A new trader may look at the Heikin Ashi chart and think that it looks just like the candlesticks that one will see on a regular chart, but they are NOT the same. Assuming that two charts that have similar looks are actually one and the same is a great way to lose money in the market. You need to understand the differences that you are dealing with here and it helps to know how to calculate Heikin Ashi candlesticks.
Traditional Japanese candlesticks show an open price, a close price, a high price, and a low price for a given period of time (whichever period you have set the chart for). This candle will also be green if the price has moved up and red if it has moved down. This allows you to see all of the price action that took place during that period of time all in one chart. It is useful, but it is different from the Heikin Ashi.
Heikin Ashi candlesticks show not just the current price action, but also price action from the past. This is because Heikin Ashi candlesticks also bring in price action from the past to produce an average that is then presented in the candlestick.
The main difference is that the open and close are calculated differently. The Heikin Ashi is using an average. This is important because it tends to smooth out the price action that occurred in the market over a given period of time. These candlesticks still feature open, close, high, and low points, but those figures are all determined by averages instead of by the specific price movement for that given time period.
In learning how to calculate Heikin Ashi candlesticks, look at your Heikin Ashi chart closely and you will see that each new candle begins directly in the middle of the previous one. This is because the new candle is determined by the average of the previous candle in terms of its open and close.
The general concept of the Heikin Ashi candlesticks is that they smooth the price action. A lot of the “market noise” inherent in the traditional Japanese candlestick charts is minimized with the Heikin Ashi candlestick chart.
In summary, the formula for the Heikin Ashi chart works like this:
High = Maximum of High, Open, or Close (whichever is highest)
Low = Minimum of Low, Open, or Close (whichever is lowest)
Open = [Open (previous bar) + Close (previous bar)] / 2
Close = (Open + High + Low + Close / 4
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