Introduction:

Like candlesticks, Heikin-Ashi is a charting technique to represent and visualise the price data. Heikin-Ashi is believed to be developed in Japan by Munehisa Homma in 1970s.

In Japanese, Heikin translates to ‘Average’ and Ashi translates to ‘bar’. It differs from candlestick as it considers certain average prices instead of the Open-High-Low-Close prices directly. This averaging makes it visually smoother in showing trends as compared to candlesticks. Going forward, we will have a deeper look at differences between them.

Image 1 : Google Candlestick Chart as seen on Streak.world

Advantages of Heikin-Ashi over Candlestick:

Image 2 : Google Heikin-Ashi Chart as seen on Streak.world

The chart in the image 1 is candlestick chart and the one in the image 2 is a heikin-ashi chart. As we can see, the heikin-ashi reduced the whipsaws and noise which is visible in heikin-ashi. This is especially evident because heikin-ashi reduces the number of red candles during an uptrend and the number of green candles during a downtrend.

How does this smoothing reflect on indicators ?

As an example, we will have a look at Supertrend indicator. Supertrend indicator works very well in trending markets but it also gives out may wrong signals in sideways markets due to whipsaws. Lets have a look at the charts :

Image 3 : Google 15 min candlestick chart with Supertrend indicator as seen on Streak.world

Image 4 : Google 15 min heikin-ashi chart with supertrend indicator as seen on Streak.world

The total number of signals in the image 1, showing candlestick chart are 13 whereas, during the same period the number of signals in the image 2, showing heikin-ashi chart are only 9. The chart shows all 3 different types of trends. Up trend, sideways trend and down trend. It is very apparent that the wrong signals were especially reduced during the side ways trend where supertrend on candlestick gave more false signals as compared to the supertrend on heikin-ashi chart.

Reason for these differences:

As we had discussed earlier, the main reason for the differences that we have seen in the images above is due to averaging that is used in heikin-ashi charts rather than displaying the actual OHLC values directly. Lets see how the smoothing is carried for heikin-ashi chart :

Image 5 : Heikin-Ashi Calculation

In the image above, HA refers to Heikin-Ashi, Open, High, Low and Close are corresponding values of the current candlestick Prev. Open and Prev. Close refers to open and close values of previous candlestick.

The close and open are calculated using averaging technique while high and low are calculated by finding min and max values. This averaging creates smoothness seen in heikin-ashi charts.

Interpreting Heikin-Ashi candles at a glance:

Large Green Body with no lower shadow indicates a strong bullish trend. Large Green Body with no upper shadow indicates a strong bearish trend. Small body Candles with both upper and lower indicates indecision and change in trend. This is similar to doji in candlesticks.

Comparing Heikin-Ashi & Candlestick backtests:

Let’s compare the backtests of a same strategy using the supertrend indicator discussed earlier and see the difference in numbers. We will be backtesting a very simple strategy with the following conditions :

Entry: Sell when close price crosses below supertrend indicator

Exit: Buy when close price crosses below supertrend indicator

The strategy is made on the 1 hour time frame and backtest has been carried out for a period of 1 year. Supertrend indicator has been used for demonstration which is a trend following indicator.