Heikin-Ashi Charts: A Smoother View of Market Trends

Heikin-Ashi, a Japanese term meaning "average bar," offers a unique approach to candlestick charting by smoothing out price fluctuations. Unlike traditional candlestick charts that capture volatility, Heikin-Ashi focuses on revealing true market trends by filtering out noise. 

This method helps traders clearly distinguish between temporary price fluctuations and genuine trend reversals—an essential skill in volatile markets. Originally developed by Munehisa Homma in the 1700s, Heikin-Ashi charts are based on a modified formula using two-period averages, rather than just open, high, low, and close data. 

What Are Heikin-Ashi Candlesticks? 

• Heikin-Ashi charts combine prior period open-close data with the current period’s open-high-low-close (OHLC) values 

• This hybrid approach produces candles that smooth out short-term volatility and help highlight underlying trends 

• The outcome is a cleaner, less erratic chart that makes trend direction and reversals easier to interpret

How to Calculate Heikin-Ashi Candles 

Heikin-Ashi candles are created using a specific set of formulas that rely on both current and previous data points. The steps are: 

1. Close = (Open + High + Low + Close) / 4 – Represents the average price of the current period 

2. Open = (Previous Heikin-Ashi Open + Previous Heikin-Ashi Close) / 2 – Averages the prior open and close values 

3. High = Highest of (Current High, Current Heikin-Ashi Open, Current Heikin-Ashi Close) – Captures the peak among three values 

4. Low = Lowest of (Current Low, Current Heikin-Ashi Open, Current Heikin-Ashi Close) – Highlights the lowest point among three variables 

How to Prepare the First Heikin-Ashi Candle 

To construct the initial candle, we use raw OHLC values from the current period: 

• First Close = (O + H + L + C) / 4 

• First Open = (O + C) / 2 

• First High = High of the current period 

• First Low = Low of the current period 

Although the first candle might not reflect an accurate picture due to the absence of prior data, its accuracy improves over time, typically after 7–10 candles. 

How to Read and Interpret Heikin-Ashi Charts 

Heikin-Ashi charts generate five primary signals used to identify trend direction and trading opportunities: 

1. Hollow green candles with no lower shadows: Strong uptrend, continue holding long positions 

2. Hollow green candles (even with lower shadows): Uptrend in progress, consider adding to long trades or exiting shorts 

3. Small-bodied candles with both upper and lower shadows (e.g., Doji): Trend may be reversing or pausing—wait for confirmation before acting 

4. Filled red candles: Downtrend, exit long positions and consider initiating short trades 

5. Red candles with no upper shadows: Strong downtrend, stay short or avoid long entries 

The lack of tails on bullish or bearish candles is a powerful visual cue of strong market momentum. The longer the sequence of such candles, the more reliable the trend. 

However, Doji candles or similar formations may signal trend exhaustion rather than reversal. It’s important to wait for confirmation before reacting. 

Benefits of Heikin-Ashi Charts 

• Simple to read: Traders familiar with candlesticks can easily use this method 

• Reliable trend signals: Based on historical price data, these charts have a high success rate in spotting genuine trends 

• Removes noise: Filters out short-term corrections, making trend analysis clearer 

• Widely available: Integrated into most trading platforms, including m.Stock 

• Can be combined with other indicators: Works well with momentum oscillators and traditional trendlines 

Drawbacks of Heikin-Ashi Charts 

• Averages hide actual prices: Since the chart reflects average values, actual open/close prices are not shown 

• Lack of price gaps: Momentum traders who rely on price gaps may miss key cues 

• Slower trade setups: Because the method uses data from two periods, setup signals take longer to form, less suitable for intraday traders 

Points to Remember 

• Heikin-Ashi charts simplify trend analysis by eliminating price noise 

• They offer traders a reliable way to spot long-term trends without the complexities of traditional charting tools 

• Ideal for swing and positional traders, especially when paired with support/resistance analysis or technical indicators