Heikin-Ashi indicator: settings and signals

Heikin Ashi is a way of constructing candles in which each candle is averaged with the previous one, which removes noise at the cost of losing the real open and close prices.

What the indicator looks like on a real chart

What the indicator actually measures

The close of a Heikin Ashi candle is the average of the four prices of the source bar, and the open is the midpoint of the previous Heikin Ashi candle. Because of this recursion each candle carries the entire preceding history within it, and the series comes out noticeably smoother than the original.

The practical effect is clearly visible when comparing two panels: where ordinary candles alternate color almost every bar, Heikin Ashi builds long single-color runs. A change of color becomes a rare event, and that is what is made the basis of the signal.

The price for smoothness is substantial: the open and close of Heikin Ashi are computed, not real. You cannot place orders by them, you cannot compute entry points, and any backtest on these prices will give a result unattainable in real trading.

Formula

The close is the average of the open, high, low and close of the source bar. The open is the half-sum of the open and close of the previous Heikin Ashi candle. Because of the recursive dependency the values do not coincide with any actually traded price.

Standard settings

There are no adjustable parameters — it is a charting method, not an indicator with a period. Sometimes double smoothing is applied, passing already-smoothed candles through the same formula, which makes the picture even smoother and takes it even further from real prices.

Implementation code (Python)

def heikin_ashi(o, h, l, c):
    ha_close = (o + h + l + c) / 4
    ha_open = ha_close.copy()
    for i in range(1, len(c)):
        ha_open.iloc[i] = (ha_open.iloc[i-1] + ha_close.iloc[i-1]) / 2
    return ha_open, ha_close

When the indicator stops working

Common mistakes in use

• Running a backtest on Heikin Ashi prices. The result will be unattainable: entry at a price that did not exist in the market systematically overstates profit.
• Setting a stop-loss by the bounds of the smoothed candles instead of the real extremes.
• Treating a long run of single-color candles as a sign of trend strength. The run is a consequence of smoothing, not a market phenomenon.
• Forgetting that gaps are invisible on such a chart, and losing sight of the real price discontinuities.

Who needs this and why

A visual-assessment tool for those bothered by the noise of ordinary candles when determining direction. All calculations — entries, stops, testing — should be done on ordinary prices.

Frequently asked questions

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