAO-1 + HAC-1) / 2
HAC = (O + H + L + C) / 4
HAH = Highest(H, HAO, HAC)
HAL = Lowest(L, HAO, HAC)
Heikin Ashi charts are used in trading in the same manner as standard candlestick or bar charts (i.e. chart patterns are used to indicate price movements). However, Heikin Ashi charts have an additional aspect in that the direction of the bar (i.e. its color for candlesticks) is supposed to indicate the overall direction of the market, while ignoring the intermediate direction (e.g. false changes of direction).
In the example chart, the standard candlesticks (the upper section) change direction (i.e. color) quite often even though the price is still moving in the same overall direction. The Heikin Ashi candlesticks (the lower section) change direction (i.e. color) less often, indicating that the price is still moving in the same direction.