Let’s have a look at the heikin ashi candle chart and the use of this technique to smooth price data together with the zero-lagging technique we presented in an earlier article about moving averages.

Heikin ashi, Japanese for “average bar,” is a technique used to better visualize price trends by recalculating the standard candlesticks. This technique was introduced by Dan Valcu in 2004. The heikin ashi chart is a candle chart based on the recalculated values for the normal open, high, low, and closing prices, but with a different interpretation.

The Heikin ashi candle is a technique to better visualize price trends and is calculated as follows:
•HaClose = (Open+High+Low+Close)/4
= the average price of the current bar
•HaOpen = [HaOpen(previous bar) + Close(previous bar)]/2
= the midpoint of the previous bar
•HaHigh = Max(High, HaOpen)
= the highest value in the range
•HaLow = Min(Low, HaOpen)
= the lowest value in the range

The average heikin ashi closing I calculate dividing the sum of these 4 values by 4.

If you compare the standard candle chart, based on the real open, high, low, and closing prices with the heikin ashi candle chart, based on the re-calculated prices for haOpen, haHigh, haLow, and haClose, it will look like a much smoother move. You can of course not use the standard candle patterns recognition here. The interpretation of the heikin ashi candle is much simpler.

A strong uptrend has up-moving white bodies without a lower shadow. A strong downtrend has down-moving black bodies without an upper shadow. The trend is weakening when the bodies get smaller, eventually with shadows on both sides.

With most technical analysis programs it is not possible to create an indicator that will result in more than one data item displayed on a single bar. For heikin ashi candles, however, you need four data items displayed on the same bar. So, if you really want to use heikin ashi candle charts, it is best to buy conversion software that automatically converts the basic data creating a mirror of the data in heikin ashi format.

For many applications and formulas it is interesting to have a smoothed closing price without any delay. For this you can use my average heikin ashi closing price as the result of (haOpen + haHigh + haLow + haClose)/4.

You will see the nice smoothing effect of using the heikin ashi average closing price compared to the standard closing price. The smoothing is mostly without a delay at the price turning points. So, it is very useful as a first degree smoothing indicator.

A first application could be to smooth the heikin ashi average closing price with a 21-period triple Exponential moving average or TEMA, one of the averages we talked about in a previous article about moving averages. Trading on the turning points of this average, preferably confirmed by breaking a downtrend or uptrend line can give you very nice profitable trades.

Combining heikin ashi with the TEMA average and with the zero-lagging principle also explained in my previous article about averages, you can produce a nice fast and reliable cross-over system. You can use the crossing of a 55-days zero-lagging closing price average crossing the 55-days heikin ashi zero-lagging TEMA average. Try it out and you will see some very profitable buy and sell signals.

These are the formulas I use in MetaStock.
Zero-lagging TEMA average on closing prices:
Period:= Input(“Closing prices average?”,1,100,60);
TMA1:= Tema(CLOSE,Period);
TMA2:= Tema(TMA1,Period);
Difference:= TMA1 – TMA2;
ZeroLagTMACL:= TMA1 + Difference;

Zero-lagging heikin ashi TEMA average:
avg := Input(“ZL TEMA average? “,1,100,55);
haOpen:=(Ref((O+H+L+C)/4,-1) + PREV)/2;
TMA1:= Tema(haC,avg);
TMA2:= Tema(TMA1,avg);
Diff:= TMA1 – TMA2;
ZeroLagTMAHA:= TMA1 + Diff;

The heikin ashi price bar can be used as a smoother candlestick bar chart while the heikin ashi average closing price is very useful as a smoothing device and replacement for the normal closing price in all kind of custom formulas as shown in a few examples here. You can certainly built profitable trading systems with this indicator.

Source by Sylvain Vervoort