What Are Heikin Ashi Candles & How Do They Work?

Heikin Ashi candles offer a distinct approach to visualizing price movements, providing a smoother representation than traditional candlesticks. The term “Heikin Ashi” translates from Japanese to “average bar,” reflecting their core function. Their primary purpose is to filter out market noise and make underlying trends more apparent, aiding in trend identification.

Calculating Heikin Ashi Candles

The construction of Heikin Ashi candles involves a modified set of formulas that derive their open, close, high, and low prices from both current and previous period data. Unlike standard candles that use the actual open, high, low, and close (OHLC) of a period, Heikin Ashi values are averaged.

The Heikin Ashi close price (HA_Close) is determined by averaging the current period’s open, high, low, and close prices: HA_Close = (Open + High + Low + Close) / 4. The Heikin Ashi open price (HA_Open) is derived from the midpoint of the previous Heikin Ashi candle: HA_Open = (Previous HA_Open + Previous HA_Close) / 2.

For the Heikin Ashi high price (HA_High), the highest value among the current period’s actual high, the calculated HA_Open, and the calculated HA_Close is used: HA_High = Max(High, HA_Open, HA_Close). Similarly, the Heikin Ashi low price (HA_Low) is the lowest value among the current period’s actual low, the calculated HA_Open, and the calculated HA_Close: HA_Low = Min(Low, HA_Open, HA_Close).

Distinctions from Standard Candlesticks

Heikin Ashi candles differ significantly from standard Japanese candlesticks in their visual representation and the information they convey. Traditional candlesticks provide raw, precise open, high, low, and close prices for each specific period, reflecting every price fluctuation and potential gap. This granular detail can sometimes lead to a “noisy” chart, with frequent color changes and whipsaws that might obscure the underlying trend.

In contrast, Heikin Ashi candles smooth out price data by incorporating averaged values from previous periods into their calculations, reducing market noise and false signals. This presents a clearer and more continuous picture of the prevailing trend. For instance, while traditional charts often display price gaps, Heikin Ashi charts do not, as their averaged construction fills in these gaps, providing a less fragmented view of price action.

The exact price levels displayed by Heikin Ashi candles are derived averages, meaning they do not always correspond to the actual real-time prices of the asset. Traditional candlesticks, however, always show the precise open, high, low, and close, which directly matches the market’s trading price. This characteristic means Heikin Ashi charts are primarily designed for trend identification and analysis, rather than for pinpointing exact entry and exit prices. They tend to stay the same color during sustained trends, highlighting momentum more effectively than traditional candles, which can alternate colors even within a strong trend.

Reading Heikin Ashi Patterns

Interpreting Heikin Ashi patterns involves observing candle color, body size, and the presence or absence of wicks to gauge trend strength and potential shifts. The color of a Heikin Ashi candle is a primary indicator of trend direction. Green or hollow candles signify an uptrend, while red or filled candles indicate a downtrend. A consistent series of green candles suggests sustained buying pressure, whereas a succession of red candles indicates persistent selling pressure.

The size of the candle body provides insight into the momentum of the trend. Long Heikin Ashi bodies, regardless of color, suggest strong directional movement. For example, long green bodies indicate robust bullish momentum, while long red bodies denote significant bearish strength. Conversely, small candle bodies, often appearing after a period of strong directional movement, can signal weakening momentum or market indecision, potentially preceding a trend pause or reversal.

Wicks, also known as shadows, offer additional clues about trend strength and potential reversals. In a strong uptrend, Heikin Ashi candles will often appear green with little or no lower wicks, indicating that buying pressure is dominant and prices are consistently closing near their highs. Similarly, a strong downtrend is characterized by red candles with minimal or no upper wicks, showing that selling pressure is in control and prices are frequently closing near their lows. The appearance of candles with small bodies and long wicks on both the upper and lower sides suggests market indecision and a potential trend reversal, as neither buyers nor sellers are firmly in control.