Heiken-Ashi --- candles, charts, prices, and trading

Clint · February 24, 2020, 7:50am

A detailed examination of Heiken-Ashi

candles, charts, prices, and trading

平均足

Heiken-Ashi = average bar

Heiken-Ashi charts are interesting, but what are they actually showing?

Most traders — when they see a Heiken-Ashi chart for the first time — have some questions:

What causes a Heiken-Ashi chart to look so orderly, compared to a normal candlestick chart?
Why do the Heiken-Ashi candles appear to be grouped according to color?
Why are the Heiken-Ashi candles not the same size as ordinary candles?
Why are the prices on Heiken-Ashi charts different from the prices on normal charts?
Can Heiken-Ashi charts be trusted? — Can they be traded? — If so, how?

This thread will delve into Heiken-Ashi, in an attempt to answer those questions.

This investigation got started in Norman’s thread, when he pointed out that Heiken-Ashi highs and lows often don’t match the actual highs and lows on normal candlestick charts. I got involved in that conversation, and soon realized that trying to explain Heiken-Ashi highs and lows was just the beginning of a really big research project.

For the past couple of weekends, I have been trying to gather and organize enough information to answer the questions posed above. I don’t know how many posts will be required to write it all out.
But, in any case, here goes –

Heiken-Ashi candles – an overview

It’s clear that Heiken-Ashi (HA) charts are strange, because there’s something strange about HA candles. And the HA candles are strange, because something about the basic parameters of those candles makes them very different from ordinary candles.

Four standard parameters – open, high, low, and close – comprise every candle (or price bar) depicted on the “normal” charts we are all familiar with. On Japanese candlestick charts (and on western-style bar-charts), those four metrics are actual market prices. And they are accurately depicted (graphically) in the candles (or bars) on our charts.

On Heiken-Ashi charts, on the other hand, the open, high, low, and close depicted in the HA candles represent mathematically manipulated prices, – which, in many cases, do not match actual market prices.

In each HA candle, the HA open, high, low, and close are computed from prices borrowed from –

the previous HA candle
or the current actual candle
or, in certain instances, the current HA candle itself

Factoring these “borrowed” prices into the HA formulas results in the following –

HA open and close levels almost never match actual open and close levels
HA highs and lows often do not match actual highs and lows
HA candles typically trend (both up and down) in a more orderly fashion than ordinary candles
HA candle-colors typically group together in a way that ordinary candles do not

To sort out how these effects arise on our Heiken-Ashi charts, let’s begin by analyzing the formulas that produce Heiken-Ashi candles.

Deconstructing the Heiken-Ashi candle formulas

Most sources which offer formulas for computing the Heiken-Ashi open, high, low, and close, fail to distinguish between actual market prices and the HA prices borrowed for use in the calculations, and they fail to distinguish between prices borrowed from a current candle and prices borrowed from a previous candle.

This failure to clearly identify the prices which factor into each HA candle creates unnecessary confusion among traders trying to understand Heiken-Ashi.

In the description and formulas given below, I have attempted to avoid any possible confusion by labeling each element, as follows:

All parameters refer to the current candle, except where the word previous appears as a prefix
All actual prices and all HA prices bear the prefixes actual and HA, respectively

Here is how the four HA parameters (O, H, L, and C) are computed for each HA candle:

Heiken-Ashi OPEN

The HA OPEN is derived from the body of the previous HA candle. Unlike ordinary candles, which open at the close of the previous candle, the current HA open is always the midpoint of the previous HA candle. That is, the HA open is the average of the previous HA open and HA close.

Heiken-Ashi OPEN = ½ x [previous HA open + previous HA close]

Heiken-Ashi HIGH

The HA HIGH is the highest of the following three prices: the actual high price occurring in the current period, the HA open price in the current period, or the HA close price in the current period

Heiken-Ashi HIGH = MAX [actual high, HA open, HA close]

Heiken-Ashi LOW

The HA LOW is the lowest of the following three prices: the actual low price occurring in the current period, the HA open price in the current period, or the HA close price in the current period.

Heiken-Ashi LOW = MIN [actual low, HA open, HA close]

Heiken-Ashi CLOSE

The HA CLOSE is computed from the actual O-H-L-C prices displayed in the closed current candle. Specifically, the HA close is the average of the current actual open, high, low, and close.

Heiken-Ashi CLOSE = ¼ x [actual open + actual high + actual low + actual close]

The next task will be to show graphically, with charts, how the way in which Heiken-Ashi candles are constructed results in significant differences between normal Japanese candlestick charts and Heiken-Ashi charts.

That is the subject of the next post.

Clint · February 24, 2020, 7:51am

Heiken-Ashi continued

平均足

Graphically comparing the Heiken-Ashi O, H, L, and C to the actual O, H, L, and C

For this comparison, I’m using the current USD/CHF daily chart, expanded to show the most recent 37 daily candles (from January 1, 2020, through last Friday, February 21, 2020).

This particular chart serves our purpose here, because it contains a little bit of everything – a short consolidation period, a couple of short up-and-down moves, and a longer up-move.

The charts displayed below are Oanda’s basic charts. The Oanda platform also contains advanced charting from Trading View, which will be discussed in detail in the third post in this study.

• To begin, let’s compare naked candlestick and Heiken-Ashi charts.

(1) USD/CHF candlestick chart

Chart (1) is a typical example of the Japanese candlestick charts we have all come to know and love.
Note that this is neither a BID price chart, nor an ASK price chart. Rather, this chart (and all the “candlestick” charts in this series) display “mid” prices (the average of the BID and ASK prices) — because, in this charting package, Heiken-Ashi prices are computed based on “mid” prices. Not all charting packages follow this format. Trading View (mentioned above) offers HA charts computed on either BID, ASK, or “mid” prices (as selected by the platform user).

(2) USD/CHF Heiken-Ashi chart

Chart (2) displays HA candles on the same pair, same time-frame, and same look-back period as the previous chart. We notice immediately that down-moves (even very short ones) are all red, and up-moves (even very short ones) are all green. We notice significant differences in the size of the candles, compared to the normal candlestick chart. And we see less “choppiness” in the swings from high to low, and low to high.

• Actual OPEN price levels are overlaid on both charts (candlestick and HA)

(3) USD/CHF candlestick chart with OPEN price levels overlaid (black line)

In Chart (3) we are back to the candlestick chart again, this time with an overlay. The current, actual OPEN prices are overlaid on this chart – and, because this overlay conforms exactly to the candle bodies in this chart, it is almost impossible to see.

(4) USD/CHF HA chart with actual OPEN price levels (black line taken from the candlestick chart)

Chart (4) is, once again the HA chart, this time with the actual OPEN price-line from the candlestick chart imported and overlaid on it. Here we see graphically how much deviation there is between the HA open and the actual open in each time period. In most cases (but, not all), the green HA candles open below the actual candles, when prices are in an up-move. And, in most cases (but, not all), the red HA candles open above the actual candles, when prices are in a down-move.

• The OPEN price-line is removed, and the actual CLOSE price-line is overlaid on both charts

(5) USD/CHF candlestick chart with CLOSE price levels overlaid (black line)

In Chart (5), we are back to the candlestick chart. The OPEN price-line overlay has been removed, and the current, actual CLOSE price-line has been overlaid on the chart. And, as was the case in Chart (3), the line is difficult to see, because it conforms exactly to the candle bodies.

(6) USD/CHF HA chart with actual CLOSE levels (black line taken from the candlestick chart)

Chart (6) is the HA chart, once again. The CLOSE price-line from Chart (5) has been overlaid onto this chart, showing clearly how the HA close deviates from the normal candlestick close. Generally, but not always, the HA close is lower than the actual close, when prices are moving up, and higher than the actual close, when prices are moving down. As detailed in the previous post, the HA close is determined by a complicated formula containing four actual prices, which makes it nearly impossible to guess intuitively where that HA close will settle.

• The CLOSE price-line is removed, and actual HIGHS and LOWS are overlaid on both charts

(7) USD/CHF candlestick chart with both HIGHS and LOWS overlaid (green line and red line)

Chart (7) begins our last comparison – highs and lows. On this candlestick chart, the CLOSE price-line has been removed, and two price-lines have been overlaid – a green line, denoting the actual highs, and a red line denoting the actual lows. As you would expect, there is perfect conformity between these lines and the tips of the upper and lower shadows (wicks) of the candles.

(8) USD/CHF HA chart with actual HIGHS and LOWS (lines taken from the candlestick chart)

In Chart (8) the HIGH and LOW price-lines from Chart (7) have been overlaid. Black arrows mark all the instances where the HA highs and lows do not match the actual highs and lows. Notice that, in general, when prices are rising, the HA lows are lower than the actual lows; and when prices are falling, the HA highs are higher than the actual highs. A close examination of the formulas for HA HIGH and HA LOW (in the previous post) will reveal why it is impossible for HA highs to be lower than actual highs, and it is impossible for HA lows to be higher than actual lows.

So far in this study, we have considered how HA candles and charts look, compared to normal candles and charts. And we have discussed price levels on these charts – but we have not mentioned actual numerical prices.

In the next post, we’ll discuss actual numerical prices, and we’ll examine how a couple of different trading platforms display Heiken-Ashi prices, versus actual prices.

Clint · February 24, 2020, 7:52am

Heiken-Ashi continued

平均足

In the previous post, we considered each of the four candle parameters – open, high, low, and close – separately, in order to highlight how the HA transformations (formulas) alter each parameter.

We noted that, in most cases, the HA OPEN and HA CLOSE differ from the actual open and close – regardless of whether prices are trending, or moving sideways.

And we noted that HA HIGHs and LOWs differ from the actual highs and lows frequently, when prices are trending – but, less frequently when prices are moving sideways.

Now, let’s move from individual HA candles to HA charts.

Heiken-Ashi smoothing effects and color-bias

You have probably realized intuitively that it is the way the HA candles OPEN and CLOSE that creates the smoothing effect we see when we compare HA charts to normal candlestick charts. And it is also the HA OPEN and CLOSE that create the color-bias in the HA candles, making extended price moves (both up and down) appear all one color. Let’s briefly examine how the HA OPEN and CLOSE prices are responsible for these effects.

Scroll back to Chart (4) in the previous post, and look at the up-move in the right half of that chart. The black line shows the actual open levels. The lower edges of the green candle bodies mark the HA OPEN levels. Notice that the actual open levels trace out a rather ragged-looking stair-step, while the lower edges of the green HA candle bodies follow a much more orderly upward march. This more orderly pattern results from the averaging effect of opening each HA candle at the midpoint of the previous candle, rather than at the close of the previous candle, as normal candlestick charts do.

Also, opening each HA candle at the midpoint of the previous HA candle creates the color-bias. At the moment of opening, the new HA candle has a body with significant height, and that candle body is strongly biased to be the same color as the candle which just closed. Furthermore, the HA price would have to retrace all of that initial candle height, before its color could reverse. This contrasts sharply with the corresponding actual candle, which has no body at the moment of opening, and has only to retrace one tick from its opening level, in order to take on a color opposite of the preceding candle.

Finally, consider Chart (6) in the previous post. Here the actual close levels are superimposed on the HA candles. We can see immediately that the actual close levels trace out the same sort of ragged stair-step that we noted in the actual open levels. By contrast, the HA CLOSE levels appear more orderly. And this is another instance of averaging in the construction of the the HA candles. The HA CLOSE levels, as discussed in the first post, are calculated as the average of the actual candle’s open, high, low, and close. This averaging eliminates extremely high HA CLOSE levels in up-moves, and extremely low HA CLOSE levels in down-moves.

Now we can begin to understand the Heiken-Ashi name — Heiken-Ashi means Average Bar.

Heiken-Ashi prices versus actual prices

The LAST price on an open candle is not another “parameter”, in addition to the O, H, L, and C that we have discussed at length. Rather, on ordinary candlestick charts, and on HA charts, the LAST price on an open candle is the precursor to the CLOSE price on that candle. At the final moment, as the open candle is closing, the LAST price becomes fixed as that candle’s CLOSE.

On an ordinary candlestick chart, the LAST price is the actual market price at which a transaction is occurring at that moment. On a HA chart, the LAST price is a mathematically manipulated price, according to the formula for the HA CLOSE, given in the first post.

Here is a screen-shot combining two Oanda charts running simultaneously – a standard Japanese candlestick chart displaying EUR/GBP “mid” prices, and the corresponding Heiken-Ashi chart, running on the same platform.

(9) Side-by-side EUR/GBP candlestick and Heiken-Ashi charts, each showing 3 candles

Both charts have been squeezed down to show only the most recent three candles. This screen-shot was taken at about 3:15 pm on February 25. At that time, the actual LAST price was approximately 0.8365, and the HA LAST price was approximately 0.8374 — a 9-pip difference – as estimated from the price scales on the right… The OPEN price levels are marked, as well. Notice that the HA HIGHs and LOWs appear to match the actual highs and lows. Typically, we see such matching, when price is not trending strongly. Notice also that O, H, L, and C prices do not appear on these two charts. Those prices will be our next subject.

Let’s scroll back to December 30, and look at a couple of NZD/USD Daily charts.

These charts – a standard candlestick chart and the corresponding HA chart – cover the period from September 11 through December 30 of last year. The charts, as before, are Oanda’s basic charts, displaying “mid” (or average) prices on the candlestick chart.

(10) NZD/USD Daily candlestick chart with O, H. L. and C prices for the last candle

Hovering the cursor in line with the last candle on the right (the December 30 candle), opens the data-box showing the O, H, L, and C prices for that candle (which happens to be a near-perfect doji).
The data-box shows: OPEN = 0.67280, HIGH = 0.67558, LOW = 0.67169, and CLOSE = 0.67292

Here is the corresponding Heiken-Ashi chart. Notice that the December 30 candle is no longer a doji , having changed character significantly.

(11) NZD/USD Heiken-Ashi Daily chart with O, H, L, and C prices for the last candle

The data-box shows: OPEN = 0.67280, HIGH = 0.67558, LOW = 0.67169, and CLOSE = 0.67292
— the same four values as the ordinary candlestick chart, but for a very different-looking candle. Clearly, Oanda’s Heiken-Ashi charts depict HA candles, but list actual (not HA) prices. The change in the December 30 candle, from a doji to an ordinary bullish candle, is caused entirely by the HA price manipulations (i.e., the formulas). But, the display of actual prices on this Heiken-Ashi chart (rather than displaying the HA prices which generated the candles) is due to decisions made by Oanda in the design of their platform.

Oanda’s Trading View app is an example of a charting package which displays Heiken-Ashi prices on HA charts, as opposed to displaying actual prices on HA charts. We’ll discuss the pros and cons of each of these methods in the next post. Here is the NZD/USD Daily chart from Oanda’s Trading View app.

(12) NZD/USD Heiken-Ashi Daily chart with O, H, L, and C prices for the last candle

Chart (12) covers the same September 11 - December 30 time period as before. This chart displays the mathematically-derived Heiken-Ashi O, H, L, and C prices. Actual prices are not indicated. The Trading View app (denoted as "Advanced Charting: on the Oanda platform) is driven by the Oanda price feed.

Oanda is one of two large forex brokers in the U.S. market. The other is Forex .com. They are virtually equal in U.S. market share. Heiken-Ashi charts on the Forex .com platform display HA prices, clearly labeled as such, and those prices match very closely the HA prices displayed on Oanda’s Trading View charts.

In the next post, we will conclude this study with a discussion of why and how you might choose to use Heiken-Ashi charts in your analysis and trading.

Clint · February 24, 2020, 7:53am

Heiken-Ashi continued

平均足

Is Heiken-Ashi the greatest thing since the birth of technical analysis?

Heiken-Ashi charts are appealing to look at. Most traders who see them for the first time actually prefer them over ordinary candlestick charts.

By making the market look more orderly than it really is, HA charts make us believe that we are gaining deep insight into what the market is really doing.

With Heiken-Ashi in our toolbox, do we have a powerful tool in our hands, or are we being fooled?

One acknowledged expert is silent on the subject of Heiken-Ashi

In 1987, Steve Nison – already an expert in western technical analysis – learned about Japanese candlestick charting for the first time. Over the next four years, he became the leading expert, outside Japan, in this traditional Japanese way of analyzing markets; and in 1991 he published his now-famous book Japanese Candlestick Charting Techniques. If you haven’t read that book, you really should.

The Nison book covers everything that Steve Nison learned about candlestick charting over four years of intense study. It could be argued that the book contains everything known about candlestick charting, period – including how it dovetails with western charting techniques and western technical indicators.

Nison delves into the history of rice trading in Japan from the late 1500’s to the mid-1700’s – when the world’s first futures market developed, and when technical analysis was born. He discusses at length the career of Munehisa Homma, a wealthy 18th-century rice farmer and trader, whose trading methods evolved into the candlestick charting techniques we use today.

In a very short article on Heiken-Ashi charting, INVESTOPEDIA credits Munehisa Homma with the development of the Heiken-Ashi charting method. If that is accurate, then Steve Nison certainly knew about it when he researched and wrote his book. Yet, nowhere in his book does Steve Nison mention Heiken-Ashi charting – not in the 288 pages of text, not in the Glossary, and not in the Index. One has to wonder why. I have my theory.

Steve Nison believes that everything technical that can be known about the market at any given time, over any given time period, is recorded in the classic Japanese candlestick charts. It’s my theory that Steve Nison believes that Heiken-Ashi presents a distorted view of that market, and therefore adds nothing of value to a trader’s understanding of the market, or his ability to analyze the market.

It is certainly true that Heiken-Ashi charts distort the shape (and the color) of the normal Japanese candlestick charts from which they are derived. In the “smoothing” process, which makes Heiken-Ashi charts look pretty, market “noise” is eliminated. But, that noise is market detail, and that detail is then lost.

If Steve Nison has deliberately ignored Heiken-Ashi, considering it unnecessary for a complete and accurate view of the market, I can’t quarrel with his opinion.

There are many traders, some quite experienced, who hold the opposite opinion

Japanese candlestick charts are pure price charts, equivalent in every way to western bar-charts.

Heiken-Ashi charts, on the other hand, are not. Heiken-Ashi charts are indicators, not price charts.
Most authors and internet video-presenters treat HA charts as indicators, and some are straightforward in calling them indicators.

The one article I have seen which refers to a Heiken-Ashi chart as “a better candlestick chart” is misleading, in my opinion. Heiken-Ashi charts do not represent tricked-out substitutes for candlestick charts. Rather, as indicators, they represent tools, to be used side-by-side with standard Japanese candlestick charts.

Writers and teachers who present Heiken-Ashi typically combine it with other indicators, such as moving averages, stochastics, RSI, and MACD. Their work is easy to find on the internet, with a google search, or a Youtube search. It’s way beyond the scope of this series of posts to analyze all the methodologies possible with Heiken-Ashi, with or without the use of other indicators. It is left to you to consider those methodologies, and to choose the ones – if any – that suit your trading style.

In the hands of an experienced technical trader, Heiken-Ashi charts are good tools for aiding and confirming the analysis done on standard price charts – most importantly, for pointing to trend continuations and trend changes that otherwise might be missed, or misinterpreted, on standard charts.

Heiken-Ashi smoothed

In recent years, the idea of smoothing Heiken-Ashi charts has gained a bit of a following. This EUR/USD smoothed Heiken-Ashi chart from several years ago is a good example of the effect.

The objective in smoothing an already-smoothed representation of the true market seems to be to turn the original candlestick chart into a moving average of itself (and, in the process, to banish the last of the red candles from up-moves, and the last of the green candles from down-moves).

The moving-average cross-over scheme depicted in the chart, above, illustrates how the smoothed HA chart, together with a couple of moving averages, can signal entries and exits.

It must always be remembered that those lovely HA entry and exit points might look very different on a true price chart – which is why the hypnotically-beautiful Heiken-Ashi charts must always be used in conjunction with classic Japanese candlestick charts.

BlueOcean-FX · March 4, 2020, 6:57pm

Hey @Clint

This was a very informative article. I wish there were more HA traders out there.

How are you finding Heikin Ashi trading itself? Would you ever trade traditional candlesticks again?

I was introduced to HA by a friend and since then it has revolutionised the way I trade. Whilst I only trade daily charts now even observing the H4 charts is much smoother.

For a long time I was bogged down the wide range of traditional candle stick patterns. Whilst entries with traditional candlestick patterns may result in better risk reward in the short term, in the long term I found there was too many false signals causing loosing trades. But with HA it is much easier. A good reversal doji and all the while the candles are showing the desired direction, leave it.

Kind regards

AJ

NormanA · March 5, 2020, 3:09am

Thank you Clint for all your work. I’ll save the thread in my HA folder for future reference.

Best wishes,
Norm