A candlestick is a type of price chart used that displays the high, low, open, and closing prices of a security for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum, hundreds of years before becoming popularized in the United States.The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).The candlestick's shadows show the day's high and low and how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices. Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades.
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The Heiken-Ashi technique averages price data to create a Japanese candlestick chart that filters out market noise. Heiken-Ashi charts (also known as Heikin-Ashi), developed by Munehisa Homma in the 1700s, share some characteristics with standard candlestick charts but differ based on the values used to create each candle. Instead of using the open, high, low and close like standard candlestick charts, the Heiken-Ashi technique uses a modified formula based on two-period averages. This gives the chart a smoother appearance, making it easier to spots trends and reversals, but also obscures gaps and some price data. Heiken-Ashi itself means ''average bar'' in Japanese.
An untrained eye might not even recognize that this is not a standard Japanese Candlestick chart. As you can see, each Heiken Ashi candle has a body, and an upper and lower candlewick (shadow) – the same as with the Japanese candlesticks. However, if you take a closer look you will notice that each of the Heiken Ashi bars start from the middle of the bar before it, and not from the level where the previous candle has closed. This is a major distinguishing factor between the two charting styles.
Each Heiken Ashi candle has an open, close, high and low. Therefore, there are four segments of the Heiken Ashi formula:
The opening level of the Heiken Ashi candle equals the midpoint of the previous candle. If you refer to the chart example above, it is clear that every new candle starts from the middle of the previous one.
Open = [Open (previous bar) + Close (previous bar)]/2
The close of each Heiken Ashi bar equals to the average level between the four parameters – open, close, high, and low:
Close = (Open+High+Low+Close)/4
The highest point of a Heiken Ashi candle takes the actual high of the period. This could be the highest shadow, the open, or the close.
High = Max Price Reached
The lowest point of a Heiken Ashi candle takes the actual low of the period. This could be the lowest shadow, the open, or the close.
Low = Min Price Reached
On the left side you see a chart composed of Japanese Candles. On the right side we have a chart made up of Heiken Ashi candles. The charts look pretty similar, however, the Heiken Ashi chart is smoother. Referring to the coloured circles on the chart you see the main differences between the two charts. Notice that the Heiken Ashi chart isolates some of the noisy price action.
The Heiken-Ashi technique is used by technical traders to identify a given trend more easily. Hollow white (or green) candles with no lower shadows are used to signal a strong uptrend, while filled black (or red) candles with no upper shadow are used to identify a strong downtrend. Reversal candlesticks using the Heiken-Ashi technique are similar to traditional candlestick reversal patterns; they have small bodies and long upper and lower shadows. There are no gaps on a Heiken-Ashi chart as the current candle is calculated using information from the previous candle.
Because the Heiken-Ashi technique smooths price information over two periods, it makes trends, price patterns, and reversal points easier to spot. Candles on a traditional candlestick chart frequently change from up to down, which can make them difficult to interpret. Heiken-Ashi charts typically have more consecutive coloured candles, helping traders to identify past price movements easily. The Heiken-Ashi technique reduces false trading signals in sideways and choppy markets to help traders avoid placing trades during these times. For example, instead of getting two false reversal candles before a trend commences, a trader who uses the Heiken-Ashi technique is likely only to receive the valid signal.
Key takeaways The averaged open and close help filter some of the market noise, creating a chart that tends to highlight the trend direction better than typical candlestick charts. The downside is that some price data is lost with averaging. The most recent price (close) may not reflect the actual price of the asset, which could affect risk. Long down candles with little upper shadow represent strong selling pressure. Long up candles with small or no lower shadows signal strong buying pressure.
The difference between Heiken-Ashi and Renko charts Heiken-Ashi charts are constructed based on averages over two periods. Renko charts are created by only showing movements of a certain size. While a renko chart has a time axis, the boxes or bricks are not governed by time, only by movement. While a new HA candle will form every period, a Renko chart will only produce a new brick/box when the price has moved a certain amount.