June 27, 2017

Heikin-Ashi Candlestick Charting

Depending on the charting package that you use, you may have been intrigued to see the name Heikin-Ashi as one of the options. Heikin-Ashi is Japanese for “average bar”, and the method of plotting is a way to smooth out the fluctuations that you typically see with normal candlestick charting. In use, you would need to see both charts as the Heikin-Ashi is not a substitute for a normal price chart, but simply provides a different window on the information.

The open-close-high-low prices are plotted in the same way as a regular candlestick chart, but they are calculated in a different way rather than simply being at the prices that were traded. For convenience, I’ll refer to them as the HAopen, HAclose, HAhigh, and HAlow.

The opening price HAopen is calculated from the previous day, and is the average of the previous day’s HAopen and HAclose. Basically a different description of where the price was reckoned to be by the market previously, and therefore leading into the present day.

The closing price HAclose is the average of the current bar’s OHLC, the actual trading prices for today. Once again, you can view this as a description of where the market thinks the price should be on this day, and therefore the settled closing price.

Having defined the HAopen and HAclose, the other two are easy. HAhigh is the highest of the actual high price, the HAopen and the HAclose. HAlow is the lowest of the actual low price, the HAopen and HAclose.

Incidentally, you can see that you need a Heikin-Ashi calculation of the previous day to even draw the charts properly. However, if you start with conventional values for the first day plotted, it will rapidly fall in line with the true HA values.

The result of this blending of prices is that the candles drawn are much more indicative of the trends. Here is a normal chart for BAE Systems –