Using the Heikin Ashi Technique D Valcu

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TRADING TECHNIQUES

Nani Desu Ka?*

Usi

ng

Th

e

Hei

kin

Ash

i

Te

ch

niq

ue

Enter and stay on the right side of the trend

—

or

when in doubt, stay out

—

with this Japanese chart-

with this Japanese

chart-ing technique.

ing technique.

ince the introduction of the candlestick ince the introduction of the candlestick

method to the US some two decades

ago, it caused a revolution in

perceiv-ing how the bullish and bearish forces

ing how the bullish and bearish forces

perform in the Western markets. It has

become a popular charting tool, as

become a popular charting tool, as traders have used

traders have used

candlesticks to make chart formations easier to spot

an

and name.

d name. But interpreting candlesticks can be chal-

But interpreting candlesticks can be

chal-lenging. To

lenging. To make things easier

make things easier, the

, the

heikin-ashi

tech-

tech-niqu

nique modifies the traditio

e modifies the traditional candlestick chart. Le

nal candlestick chart. Let's

t's

take a look at how it works.

BALANCING ON ONE FOOT BALANCING ON ONE FOOT

The heikin-ashi method

{heikin

means "average" or

"balance" in Japanese, while

ashi

means "foot" or

"bar") is a

"bar") is a visua

visual technique

l technique that eliminates irregulari

that eliminates

irregulari--ties from a normal chart, offering a better picture of

ties from a normal chart, offering a better picture of

trend

trends and consolidatio

s and consolidations. Just by looking at a

ns. Just by looking at a candle-

candle-stick chart created with this method, you get a good

stick chart created with this method, you get a good

idea of the market's status and its strength. Take a

loo

look at the candlestick chart of Canon AD

k at the candlestick chart of Canon AD R in Figure

R in Figure

1A versus the heikin-ashi modified chart in Figure

1B. Which chart would you prefer to use?

CALCULATION CALCULATION

The heikin-ashi candlestick techniq

The heikin-ashi candlestick technique uses

ue uses modi

modified

fied

open-high-low-close

(OHLC)(OHLC)

values and displays

by

Dan ValcuDan Valcu

them as candlesticks. The modified values are

com-puted using these definitions:

puted using these definitions:

• haClose = (O+H+L+C)/4

• • haOpen = (ha

haOpen = (haOpen (previou

Open (previous bar) + haClose

s bar) + haClose

(previous bar))/2

• haHigh = Maximum(H, haOpen, haClose)

• haLow = Minimum(L, haOpen, haClose)

The "open," "

The "open," "high,

high," "low,

" "low," and "close" refe

" and "close" referred

rred to

to

are of the current bar. The prefix

ha-

indicates the

corresponding heikin-ashi modified values. I have

used daily data throughout this article, so one bar

represents one trading day.

represents one trading day. Depending on the trading

Depending on the trading

time frame, you may employ other data, such as

intraday, weekly, or monthly.

The value

haOpen

is always set to the midpoint of

the body of

the body of the previous

the previous bar, while

bar, while

haClose

is com-

is

com-puted as the average price of the current bar. The

puted as the average price of the current bar. The

modified high,

haHigh,

is chosen as the highest value

of the set {real high (H), modified open (haOpen),

and modified close (haClose)}. The same logic

ap-plies to the definition of the modified low: It is the

plies to the definition of the modified low: It is the

lowest value in the set {real low (L), modified open

(haOpen), and modified close (haClose)}.

The first sidebar, "Heikin-Ashi OHLC Values,"

de-tails how to compute heikin-ashi values using Excel.

tails how to compute heikin-ashi values using Excel.

APPLYING IT APPLYING IT

Looking at charts is the best way to understand the

main features of the heikin-ashi technique. If the

haClose is above h

haClose is above haOpen, then a bullish sign occurs

aOpen, then a bullish sign occurs

(white candle). If haClose is below haOpen, then a

bearish sign appears (black candle).

*Editor's note: This phrase is Japanese for "What is it?" *Editor's note: This phrase is Japanese for "What is it?"

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FIGURE 1 A:

FIGURE 1 A: DAILY CHADAILY CHART OF RT OF CANON.CANON._Thi_{This is the tr}_{s is the tr aditional candlestick chart of}_{aditional candlestick chart of Canon.}_Canon.

1 1 [7 [7 | 1|13 3 |20 |20 I2I2 TT - 42.0 - 42.0 4 1 . 5 4 1 . 5 4 1 . 0 4 1 . 0 40 40 55 «0.0 «0.0 3 9 . 5 3 9 . 5 3 9 . 0 3 9 . 0 3 8 . 5 3 8 . 5 3 8 . 0 3 8 . 0 3 7 . 5 3 7 . 5 3 7 . 0 3 7 . 0 36 36 55 3 8 . 0 3 8 . 0 35 35 55 35 35 00 J4 J4 55 34 34 3 3 . 5 3 3 . 5 3 3 . 0 3 3 . 0 3 2 . 5 3 2 . 5 32 32 00 3 1 . 5 3 1 . 5 31 31 LLII 3 0 . 8 3 0 . 8 3 0 . 0 3 0 . 0 2 9 . 5 2 9 . 5 2 9 . 0 2 9 . 0 2 8 . 5 2 8 . 5 2 8 . 0 2 8 . 0 if if 55 27 11 27 11 2 6 . 5 2 6 . 5 26 26 00 2 5 . 5 2 5 . 5 2 5 . 0 2 5 . 0 24 24 55 FIGU

FIGURE IRE I BB : : DAILDAILY MY M ODIFIED ODIFIED CHACHART OF CART OF CANON.NON._Th_The_{e heiki}_heikin-_{n- ashi technique works as a}_{ashi technique works as a filter,}_{filter, elimin}_eliminating_{ating irregulariti}_{irregularities and making}_{es and making}

the chart smoother with well-defined trends. the chart smoother with well-defined trends.

At

At ffirsirst glt glance, ance, FFigure 1 igure 1 shows shows that ththat the heikin-e heikin- ashi chartashi chart looks more compact and smooth compared to the traditional looks more compact and smooth compared to the traditional chart

chart. White candles display . White candles display a risa rising trending trend, while black candles, while black candles indicate a downtrend. Gaps, which occur frequently on the indicate a downtrend. Gaps, which occur frequently on the traditional

traditionalO H L CO H L C chart,chart, are not present becauare not present becau se they are ise they are incor- ncor-porated

porated into thinto the modifie modified candles. Sted candles. St rong positivrong positive trende trend s havs havee long white bodies with no lower shadows, while strong long white bodies with no lower shadows, while strong nega-tive trends have long black bodies with no upper shadows. tive trends have long black bodies with no upper shadows.

When bodies become shorter, a weaker trend is anticipated When bodies become shorter, a weaker trend is anticipated (se

(see mid-e mid- October aOctober and end of December). nd end of December). In tIn t he beghe beginning of inning of N

N oveovember, Cmber, C anon anon weweakened its uptrend and akened its uptrend and stastarted a consoli-rted a consoli-dation period with several small bodies with both long upper dation period with several small bodies with both long upper and lower shad

and lower shadows. A vows. A very sery small body with tall shadomall body with tall shado ws ws on ton thehe fi

firsrst tt trading day in 2000 warned about rading day in 2000 warned about a poa possssible chanible change of thege of the risi

rising trenng trend. d. As As concon solidationsolidation s contain s contain sevseveral bodies weral bodies with tallith tall

shadows, it is not safe to assume that the presence of a small shadows, it is not safe to assume that the presence of a small body w

body with tall shadows with tall shadows will ill indicate a change in trenindicate a change in tren d. d. FF igureigure 2 summarizes the five scenarios that can be identified on a 2 summarizes the five scenarios that can be identified on a heik

heikin-in- asashi candle chart.hi candle chart.

EXAMPLES EXAMPLES

To giv

To give you an idea of e you an idea of how to apply how to apply the heikin-the heikin- ashi charashi chartintin gg tech

techniquniqu e, I e, I wwilill show l show you three exyou three examples usamples using the Staning the Stan darddard & Po

& Po oror's 500 index (SP500-'s 500 index (SP500- HA), thHA), th e price of e price of golgold (Xd (XGLD-

GLD-H A ) ,

H A ) , and Pfizerand Pfizer ( P F E - H A ) .( P F E - H A ) . The heikThe heikin-in- ashiashi O H L CO H L C values werevalues were calculated as indicated in the sidebar and plotted. Each chart calculated as indicated in the sidebar and plotted. Each chart contains two candlesti

contains two candlestick subchartsck subcharts: The top : The top contains the contains the momo di- di-fied OHLC values, while the bottom has the real values. Each fied OHLC values, while the bottom has the real values. Each number in the table in Figure 2 (1 to 5) applies to the chart number in the table in Figure 2 (1 to 5) applies to the chart whenever a relevant scenario appears. They are labeled in whenever a relevant scenario appears. They are labeled in

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TRADING TECHNIQUES

different colors to different colors to differ-entiate descending and entiate descending and ascending trends. For ascending trends. For each chart I'll discuss each chart I'll discuss how this technique can how this technique can be used to either enter be used to either enter and stay on the right side and stay on the right side

of the trend, or avoid of the trend, or avoid

trad-ing durtrad-ing periods of ing during periods of con-solidations.

solidations.

Standard & Poor's 500 Standard & Poor's 500 (SP500-HA):

(SP500-HA):

Figure 3 offers no doubt Figure 3 offers no doubt about the usefulness of about the usefulness of this method, even for a this method, even for a novice: All trends are novice: All trends are vis-ible, with short ible, with short

consoli-dations marked as (4) occurring in February and July. Strong dations marked as (4) occurring in February and July. Strong rising trends (2)

rising trends (2) were marked by long white candwere marked by long white candle bodies withle bodies with no lower shadows,

no lower shadows, while strong fallwhile strong falling trends (2) ing trends (2) were accom-were accom-panied by filled candle bodies with no upper shadows.

panied by filled candle bodies with no upper shadows.

Using the observations in Figure 2, note how the smaller Using the observations in Figure 2, note how the smaller bodies (3) in January 2003 warned about a weakening of the bodies (3) in January 2003 warned about a weakening of the trend, and subsequently, a reversal (4). Trend changes (5) were trend, and subsequently, a reversal (4). Trend changes (5) were pointed out by small bodies with longer shadows, but as an pointed out by small bodies with longer shadows, but as an exception, the reversal in March occurred without any such exception, the reversal in March occurred without any such sig

sign. Although a rising trend, n. Although a rising trend, the segment AB the segment AB was composedwas composed FIGURE

FIGURE_{2: FIVE SCENARIOS OF HEIKIN-ASHI CHARTS. Here you see the different types of trend behavior for ascending and descending}_{2: FIVE SCENARIOS OF HEIKIN-ASHI CHARTS. Here you see the different types of trend behavior for ascending and descending}

trends. trends.

of sev

of several short sections eral short sections (normal trend, weakening, consolida-(normal trend, weakening,

consolida-tion).

tion). It could also be seen as a normal ascending trend (1) dueIt could also be seen as a normal ascending trend (1) due

to a majority of white bodies.

Article continues on page 24

The h

eiki

eikin-ashi

n-ashi

is a vi

is a visual technique

sual technique

that elimina

tes irregularit

ies f

ies from

rom

a

normal ch

art, o

ff

ffering a b

ering a b

etter

etter picture

picture

of t

of trends and

rends and

cons

oli

olidati

dations.

ons.

FIGURE 3: S&P 500 MODIFIED. All trends are well-defined by sequences of white or red bodies, making them easy to identify and follow. FIGURE 3: S&P 500 MODIFIED. All trends are well-defined by sequences of white or red bodies, making them easy to identify and follow.

TRADING TECHNIQUES

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TRADING TECHNIQUES

FIGURE

FIGURE_4:_4:MMODIFIODIFI ED CHAED CHARTRT_OF_OFGOLD PRICES.GOLD PRICES._W_{White bodies dominate in}_{hite bodies dominate in rising tr}_{rising tr ends.}_{ends. Pullba}_{Pullbacks are short and strong,}_{cks are short and strong, marked by longer}_{marked by longer} red bodies. red bodies. Gold Gold _(XGLD-_(XGLD-_HA_HA_):_): - 37.0 - 37.0 - 36.5 - 36.5 - 3 6 0 - 3 6 0 - 35.5 - 35.5 - 35.0 - 35.0 34.5 34.5 - 34.0 - 34.0 j j - 33.- 33.55 г 33.0 г 33.0 г 32.5 г 32.5 h 32.0 h 32.0 31.5 31.5 - - 3131.0.0 - 30.5 - 30.5 30.0 30.0 29.5 29.5 29.0 29.0

FIGURE 5: MODIFIED CHART

FIGURE 5: MODIFIED CHARTOF PFIZER.OF PFIZER. _{In an uptrend or downtr}_{In an uptrend or downtrend,}_{end, Pfiz}_{Pfizer displays severa}_{er displays several small consolid}_{l small consolidation periods}_{ation periods marked by the presence}_{marked by the presence}

of small

of small bodies with upper and lower shadows.bodies with upper and lower shadows.

Another example of the simplicity gained by using modified Another example of the simplicity gained by using modified

heikin-heikin- ashi values is iashi values is in tn the chart he chart of of golgold prices in Fd prices in F igigure 4. Aure 4. A longer ris

longer rising trend (April-ing trend (April- MMay) way) was dominated by white candlesas dominated by white candles (1) and

(1) and (2) with a small consolidation (4) to(2) with a small consolidation (4) towaward thrd the end e end of Aof April.pril.

The very small body in May was just a pause before the next leg The very small body in May was just a pause before the next leg up; most of the candles were white bodies with no lower up; most of the candles were white bodies with no lower shadows

shadows. The smaller bodies tow. The smaller bodies toward the end ard the end of May annoof May anno ununcedced either a weakening of

either a weakening of the trend (3) or ththe trend (3) or th e se start of a consolidatiotart of a consolidationn period (4).

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(small bodies with both long upper and lower shadows). In (small bodies with both long upper and lower shadows). In Aug

August, there was aust, there was another consolidatinother consolidation (4). Given the pron (4). Given the presenceesence of an ascending triangle, there was a very good chance that of an ascending triangle, there was a very good chance that price would break out of this short consolidation.

price would break out of this short consolidation. Pfizer (PFE-HA):

Pfizer (PFE-HA):

If you have been trading Pfizer

If you have been trading Pfizer (PFE),(PFE), you should be familiaryou should be familiar

with its behavior, which is highlighted in both charts in Figure with its behavior, which is highlighted in both charts in Figure 5: many small consolidations on the way both up and down. 5: many small consolidations on the way both up and down. Ga

Gaps are not shown on the modified chart, ps are not shown on the modified chart, which makes it which makes it easiereasier to read. The small body with long upper and lower shadows (5) to read. The small body with long upper and lower shadows (5) con

confirmfirms a change of trs a change of trend in Aprilend in April. As shown on the daily chart,. As shown on the daily chart, the longer trends are not continuous (as in the previous the longer trends are not continuous (as in the previous ex-amp

amples)les), but interrupted by small consolidations. , but interrupted by small consolidations. In this case, In this case, itit wo

woululd be worthwhile d be worthwhile to to analyze weekly charts.analyze weekly charts.

HEIKIN-ASHI AND SIMPLE INDICATORS HEIKIN-ASHI AND SIMPLE INDICATORS

Fr

From om a visual standpoint, ta visual standpoint, the heikin-ashhe heikin-ashi technique is based oni technique is based on the effect of the size and color of the candle bodies. For the effect of the size and color of the candle bodies. For additional confirmation, many traders use indicators, so to additional confirmation, many traders use indicators, so to make life easier I defined two simple indicators: haOpen and make life easier I defined two simple indicators: haOpen and haClose. I applied these to the chart of Ultimate Software haClose. I applied these to the chart of Ultimate Software Group

Group (ULTI).(ULTI). See the second sidebar, "Defining SimpleSee the second sidebar, "Defining Simple Indicators Based On Modified OHLC Values," for details on Indicators Based On Modified OHLC Values," for details on these indicators. You can see them in a separate window in these indicators. You can see them in a separate window in

DEFINI

DEFINING SIMPLNG SIMPLE E INDIINDICATORS WCATORS WITH MITH METASTETASTOCKOCK BASED ON MODIFIED OHLC VALUES

BASED ON MODIFIED OHLC VALUES

In MetaStock, choos

In MetaStock, choose Tools, Ine Tools, Indicator Builder, and New dicator Builder, and New toto create these four new indicators:

create these four new indicators: Name: haClose Name: haClose haclose:=(O+H+L+C)/4; haclose:=(O+H+L+C)/4; haclose; haclose; Name: haOpen Name: haOpen haopen:=(PREV+Ref(Fml("haClose"),-1))/2; haopen:=(PREV+Ref(Fml("haClose"),-1))/2; haopen; haopen; Name: haDiffCO Name: haDiffCO

hadiffco:= Fml("haClose") - Fml("haOpen"); hadiffco:= Fml("haClose") - Fml("haOpen"); hadiffco;

hadiffco;

Name: Mov-haDiffCO Name: Mov-haDiffCO Periods:=lnput(

Periods:=lnput("Time "Time periods",3,50,3);periods",3,50,3);

movhadiffco:= Mov(Fml("haDiffCO"), Periods, S); movhadiffco:= Mov(Fml("haDiffCO"), Periods, S); movhadiffco;

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TRADING TECHNIQUES

Figure 6. In these indicators, long bodies correspond to large Figure 6. In these indicators, long bodies correspond to large differences between the modified close and open (2). Small differences between the modified close and open (2). Small bodies (3) represent these two indicators getting closer, and bodies (3) represent these two indicators getting closer, and mean either the start of a consolidation (4) or a possible

mean either the start of a consolidation (4) or a possible changechange of trend. Between February and March 2002 (trend AB), the of trend. Between February and March 2002 (trend AB), the stock was in an uptrend, but the modified chart

stock was in an uptrend, but the modified chart ULTI-HAULTI-HA

records this as a series of white candles with both lower and records this as a series of white candles with both lower and upper shadows (4). This is an exception.

upper shadows (4). This is an exception.

I created another simple indicator, haDiffCO, which is I created another simple indicator, haDiffCO, which is displayed in a separate subchart. Positive values correspond displayed in a separate subchart. Positive values correspond toto white bodies (ascending trends), while negative values white bodies (ascending trends), while negative values

indi-cate downtrends. In addition, you can apply a shorter moving cate downtrends. In addition, you can apply a shorter moving average (Mov-haDiffCo) to this indicator, and observe that: average (Mov-haDiffCo) to this indicator, and observe that:

•

• Crossings will poiCrossings will point, witnt, with gooh good accuracy, to d accuracy, to chachanges innges in the trend. Unfortunately, the whipsaws may eliminate the trend. Unfortunately, the whipsaws may eliminate some good trades.

some good trades.

• Positive values of Mov-haDiffCo indicate an uptrend, • Positive values of Mov-haDiffCo indicate an uptrend, while Mov-haDiffCo values below zero show a while Mov-haDiffCo values below zero show a

downtrend. downtrend.

Both of these indicators are also discussed in the sidebar. Both of these indicators are also discussed in the sidebar.

For more information, visit the S&C ad index at

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TRADING TECHNIQUES

Another interesting feature is the anticipation of a change in Another interesting feature is the anticipation of a change in the strength of the next trading bar. Assume you are at the end the strength of the next trading bar. Assume you are at the end of today' s trading session. Based on the calculation of

of today' s trading session. Based on the calculation of haOpenhaOpen::

haOpen

haOpen (tomorrow) (tomorrow) = = (haOpen(to(haOpen(today) day) + + haClose(today))/2 haClose(today))/2 (A)(A)

The position of haClose(tomorrow)

The position of haClose(tomorrow) versus haOpen(toversus haOpen(tomorrow)morrow) will determine the color of the candle body:

will determine the color of the candle body:

If haClose(tomorrow) > haOpen(tomorrow) If haClose(tomorrow) > haOpen(tomorrow)

Else Else

Body (tomorrow) = white Body (tomorrow) = white Body (tomorrow

Body (tomorrow) = ) = filled/redfilled/red

(B) (B) Endif Endif SUMMARY SUMMARY

The heikin-ashi charting technique is a visual, less subjective

method for displaying trending and consolidation periods. The

color of the modified candlesticks indicates the nature of the

trend: A series of white bodies show

trend: A series of white bodies shows an ascending tres an ascending trend, whilnd, whilee

a sequence of black candle bodies is associated with a

downtrend. The size of the candlestick body indicates the

strength of

strength of the current trend: Long white bodies show the current trend: Long white bodies show a stronga strong

ascending trend and long black bodies are associated with

stronger downtrends.

In an ascending trend, the emergence of the lower shadow

suggests weakening, although an exception was highlighted in

Figure 6. In a falling trend, the presence of upper shadows

suggests weakening. Periods of consolidation are

character-ized by a sequence of smaller white and black bodies with

ized by a sequence of smaller white and black bodies with

longer upper and lower sh

longer upper and lower shadows. In some cases, the emeadows. In some cases, the emergenrgencece

of a candle with a small body and long shadows suggests an

imminent change of trend (for an exception, see the reversal in

March 2003, Figure 3). If the visual element is not sufficient,

simple indicators can be used to arrive at similar conclusions.

The main advantage of this simple method is a better visual

perspective of the current status and strength of the trend or

consolidation, and a possible anticipation of the next bar's

strength. As with any other charting method, the heikin-ashi is

not

not 100100% reliable and therefo% reliable and therefore should be combined with otherre should be combined with other

technical indicators. Your trading, of course, should also

include risk- and capital-control strategies.

Dan Valcu is a Swedish private trader, computer consultant,

and a technical analysis instructor. He may be reached at

ta@educofin.com. With special thanks to S. Koike.