(Please click on the accompanying chart to enlarge.)

Heikin Ashi, as shown on the current daily EUR/USD chart to the left, is a Japanese charting technique that appears similar to traditional candlestick charts. The differences, however, are extremely significant.

The purpose of these modified candlesticks is to display the trend more clearly. A series of hollow candles without lower wicks indicates a strong uptrend. Conversely, a series of solid candles without upper wicks denotes a strong downtrend.

The distinct look of Heikin Ashi charts is noticeable on the very first glance. During trending periods, virtually uninterrupted series of solid or hollow candles are the rule. This means that even during minor retracements in a strong trend, Heikin Ashi charts will essentially show a one-directional run. Therefore, during these trending periods, Heikin Ashi charts work their best in indicating whether a trend has ended or is still intact.

The formulas used to derive the Heikin Ashi candles are what really set them apart from more conventional price representations. Following are the formulas for the different components of a Heikin Ashi candle:

Close = [Open+High+Low+Close]/4
Open = [Open (previous bar) + Close (previous bar)]/2
High = Maximum (High, Open, Close)
Low = Minimum (Low, Open, Close)

- James

James Chen is the Chief Technical Analyst at FX Solutions, a leading Forex broker. He is also a registered Commodity Trading Advisor (CTA) and a Chartered Market Technician (CMT) Level 3 candidate. At FX Solutions, Mr. Chen writes daily currency analysis, conducts forex trading seminars, and has authored numerous articles on currency trading and technical analysis for major financial publications. His upcoming book, Essentials of Foreign Exchange Trading (John Wiley & Sons), will be released in early 2009.