# Heikin Ashi Explained (How To Use It)

Last Updated on March 6, 2021 by Oddmund Groette

A reader recently asked if we use Heikin Ashi in our trading. We don’t. Neither of us has ever heard of Heikin Ashi! So what exactly is Heikin Ashi?

In this article, you’ll learn what Heikin Ashi is and how you can utilize it in your trading. Moreover, we test some additional filters to improve the strategy. We find little value in the indicator.

## What is Heikin Ashi?

The name implies it originates from Japan. As it turns out, Heikin Ashi is another version of the famous Japanese candlesticks used in all our charting. Presumably, Heikin Ashi means “average bar” in Japanese, which sums up the difference between the two forms of candlesticks.

Candlesticks show the daily price action of the open, high, low, and close, while Heikin Ashi aims to indicate the trend by smoothing the price movements. Heikin Ashi is, to our understanding, used mainly as a supplement for other indicators, something we will test further down in the article.

To understand the difference we need to look at how it’s calculated:

## How to calculate Heikin Ashi:

The formula is not straightforward and a bit complicated.

Heikin Ashi smooths the candlesticks using average values of the open, high, low, and close. However, the open and close are calculated differently for Heikin Ashi – it’s not the actual prints, but a mathematical formula is used to make “artificial” values. We needed some help from Google. Here’s what we found:

• The Heikin Ashi close (HAC): ( open + high + low + close ) / 4
• The Heikin Ashi open (HAO): ( previous day’s open + previous day’s close ) / 2
• The Heikin Ashi high: maximum ( high, HAO, HAC)
• The Heikin Ash low: minimum ( low, HAO, HAC)

The HAO price is dependent on the previous Heikin Ashi values. Because the open price is the midpoint of the “body” of the previous candle, every Heikin Ashi candle starts at the midpoint of the previous one.

## Heikin Ashi code for Amibroker:

Amibroker doesn’t come with the code for Heikin Ashi, at least not the version we have. We believe this code resembles the Heikin Ashi:

HAC = (O + H + L + C)/4;
HAO = AMA( Ref( HAC, -1 ), 0.5 );
HAH = Max( H, Max( HAC, HAO ) );
HAL = Min( L, Min( HAC, HAO ) );
barcolor = IIf( HAC >= HAO, colorBlue, colorRed);
PlotOHLC( HAO, HAH, HAL, HAC, “”, barcolor, styleCandle );

## What does the Heikin Ashi look like?

Below is the S&P 500 with standard candlesticks and Heikin Ashi:

The lower half, which contains the Heikin Ashi, shows candlesticks that are blue and red. Blue signals a positive trend, while red is bearish. A black and filled candlestick in the upper half doesn’t necessarily translate into a red Heikin Ashi candle. The main idea with Heikin Ashi is to smooth the movements into more reliable trends. The Heikin Ashi above shows less blue to red changes than black and white in the original candlestick chart. Blue and red candles seem to flow in patterns, or they seem to show some regularities and trends. Another significant difference is that Heikin Ashi doesn’t offer price gaps.

However, what seems orderly and trending, might not be obvious when we test some quantifiable rules.

## What does Heikin Ashi indicate?

The frequent change in candlesticks (gaps, hollow body, filled body, etc.) makes it difficult to spot trends. Heikin Ashi is a quantified display showing the direction. The arguments for consecutive colored candles seem apparent, but as with any other indicator, Heikin Ashi tells us what has happened in the past. Does it offer any benefits in predicting future movements?

## Does Heikin Ashi contain any predictive value?

We use candlesticks in our charts, not because we look for edges, but we believe it’s easier to get a grasp of the daily action and where prices opened and closed. However, in a previous article, we revealed that some candlestick formations do seem to offer value:

Can we get the same promising results using Heikin Ashi?

## Heikin Ashi quantified

Let’s test some simple ideas:

Let’s buy on the close if the candle turns blue and sell on the close when it turns red on the S&P 500. Pretty simple. If we use daily candles, the result is not very impressive and like a random walk. If we switch to weekly mode, the results improve, but the CAGR is only 4.5% compared to buy and hold of 9.9%. When we test on monthly data, the CAGR increases to 8.4%, with a significantly lower drawdown of 28% (buy and hold has 55%). The strategy is invested 73% of the time.

Perhaps surprisingly, the strategy performs worse on the gold price and GDX (gold miners).

If we turn the strategy upside down and buy on the close of a red Heikin Ashi and sell on a blue candle, the return is 6.5% on daily candles. On weekly and monthly data it performs worse.

#### Heikin Ashi and moving averages:

On daily candles, the results are promising if the signal happens below the 200-day average – if you go short. No matter what we did, no matter the time frame or criteria, the results didn’t improve compared to the simple strategy above.

Some weeks ago we covered the ADX-indicator:

Because stock indices tend to revert to the mean, we test by entering on the close after two red Heikin Ashi candles. Additionally, we use an x-day filter of the ADX (test yourself for different parameters). The exit is on a day where the close is higher than yesterday’s high.

On the S&P 500 we get this equity chart:

This is only a CAGR of 5.27% but exposure is only 5% of the time frame.

Consumer staples (XLP) seem much better, though, but the average per trade is a low 0.22%.

## Conclusion:

This quick “analysis” of Heikin Ashi didn’t provide us with much hope that this is a viable indicator. However, some readers have might have other suggestions for improvements or what can be done to turn the candles into profitable strategies.