How to Read Heikin Ashi Candlestick Charts

The Heikin Ashi (sp., Heiken Ashi) candlestick chart gives the user an alternative to using a traditional candlestick. With Heikin Ashi the candlestick patterns and their variations that many find difficult to learn and remember become more simple to read. Using modified candlesticks computed using the opening, high, low and closing price values of traditional candlesticks it presents a simple visual method to assist with determining trend direction and strength. Many observe a reduction of the irregularity associated with traditional candlesticks and candlestick patterns on their price charts.

By reducing classifications and categories, the number of rules and subjective expertise required using traditional candlesticks is also significantly reduced. In its most basic form only eight rules determine trend direction and strength:

“The following tables will make better sense if the chart examples further down on this page are first examined.”

Identifying a Positive Trend (Price rising)

Normal Strength –  There will be empty candlestick bodies.

Strong Positive Trend – You will see empty candlesticks with long bodies without lower wicks.

Weak –  There will be empty candlestick with shorter bodies without lower wicks.

Consolidation – A group of small candlesticks with both upper and lower wicks.

Identifying a Negative Trend (Price falling)

Normal Strength – Candlesticks have filled bodies.

Strong Negative Trend – You will see filled candlesticks with long bodies and no upper wicks.

Weak  –  Filled candlesticks with shorter bodies and no upper wicks.

Consolidation – A group of small candlesticks that have upper and lower wicks.

Image courtesy of Investopedia

Heikin-Ashi-image-of-bar-chart-how-to-readFrom the tables above it is understood that the actual number of Heikin Ashi rules is eight, four of which are bullish and four are bearish. The only subjective analysis is the determination of small, long and shorter candlestick bodies, and wick lengths relative to the length of the candlestick bodies.

An Heiken-Ashi candlestick is not dependent upon multiple chart periods (bars or time periods) that have already elapsed as most oscillators and indicators require for their computation. When utilizing previous time periods the result of a computation by definition “lags”. Therefore the result provided by oscillators and indicators is affected by history and the impact of that lag can cause ambiguity of the price chart’s current state of affairs, making quantitative analysis more difficult. Think of more difficult as less absolute and more subjective, meaning the individual must bring more learned experience to assess a situation for which there appears no clear-cut answer. Subjectivity can also be thought of as a greater probability of introducing error in judgement.

The Heiken-Ashi (HA) candlesticks replace traditional candlesticks on a chart with those computed by its formula. This allows other chart studies of choice to be utilized that can provide additional decision analysis and technical confirmation.

Computation of Heikin Ashi (HA) Modifed Candlesticks:

OHLC – Heikin-Ashi Computation

HaOpen - (HaOpen previous bar + Close previous bar) / 2

HaHigh - Highest of (High, HaOpen, HaClose)

HaLow - Lowest of (Low, HaOpen, HaClose)

HaClose - (Open + High + Low + Close) / 4

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