charts are one of the most popular ways to look at price action. A single shows the high, low, open, and close for a specific time period. This means that a lot of price information is stored in a single . However, sometimes, that price information is filled with or chaotic trading.
That's where Heikin Ashi charts are most useful - they smooth out the price by showing an average price range rather than the exact measurements. In fact, Heikin Ashi charts were developed in Japan and the word Heikin means “average” in Japanese. For those who invest over long-term horizons or look for sustainable trends, Heikin Ashi charts can be an effective way to smooth out price and show clearer trends.
The key to understanding Heikin-Ashi charts is to remember that each bar, whether it's red or green, shows an average price range for a specific time period whereas a chart shows the exact price levels for that time period.
The formula for a Heikin Ashi looks like this:
Open = (Previous bar open + previous bar close) / 2
Close = (Open + High + Low + Close) / 4
High = Highest point whether it's the open, high, low or close
Low = Lowest point whether it's the open, high, low or close
Make sure to test out these two different chart types and have some fun. There is no better way to learn than to compare and contrast the two types of charts as we are doing in this example. Remember, it is also about your personal preference. Do you want to see every granular detail in price action? Or do you want to see an average price of that trading action? This is entirely up to you and the tools are here for you to try.
While Heikin Ashi and other non-standard charts can be useful to analyze markets, they should not be used to backtest strategies or issue trade orders, as their prices are synthetic and do not reflect bid/ask levels at exchanges or brokers. If you need more information to understand why that is, have a look at these publications:
• In the Help Center: Strategy produces unrealistic results on non-standard chart types (Heikin Ashi, Renko, etc.)
• From PineCoders: Backtesting on Non-Standard Charts: Caution!
Thanks for reading and please leave any comments or questions if you have them!
Someone asked how they can select Heikin Ashi. Click the dropdown at the top of your chart where it currently shows either your or Line chart options. Then select Heikin Ashi from the dropdown menu.