Heikin Ashi Chart Basics
Heikin Ashi uses average price to smooth the chart
Heikin Ashi is a type of trading chart that originated in Japan. Heikin Ashi charts are similar to candlestick charts in that the color of the candlestick denotes the direction the price is moving. The main difference between candlestick and Heikin Ashi charts is that the HA charts average price moves, creating a smoother appearance. Because the HA price bars are averaged, they don't show the exact open and close prices for a particular time period. For this reason, Heikin Ashi charts are often used a technical indicator--in addition to a typical candlestick chart--to help highlight the current trend.
Heikin Ashi charts can be used on their own though, especially by swing traders or investors. Day traders tend to use Heikin Ashi charts more as an indicator, as HA charts do have some benefits which will be discussed later.
Heikin Ashi Calculation
Heikin Ashi charts calculate their own open (HAO), high (HAH), low (HAL) and close (HAC) using the actual open (O), high (H), low (L) and close (C) of the time frame (1 minute, 5 minute, 15 minute, etc.).
HAO = (Open of previous bar + Close of previous bar) / 2
HAC = (Open + High + Low + Close) / 4
HAH = Highest of High, Open, or Close
HAL = Lowest of Low, Open, or Close
There is a mathematical formula for calculating each price bar on a Heikin Ashi chart. Because of this, you don't know the exact price a time period opened or closed at. When day trading, this can be an issue, since knowing the exact price--especially when trading off a chart--is important. For longer-term traders this is less of an issue, since the open and close of a price bar are not as important in trades that last months or years.
Trading with Heikin Ashi
While Heikin Ashi won't show the exact price all the time, there are benefits to using Heikin Ashi charts. The main advantage is that the charts are much "smoother" looking. This helps to more easily identify the trending direction. Heikin Ashi Charts are also color coded, like candlesticks, so as long as the price is rising (based on the calculations) then the bars will show up as green (or another color or your choosing). As long as the price is falling (based on the calculation) then the bars will show up as red (or another color of your choosing).
The attached chart shows the S&P 500 SPDR (SPY) ETF over the time frame using Heikin Ashi and candlesticks.
While a candlestick charts may flip-flop constantly from a green bar to a red bar to a green bar, Heikin Ashi charts tend to have longer stretches of green and red bars, better highlighting current trends.
Heikin Ashi charts can be used in the same fashion as any other chart, such as to find chart patterns (like triangles) or trade setups. Entry and exit points may vary slightly compared to using a candlestick chart, since the price on a HA chart may be slightly different than on the candlestick chart.
Test your strategies to see if they work well on Heikin Ashi charts, before opting to use them when real money is on the line.
Final World on Trading With Heikin Ashi Charts
One chart type isn't necessarily better than another. Rather, some traders will like Heikin Ashi charts because they help isolate the trend better and aren't as choppy looking, while other traders will like the precise pricing of candlestick or bar charts.