What is Heikin-Ashi ?
The Heikin-Ashi meaning “average bar“, in Japanese can be used to conjunction with candlestick charts to spot trends and to predict future prices. Most profits are generated when markets are trending, so predicting trends correctly is necessary. Heikin-Ashi charts can also be used to keep traders in trades while a trend persists but get them out when the trend pauses or reverses.
Normal candlestick charts are composed of a series of open-high-low-close (OHLC) candles set apart by a time series.
MT4 Heikin-Ashi Smooth pattern
The Heikin-Ashi technique uses a modified formula:
- Close = (Open + High + Low + Close) / 4 o This is average bar of the current bar.
- Open = (Open of Previous Bar + Close of Previous Bar) / 2 o This is the midpoint of the previous bar.
- High = Max of (High, Open, Close) o Highest value of the three.
- Low = Min of (Low, Open, Close) o Lowest value of the three.
Constructing the Chart
The Heikin-Ashi chart is constructed like a regular candlestick chart, except the formula for calculating each bar are different. The time series is defined by the user, depending on the type of chart desired, such as daily, hourly or five-minute. The down days are represented by filled candles, while the up days are represented by empty candles.
From the chart above, there are a few differences to note between the two types of charts. Heikin-Ashi has a smoother look, as it is essentially taking an average of the movement. There is a tendency with Heikin-Ashi for the candles to stay red during a downtrend and green during an uptrend, whereas normal candlesticks alternate color even if the price is moving dominantly in one direction.
The price scale is also of note. The current price shown on a normal candlestick chart will also be the current price of the asset, and that matches the closing price of the candlestick (or current price if the bar hasn’t closed). Heikin-Ashi is taking an average, the current price on the candle may not match the price the market is actually trading at. For this reason, many charting platforms show two prices on the y-axis: one for the calculation of the Heiken-Ashi and another for the current price of the asset.