How to Calculate Heikin Ashi

If you've ever observed a trading graph with classic candlesticks, you're likely familiar with how daunting that can be. At some point, the market will appear bullish, and then you're slapped across the face with a red candle.

Many traders have trouble determining the true trend because of the noise. Enter Heikin Ashi. By changing the way candles are calculated ever so slightly, Heikin Ashi smooths the chart and keeps traders focused on the higher time frame bias.

In this article, we'll break down exactly how the Heikin Ashi candle is calculated, define the formulas in plain English, and then demonstrate how to use them in practice. If you're new to charting or looking to improve your technical knowledge, this article is a simple, step-by-step guide to get you started.

What Is Heikin Ashi?

The phrase "Heikin Ashi" comes from Japanese and translates to "average bar." Unlike traditional candlesticks that show raw price data of the period, the Heikin Ashi candle is a 'smoothed' calculation made from both the current candle and the previous candle's average. The Heikin Ashi candle removes noise and constructs smoother charts, allowing trend development to be observed more clearly.

Heikin Ashi does not replace traditional candlesticks; it's merely another viewpoint. Think of it more as a filter that reduces the trash in the market, allowing you to focus on the overall Direction.

The Key Differences from Traditional Candlesticks

Before we jump into the calculations, it is helpful to understand how Heikin Ashi differs from regular candles:

• Traditional Candlesticks: Each bar uses its own period's open, high, low, and close OHLC data.- Heikin Ashi Candles: The value for each bar is averaged and impacted by the prior bar, which diminishes sharp spikes and makes the output smoother. This slight shift makes an entirely different chart. Trends appear stronger; reversals are more pronounced; and false signals are less prevalent.

Heikin Ashi Formula Explaining

Heikin Ashi candles use four parts compared to a regular candlestick: Open, Close, High, and Low—only the calculations vary. Here is the formula simplified:

1. HA-Close = (Open + High + Low + Close) ÷ 4

o This is a straight average of that period's OHLC.

2. HA-Open = (Previous HA-Open + Previous HA-Close) ÷ 2

o This provides continuity from previous bars.

3. HA-High = Highest (High, HA-Open, HA-Close)

o This takes the highest of the three values.

4. HA-Low = Lowest (Low, HA-Open, HA-Close)

o This takes the lowest of the three values.

These formulas may look complex at first glance, but once you examine the logic, it is no more difficult than what you already understand. The point is fundamental: smooth out the chart by blending real prices with the average.

Step-by-Step Example: Creating Heikin Ashi Candles

Let's run through an easy example using made-up numbers. Assume you have a daily candlestick that had the following values:

• Open = 100

• High = 110

• Low = 95

• Close = 105

Step 1: Determine HA-Close

(100 + 110 + 95 + 105) ÷ 4 = 102.5

Step 2: Determine HA-Open

If the HA open of the previous HA candle was 98, and the HA close of the previous HA candle was 101, then:

(98 + 101) ÷ 2 = 99.5

Step 3: Determine HA-High

Maximum of (110, 102.5, 99.5) = 110

Step 4: Determine HA-Low

Minimum of (95, 102.5, 99.5) = 95

The Heikin Ashi candle will look as follows for this period:

• Open = 99.5

• Close = 102.5

• High = 110

• Low = 95

Note how the Open and Close are averages, thus making the candle visually less erratic than just plotting the high, low, open, and close prices.

What Do Heikin Ashi Candle Patterns Mean?

Once you understand the calculation of the Heikin Ashi, your next task is to learn how to decipher its meaning. Here are a few guidelines:

• Long Green (or White) Candles Without Lower Wicks

A strong upward movement suggests that momentum is already on the side of the bulls.

• Long Red (or Black) Candles Without Upper Wicks

A strong downward movement suggests that bears are in control.

• Small Bodies, with Both Wicks Indicating

The market is indecisive and often reverses or consolidates.

• Colour Changes After Several Candles

Signal for potential trend change, but wait for confirmation with other indicators.

Benefits of Using Heikin Ashi

1. Better Trend Clarity

You can be in a trade longer without getting shaken out by a minor pullback for a moment.

2. Less User Error

By averaging many 'whipsaws', you may see that using traditional candlesticks is filtered out.

3. Easier for Beginners to Read Directions

New traders especially find it easier to read a Heikin Ashi chart and see what Direction it is headed.

4. Belief in Conformance

Less chart noise means less inclination to act impulsively based on a sudden change.

What Are The Drawbacks?

Heiken Ashi certainly has many benefits, but there are some things to be aware of.

• Lagging Nature

By averaging data from prior periods in a price action chart, the signals of previous price action are often delayed compared to traditional candlestick signals.

• Less Exacting Prices

The Open and Close prices do not necessarily equate to the market price

• Not For Scalping

Traders who rely on every tick of price movement or small movements may prefer the traditional candlesticks.

Things You Can Do

• Use Traditional Candlesticks

Heiken Ashi is an excellent way to see the overall trend, but it's best to check a traditional chart before your entry or exit for exact locations.

• Use Confirming Indicators

Indicators like Moving Averages, RSI, or Volume, for example, can confirm whatever you see in Heikin Ashi or anywhere on the chart.

• Use Higher Timeframes

Heikin Ashi is most effective on the higher timeframes due to its smoothing Nature on those charts.

• Have a Plan

Decide ahead of time, for example, how many consistent colours of change would have to happen to enter or exit a trade.

Common Misconceptions

• "It is hiding real prices."

While values are averaged, a Heinkin Ashi chart is not for accurate entries but for viewing the price action trend.

• "It is always better than candlesticks."

It depends on your strategy. A scalper may end up waiting too long, while a trend trader may like it best as even more smoothing.

• "It is complicated to calculate."

Although they may look complicated, once you break down the equation, it is easy to follow.

Final Thoughts

Overall, calculating a Heikin Ashi chart is not as complicated as it may seem at first. A Heikin Ashi chart averages price action data, providing a trader with a more precise visual representation of the price trend while reducing significant emotional noise.

They are not a foolproof method, and fast volatility will lag Heikin Ashi methods; however, they are a great tool to use when attempting to feel more confident about trend trading.

Ultimately, a hybrid trading plan that includes Heikin Ashi mixed with any chart, traditional candlestick, etc, and using them together with indicators you prefer is a great route to go down. The smoother chart keeps you aware of the overall trend, and does not block you from noticing the real price action at all.

The next time you start to feel overwhelmed with a messy candlestick chart, you can switch to a Heikin Ashi chart and perhaps find it calms you down to clarify your decisions and keep your trading performance on track.