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Using the Heikin Ashi Technique D Valcu

Using the Heikin Ashi Technique D Valcu

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Published by Ian Moncrieffe
interpreting candlesticks can be challenging.
To make things easier, the heikin-ashi technique
modifies the traditional candlestick chart. Let's
take a look at how it works.
interpreting candlesticks can be challenging.
To make things easier, the heikin-ashi technique
modifies the traditional candlestick chart. Let's
take a look at how it works.

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Published by: Ian Moncrieffe on May 02, 2009
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09/02/2013

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TRADING TECHNIQUES
Nani Desu Ka?* 
Using The HeikinAshi Technique
 Enter and stay on the right side of the trend 
or when in doubt, stay out 
with this Japanese chart-
ing technique.
ince the introduction of the candlestick 
method to the US some two decadesago, it caused a revolution in perceiv-ing how the bullish and bearish forcesperform in the Western markets. It hasbecome a popular charting tool, as traders have usedcandlesticks to make chart formations easier to spotand name. But interpreting candlesticks can be chal-lenging. To make things easier, the
heikin-ashi
tech-
nique modifies the traditional candlestick chart. Let's
take a look at how it works.
BALANCING ON ONE FOOT
The heikin-ashi method
{heikin
means "average" or"balance" in Japanese, while
ashi
means "foot" or"bar") is a visual technique that eliminates irregulari-ties from a normal chart, offering a better picture of trends and consolidations. Just by looking at a candle-stick chart created with this method, you get a goodidea of the market's status and its strength. Take a
look at the candlestick chart of Canon ADR in Figure
1A versus the heikin-ashi modified chart in Figure1B. Which chart would you prefer to use?
CALCULATION
The heikin-ashi candlestick technique uses modifiedopen-high-low-close
(OHLC)
values and displays
by
Dan Valcu
them as candlesticks. The modified values are com-puted using these definitions:• haClose = (O+H+L+C)/4haOpen = (haOpen (previous bar) + haClose(previous bar))/2• haHigh = Maximum(H, haOpen, haClose)• haLow = Minimum(L, haOpen, haClose)The "open," "high," "low," and "close" referred toare of the current bar. The prefix
ha-
indicates thecorresponding heikin-ashi modified values. I haveused daily data throughout this article, so one barrepresents one trading day. Depending on the tradingtime frame, you may employ other data, such asintraday, weekly, or monthly.The value
haOpen
is always set to the midpoint of the body of the previous bar, while
haClose
is com-puted as the average price of the current bar. Themodified high,
haHigh,
is chosen as the highest valueof 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 thelowest 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.
APPLYING IT
Looking at charts is the best way to understand themain features of the heikin-ashi technique. If thehaClose is above haOpen, then a bullish sign occurs(white candle). If haClose is below haOpen, then abearish sign appears (black candle).
*Editor's note: This phrase is Japanese for "What is it?"
February 2004 •
Technical Analysis of 
STOCKS & COMMODITIES • 17
 
FIGURE 1 A: DAILY CHART OF CANON.
This is the traditional candlestick chart of Canon.
1 [7 |13 |20 I2T- 42.0
4 1 . 5
41.040 5
«0.0
39.539.038.5
3 8 . 03 7 . 5
37.036 5
3 8 . 0
35 535 0
J4
534 и33.533.032.532 031.531
LI
3 0 . 8
30.0
2 9 . 52 9 . 0
28.5
2 8 . 0
if
5
27 11
2 6 . 5
26 025.5
2 5 . 0
24 5
FIGURE IB: DAILY MODIFIED CHART OF CANON.
The heikin-ashi technique works as a filter, eliminating irregularities and makingthe chart smoother with well-defined trends.
At first glance, Figure 1 shows that the heikin-ashi chartlooks more compact and smooth compared to the traditionalchart. White candles display a rising trend, while black candlesindicate a downtrend. Gaps, which occur frequently on thetraditional
OHLC
chart,
are not present because they are incor-porated into the modified candles. Strong positive trends havelong white bodies with no lower shadows, while strong nega-tive trends have long black bodies with no upper shadows.When bodies become shorter, a weaker trend is anticipated(see mid-October and end of December). In the beginning of November, Canon weakened its uptrend and started a consoli-dation period with several small bodies with both long upperand lower shadows. A very small body with tall shadows on thefirst trading day in 2000 warned about a possible change of therising trend. As consolidations contain several bodies with tall
20 • February 2004
Technical Analysis of 
STOCKS & COMMODITIES
shadows, it is not safe to assume that the presence of a smallbody with tall shadows will indicate a change in trend. Figure2 summarizes the five scenarios that can be identified on aheikin-ashi candle chart.
EXAMPLES
To give you an idea of how to apply the heikin-ashi chartingtechnique, I will show you three examples using the Standard& Poor's 500 index (SP500-HA), the price of gold (XGLD-
HA),
and Pfizer
(PFE-HA).
The heikin-ashi
OHLC
values werecalculated as indicated in the sidebar and plotted. Each chart
contains two candlestick subcharts: The top contains the modi-
fied OHLC values, while the bottom has the real values. Eachnumber in the table in Figure 2 (1 to 5) applies to the chartwhenever a relevant scenario appears. They are labeled in
 
TRADING TECHNIQUES
different colors to differ-entiate descending andascending trends. Foreach chart I'll discusshow this technique canbe used to either enterand stay on the right side
of the trend, or avoid trad-
ing during periods of con-solidations.
Standard & Poor's 500(SP500-HA):
Figure 3 offers no doubtabout the usefulness of this method, even for anovice: All trends are vis-ible, with short consoli-dations marked as (4) occurring in February and July. Strongrising trends (2) were marked by long white candle bodies withno lower shadows, while strong falling trends (2) were accom-panied by filled candle bodies with no upper shadows.Using the observations in Figure 2, note how the smallerbodies (3) in January 2003 warned about a weakening of thetrend, and subsequently, a reversal (4). Trend changes (5) werepointed out by small bodies with longer shadows, but as anexception, the reversal in March occurred without any suchsign. Although a rising trend, the segment AB was composed
FIGURE
2: FIVE SCENARIOS OF HEIKIN-ASHI CHARTS. Here you see the different types of trend behavior for ascending and descendingtrends.
of several short sections (normal trend, weakening, consolida-tion). It could also be seen as a normal ascending trend (1) dueto a majority of white bodies.
 Article continues on page 24
The heikin-ashi is a visual techniquethat eliminates irregularities from anormal chart, offering a better pictureof trends and consolidations.
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.

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