Heikin-Ashi Candlesticks is a Japanese candlestick that utilizes the open-close data sourced from any historical period. It is combined with open-high-low-close data of the current period for creating a combo candlestick. It intends to develop candlesticks that filter out the noise to give clarity regarding the captured trend. Heikin stands for average while “Ashi” means pace in Japanese. Collectively they represent the average speed of the prices. These candlesticks are not necessarily used as the traditional candlesticks as it doesn’t show dozens of bearish or bullish reversal patterns in 1-3 candlesticks. However, they help in identifying potential reversal points, trending periods along with classic technical analysis patterns.
Calculations
The Heikin-Ashi candlesticks consider the following for calculations:
Current Open, High, Low and close prices
Current Heikin-Ashi values
Historical Heikin-Ashi values
Although it seems complicated, the calculations are simple when we understand the basic formula. Before explaining let’s clarify what each term stands for in the formula:
A “(0)” = Current Period
A “(-1)” = Prior Period
HA = Heikin-Ashi
The formula:
Heikin-Ashi Close = {Open Price (0) + High Price (0) = Low Price (0) + Close Price (0)} / 4
Heikin-Ashi Open = {(HA- Open Price (-1) + HA Close Price (-1)}/2
Heikin Ashi High = Maximum of either High Price (0), Heikin-Ashi-Open (0) or Heikin-Ashi-Close (0)
Heikin-Ashi Low = Minimum of either Low (o), Heikin Ashi-Open or Heikin Ashi-Close (0)
Considerations
Before moving further and understanding the significance of each calculation made above, it is important to have the 1st Heikin-Ashi candlestick. In this case, the premise of the calculation utilizes the data obtained from the current open price, high price, low price and close price. Similarly the 1st Heikin-Ashi open will be the average of the above opening and closing prices. Although these candlesticks are largely artificial, its effects dissipate over the next 7 to 10 periods.
Heikin-Ashi calculations before the first price date visible on each chart. Therefore, the effects of this first calculation will have already dissipated. The chart above shows examples of two typical candlesticks converting into one Heikin-Ashi Candlestick.
Heikin-Ashi candles can also be for positional trades and make the most out of various stocks in the market. The longer the duration, the better is the result that these candlesticks can help you trade wisely. We prefer one-day timeframe for calculations. In this video, we explain its usage with respect to stocks like Oberoi Realty. The video shows a clear confusion as to where it is in the current state and where it is heading. We also analyze Phillips Carbon and other stocks using Heikin-Ashi Candles.
Whenever you get a flat green candle above the moving average and then do an entry. We explain how you enter and when to exit. If there is a flat green Doji, it is the best to enter. However, when it is a situation where you see the 1st flat red Doji candle, you need to be cautious. Moreover, the moment flat head red candle appears and pierces the 10-day moving average, it’s time to exit. A detailed explanation in the video helps you do a practical analysis of stocks and use this candlestick pattern to the best of your use.
Concluding Remarks
Heikin-Ashi Candlesticks is a versatile tool that helps in filtering noise, foreshadowing reversals and identifying classic chart patterns. A chartist can apply almost every aspect of classical technical analysis on these charts. The Heikin-Ashi candlesticks are also employed for determining support and resistance, drawing trendlines and measuring retracements. There are different volume indicators and momentum oscillators too.
