You may have heard about HeiKin Ashi charts (HeiKin – “average”, Ashi – “rhythm”) – a popular way of price representation used in financial markets. HeiKin Ashi charts and Japanese candlesticks look pretty much the same at the first glance, but there are still some notable differences between them.
The most obvious difference is the calculation of the opening and closing prices. HeiKin Ashi candles are based on OHLC (open-high-low-close), but unlike Japanese candlesticks, they open at the middle of the previous candle, and their closing price is calculated as the average of the open, high, low and close prices for the session. However, highs and lows of HeiKin Ashi candles – represented by upper and lower shadows – are normal highs and lows reached during the session.
This brings us to the advantages and drawbacks of using HeiKin Ashi charts compared to Japanese candlesticks.
The way how HeiKin Ashi candles represent the open and close prices leads to a smoothing effect on the price-chart. This can be very helpful for trend-following traders, as HeiKin Ashi charts smooth out the price-action and market noise which is otherwise present with Japanese candlesticks.
During strong uptrends and downtrends, the closing prices of HeiKin Ashi candles tend to have no shadows as the closing price is calculated as the average of the open, high, low and close. This can help in measuring the strength of the underlying move, whereas Japanese candlesticks could still have upper or lower shadows in those circumstances.
The advantage of the smoothing effect also leads to their main disadvantage. Due to the smoothing effect of HeiKin Ashi charts, popular candlestick patterns may be invisible or very hard to recognize. While this may not be a problem for some traders, the inability to spot major reversal patterns at the tops or bottoms of trends could be a deal-breaker for other traders.
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