Heikin-Ashi chart

An ordinary candlestick chart plots the raw prices of each period. Every small wobble shows up.

A Heikin-Ashi chart does something different. It averages the price data first, then draws the candle from the averaged values. The wobbles get smoothed away.

The practical effect is that the trend stays visible for longer. A trader following a trend is less likely to be scared out of a good position by a single ugly day.

The workbook describes Heikin-Ashi in chapter 15.2.6 as "an adjusted candlesticks that average price data to reduce noise." It gives it 2 uses: it "gives a lot of visual clarity and is ideal for trend-following strategies," and it "helps the trader to remain longer in the trade by filtering out whipsaws."

A whipsaw is a move that reverses quickly enough to stop a trader out just before the original direction resumes. Smoothing the input is what reduces how often that happens on the chart.

The workbook gives no figure at all for Heikin-Ashi — no averaging formula, no lookback period, no brick or box size. That absence is worth stating plainly, because two of its neighbours in the same section are defined by a size: a Renko chart is built from fixed price bricks, and a point and figure chart from X and O columns. Heikin-Ashi keeps ordinary time intervals and changes only the values plotted.

Illustrative — the workbook does not print the averaging formula. A stock closes at Rs 412, Rs 408, Rs 415, Rs 409 and Rs 418 across 5 sessions. The net move is up Rs 6, but an ordinary candlestick chart prints 2 red candles inside that rise, on the days it closed at Rs 408 and Rs 409.

A trader placing a stop just under each red candle gets taken out twice in 5 days, on a stock that ended higher.

Because a Heikin-Ashi chart plots averaged rather than raw values, those 2 down days tend not to flip the candle colour. The trader sees one continuing run and stays in — exactly the "remain longer in the trade" effect the workbook credits it with.

Chapter 15.2.6 (Heikin-Ashi Chart) closes the workbook's list of 6 chart types in section 15.2. Expect the standard matching question — chart type against what it is best suited for — where Heikin-Ashi's answer is trend-following and filtering whipsaws.

A harder version asks which chart types remove time from the picture. Renko and point and figure do; Heikin-Ashi does not.

• It is not a plain candlestick chart. The values plotted are averaged, so the open, high, low and close shown on a Heikin-Ashi candle are not the raw traded prices of that period.
• It is a trend-following tool, not a pattern-spotting tool. The workbook names the ordinary candlestick chart, in 15.2.3, as the one best suited to identifying Doji, Hammer and engulfing patterns.
• Heikin-Ashi keeps time; Renko and point and figure drop it. All 3 reduce noise, but only the other 2 stop plotting when price does nothing.
• Filtering whipsaws also delays signals. Smoothing cannot remove noise and keep every turn — the workbook's framing, staying longer in the trade, cuts both ways at a genuine reversal.