Heiken Ashi candles were designed to filter out market noise and more easily identify market trends. Developed in the 1700s in Japan by Munehisa Homma, known as the father of candlestick charting, Heiken Ashi charts look similar to standard candlestick charts but are based on different values.
While traditional candles use the open, high, low and close, Heiken Ashi candles use a formula based on mathematical averages. Heiken Ashi, sometimes spelled Heikin Ashi, in Japanese means “average bar.”
Heiken Ashi Formula
Below are the averages used to calculate Heiken Ashi candles:
- Open – Midpoint of previous bar (Average of previous bar’s open and close)
- Close – Average price of current bar (Sum of open, high, low and close divided by 4)
- High – Highest value among current bar’s high, open and close
- Low – Lowest value among current bar’s low, open and close
Differences from Standard Candlesticks
Pictured below are two charts showing daily price movement in Gold futures (GC) over the same time period. Standard candles are shown in the upper chart and Heiken Ashi candles are plotted in the lower chart.
As you can see, the Heiken Ashi chart evens out some of the gaps seen on the standard candle chart. Since Heiken Ashi candles are plotted based on averages, Heiken Ashi charts tend to have a smoother appearance.
Additionally, Heiken Ashi charts tend to plot more consecutive bars of the same color – fewer alternations between red & green bars. This may potentially guide traders to stay in a trend for longer periods.
Using Heiken Ashi Charts
Similar to other chart styles including Renko bars, Heiken Ashi charts are commonly used to track trends and identify support and resistance areas. Traders also use Heiken Ashi to detect chart patterns such as cup and handle or bullish pennant.
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Source: https://ninjatrader.com/blog/filter-out-market-noise-with-heiken-ashi-candles/