Heikin Ashi is a chart type that replaces each candle's open, high, low and close with averaged values. The close is the average of the four prices of the current bar; the open is the average of the previous Heikin Ashi open and close. The result smooths the series, so the plotted price is not the market price.
The formula
Four values are recalculated for every bar:
- HA Close = (Open + High + Low + Close) / 4 — the four raw prices of the current bar
- HA Open = (previous HA Open + previous HA Close) / 2
- HA High = the highest of: the raw High, HA Open, HA Close
- HA Low = the lowest of: the raw Low, HA Open, HA Close
A worked bar. The previous Heikin Ashi candle had an open of 1.0800 and a close of 1.0820, so HA Open = (1.0800 + 1.0820) / 2 = 1.0810. The current bar's raw prices are O 1.0820, H 1.0850, L 1.0810, C 1.0840, so HA Close = (1.0820 + 1.0850 + 1.0810 + 1.0840) / 4 = 1.0830. HA High is the highest of 1.0850, 1.0810 and 1.0830 = 1.0850; HA Low is the lowest of 1.0810, 1.0810 and 1.0830 = 1.0810. The candle drawn on screen therefore has a body from 1.0810 to 1.0830, while the market closed the bar at 1.0840.
Because HA Open is built from the previous candle rather than from the current bar's opening price, each candle starts inside the body of the one before it. That is why a Heikin Ashi chart shows almost no gaps even when the underlying market gapped.
The price on the chart is not the price you trade
The 10-pip difference in the example above is the whole practical risk of this chart type. Orders are filled at the market price, not at the averaged one, so a stop or a limit placed by eye on a Heikin Ashi level is placed at a level the market never printed. On a fast move the gap between the two series widens, because the averaging lags the raw close by construction. If you use this chart, read levels from a standard candlestick or from the price feed and use Heikin Ashi only for the shape of the series.
The same averaging also delays the visible turn: the smoothing that removes noise removes the first bars of a reversal along with it.
How it differs from a standard Japanese candle
A standard candle reports four raw prices as they occurred; the values are directly comparable to the order book. Heikin Ashi reports two averages and two extremes derived from them — see Japanese Candlestick Basics for the raw construction.
The consequence is that classical candlestick patterns do not carry over. A doji, an engulfing candle or a hammer is defined by the relationship between the real open and the real close; on a Heikin Ashi chart neither of those two prices is present, so a formation that looks like a pattern is an artefact of the averaging. Pattern reading belongs on standard candles, as set out in Interpreting Candlestick Patterns.
