Japanese Candlesticks are a type of technical analysis tool used by traders to monitor and evaluate the price movement of assets. Munehisa Homma, a Japanese rice merchant, originated the concept of candlestick charting. The charts depict the nature of price changes by utilizing different colors to represent variations, taking into account demand and supply patterns and the impact of traders’ emotions. Traders can use candlesticks to discover price movement patterns and judge the price’s short-term direction.
|Candlestick colors do not follow price trends.
|The colors are red in a downtrend and green in an uptrend
|Price is depicted
|Only average prices are depicted
Heiken-Ashi candlestick chart approach modifies a Japanese candlestick chart by averaging price data and filtering out market noise. Instead of normal candlestick charts’ open, high, low, and close values, the Heikin-Ashi approach employs a modified formula based on two-period averages. This smoothens the chart, makes it easier to discern trends and reversals, and boosts quicker analyses. But it also obscures gaps and certain price data.
Japanese Candlesticks VS Heiken-Ashi
The Heikin-Ashi chart is built similarly to a standard candlestick chart, except the method for calculating each bar is different. The user defines the time series based on the type of chart needed, such as daily, hourly or five-minute intervals. The low days are represented by filled candles and the up days by empty candles. So, although Japanese candlestick charts are made up of a succession of open-high-low-close (OHLC) candles separated by a time series, the Heikin-Ashi approach employs a modified formula of close-open-high-low (COHL).
The color codes largely influence the ‘smoother look of the Heiken Ashi charts. Heikin-Ashi candles are predisposed to stay red during a downtrend and green during an uptrend. In contrast, standard Japanese candlesticks alternate colors even if the price is moving predominantly in one direction.
The current price depicted on the Japanese candlestick chart is also the asset’s current price and corresponds to the candlestick’s closing price. Because the Heikin-Ashi only employs averages, the current price on the candle may not correspond to the price at which the market is trading.