The Heikin Ashi candlestick is a technical analysis tool used to identify market trends and predict future prices. It’s an alternative type of candlestick charting that is derived from the standard candlestick chart, but it modifies the traditional calculations with its own average-based methodology.

Heikin Ashi roughly translates from Japanese as “average bar”. The aim of a Heikin Ashi chart is to make trend identification easier and to filter out some of the ‘noise’ that can occur in price movements.

Heikin Ashi Structure

Heikin Ashi candlesticks have the same basic structure as standard candlesticks – they consist of a body and wicks (or shadows). The body represents the open-to-close range, while the wicks represent the total range (high to low).

However, unlike standard candlesticks, Heikin Ashi candlesticks are calculated using information from the previous candlestick and the current standard candlestick.

Heikin Ashi Formula

The formulas for Heikin Ashi candlesticks are as follows:

• Close = (Open + High + Low + Close) / 4
• Open = (Open of previous bar + Close of previous bar) / 2
• High = Maximum of (High, Open, Close)
• Low = Minimum of (Low, Open, Close)

Heikin Ashi in Trading Strategy

1. Trend Identification: A series of consecutive green (or filled) candles in a Heikin Ashi chart indicates an uptrend, while a series of red (or hollow) candles indicates a downtrend.
2. Market Consolidation: A sequence of candles with small bodies (whether green or red) and long lower and upper shadows suggest a trend reversal or market consolidation.
3. Strength of Trend: In a strong uptrend, you will typically see Heikin Ashi candles with no lower wick. In a strong downtrend, they will often have no upper wick.

For automated trading, you can use these characteristics to formulate rules. For instance, if you see a series of green Heikin Ashi candles with no lower wick, your strategy might issue a buy order. Conversely, a series of red Heikin Ashi candles with no upper wick might trigger a sell order.

Differents types of a Heikin Ashi candlestick

There are four basic types of Heikin Ashi candlesticks, each indicating a different market condition. They are characterized by the presence or absence of wicks (or shadows) and the color of the body:

1. Bullish Candlestick: This is represented by a green (or white, in some representations) body, indicating that the close price was higher than the open price. The bullish candlestick could have both upper and lower wicks.
2. Bearish Candlestick: This is represented by a red (or black) body, indicating that the close price was lower than the open price. The bearish candlestick could also have both upper and lower wicks.
3. Strong Bullish Candlestick: This type of candlestick is represented by a green (or white) body with no lower wick, suggesting a strong upward trend. In this case, the minimum price (low) of the period is equal to the open price, meaning that prices have not fallen below the opening price during the time frame represented by the candlestick.
4. Strong Bearish Candlestick: This type of candlestick is represented by a red (or black) body with no upper wick, suggesting a strong downward trend. In this case, the maximum price (high) of the period is equal to the open price, meaning that prices have not risen above the opening price during the time frame represented by the candlestick.

One of the primary benefits of Heikin Ashi candlesticks is their ability to show the trend and strength of the market more clearly than traditional candlesticks. By averaging price data, they filter out noise and can make it easier to spot patterns and predict future price movements.