Heiken Ashi candles

economic-dictionary

Heiken Ashi candles are a form of graphical representation, derived from Japanese candles, of the price of a financial asset.

At first glance, Heiken Ashi candles are very similar to Japanese candles. So much so, that they coincide in their origin: Japan. Furthermore, this similarity increases if the analyst's experience is scarce in the stock market. In any case, the doubt is justified. All things considered, the Heiken Ashi candlestick chart is, for simplicity, a Japanese candlestick chart but smoothed out.

What do you mean by smoothing? What it means is that if the general trend is bullish, most of the candles will be bullish candles. Whereas, if the trend is bearish, most of the candles will be bearish candles. In the following graph we can see a comparison:

As we can see, in the graph on the left, the one of Japanese candles, the main trends are appreciated worse. While, on the right chart, the Heiken Ashi candlestick, makes it easy to follow the main trends. In trading terms, the Heiken Ashi candlestick chart would seem to reduce or eliminate noise. What is noise? The noise is formed by the set of events that do not allow us to see clearly what is happening. For example, in an uptrend, after several weeks of rises, if the price falls for a few days, many analysts and traders would start to doubt. Some would hesitate to such an extent that they may begin to think that the trend is going to change from bullish to bearish. However, the reality is that the price cannot go up forever and after several weeks of increases it is normal for the price to fall. In this sense, Heiken Ashi candles facilitate the isolation of these events.

Calculation of Heiken Ashi candles

In Japanese candlestick charts, the candles are totally independent of each other. On a daily chart, each day is made up of a candle with its opening, its maximum, its minimum and its closing price. So the formation of the current candle is not conditioned by the previous candle. However, in the case of Heiken Ashi candles, today's candle formation depends on yesterday's candle.

The formulas with which the parameters (Open, high, low and close) of the Heiken Ashi candles are calculated are:

  • Closing = (Opening + maximum + minimum + closing) / 4
  • Opening = (Open of previous candle + close of previous candle) / 2
  • Maximum = Maximum value of (Maximum, open or close)
  • Minimum = Minimum value of (Minimum, open or close)

The formulas for calculating Heiken Ashi candles are very simple. Even so, most trading platforms have Heiken Ashi candlestick charts as an option. Simply, it should be noted on the corresponding trading platform that instead of a graphical representation in the form of lines, bars or Japanese candles, it represents the price in the form of Heiken Ashi candles.

Types of Heiken Ashi candles

Derived from the above formulas, we can only find four types of candle. Two bullish types and two bearish types. However, we could reduce the total rates to three. Thus, first we will see all the theoretically possible types of Heiken Ashi candles. And secondly, we will explain why they can be reduced to three.

There are no more Heiken Ashi candle shapes. Candles can be bigger, smaller, with longer or shorter shadows, but generically there are only four types. The fact that there are only four types makes it much easier to analyze trends. However, since what is really important is their interpretation, the rates can be reduced to three.

Interpretation of Heiken Ashi candles

Continuing with the types of candles, we will reduce the types to three. Each type has an implication on the price chart. That is, depending on the type of candle that is formed, we can say that the market is in a bullish moment, a bearish moment or a moment of indecision.

  • Bullish: They are candles with bullish implication all those that do not have a lower shadow (opening = minimum), have an upper shadow and their body is bullish in color. It is usually white or green. The body color in this case is white, but it could be any other color.

  • Bears: They are candles with bearish implication all those that do not have an upper shadow (opening = maximum), have a lower shadow and their body is bearish in color. It is usually black or red. The body color in this case is black, but it could be any other color.

  • Indecision: They are candles that imply indecision all those that have an upper and lower shadow. Regardless of the color of the body (bullish or bearish) what they reflect is indecision in the market.

Finally, both traders and stock analysts should note that the type of candle makes sense when analyzing the chart as a whole. A candle alone does not mean anything. On the contrary, a set of candles will give more reliable and valuable information.

Heiken Ashi candles in trading

Since the birth of chart analysis, trading tools have grown exponentially. The development of technology, trading platforms and an expansion of the offer of brokers have made these tools more and more accessible. One of the tools that has proliferated successfully in the world of trading has been, without a doubt, the Heiken Ashi candles.

Its easy interpretation has caused many traders to be interested in incorporating these types of charts into their operations. That is, they have incorporated these types of charts into their trading systems. Some have even created trading systems in the form of expert advisors (EA) solely and exclusively with this type of candles. Among the advantages of Heiken Ashi candles are:

  • They smooth the movement of prices, facilitating their visualization.
  • Technical analysis can be applied in the same way as a normal chart.
  • They facilitate the interpretation of the charts and, therefore, the stock market analysis process.
  • They can be quantified and are easy to program to create automated trading systems.

The editor recommends: Japanese candles

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