Are you familiar with the Heiken Ashi formula and indicator when trading financial markets? This article will go through the Heiken Ashi formula and indicator, telling traders what it is, how to use it with MetaTrader 4 Supreme Edition, a sound Heiken Ashi trading strategy, how to spot market trends using Heiken Ashi patterns, and more.
In Japanese, Heikin-Ashi, often written Heiken-Ashi, means “average bar.” When trading stocks or forex, the Heikin-Ashi approach can be used in conjunction with candlestick charts to identify market patterns and forecast future prices. It’s useful for making candlestick charts more understandable and analysing patterns simpler.
For example, traders can use Heikin-Ashi charts to determine when to continue in deals while a trend is continuing but exit when it pauses or reverses. Because most gains are made while markets are trending, properly anticipating trends is essential.
A Japanese candlestick represents four pieces of price data in visual form, including:
This is useful since it allows you to view multiple pieces of information plotted on your chart for each period.
The upper wick or shadow of the candlestick represents the high. The lower wick or shadow represents the low. A candlestick’s body represents the open and close.
Basically, if the close is:
Each candle represents the link between the open and close. In other words, it indicates whether the price ends the period lower or higher than when it began. A rudimentary line of thinking is that an entire candlestick is bearish.
The close is lower than the opening, suggesting the price is under pressure. The same logic suggests that a hollow candlestick is bullish. The close is higher than the opening, suggesting the price is under pressure to rise.
During periods of volatility, the price oscillates between bullish and bearish candles, which makes identifying the trend difficult.
Here the Heiken Ashi formula comes into play as the problem is solved using modified candlesticks. Heiken Ashi candlesticks are similar to traditional candlesticks in that they employ average values for the four price metrics rather than opens, closes, highs, and lows.
The Heiken Ashi formula used to derive these average values is as follows:
The Heikin-Ashi chart is built similarly to a standard candlestick chart, except the formula for calculating each bar is different, as illustrated above. The user defines the time series based on the type of chart desired, such as daily, hourly, or five-minute intervals.
The low days are filled with candles, while empty candles represent happy days. The charting platform may also colour these in; such that up days are white or green and down days are red or black, for example.
There are a few distinctions between the two types of charts, which are illustrated by the charts above. Heikin-Ashi provides a smoother look since it takes an average of the movement. Heikin-Ashi candles stay red during a decline and green during an upswing, whereas standard candlesticks alternate colour even when the price is moving in one direction.
It’s also worth noting the price range. The current price indicated on a standard candlestick chart is also the asset’s current price, and it corresponds to the candlestick’s closing price (or current price if the bar hasn’t closed).
Since Heikin-Ashi uses an average, the current price on the candle may differ from the price at which the market is trading. As a calculation, several charting tools display two values on the Y-axis: one for calculating the Heiken-Ashi and another for the asset’s current price.
These charts apply to any market. Heikin-Ashi charts are an option on most charting platforms.
Five primary signals identify trends and buying opportunities:
These signals may make identifying trends or trading opportunities easier than traditional candlesticks. Trends are less frequently interrupted by false signals and hence more easily spotted.
The above chart demonstrates how Heikin-Ashi charts may be used for analysis and trading decisions. Long red candles are on the left, and the lower wicks are reasonably small at the beginning of the drop. As the price falls, the lower wicks lengthen, indicating that the price fell but was subsequently pushed back up. Purchasing pressure is increasing. A strong move to the upside follows this.
The upward move is strong, but there aren’t many indications of a reversal until there are numerous small candles in a row, with shadows on either side. This demonstrates uncertainty. Traders might consider the larger picture to help them decide whether to go long or short.
The charts may also be used to maintain a trader in a trade once it has begun to trend. It’s typically best to hold a position until the Heikin-Ashi candles change colour. A change in hue does not always indicate the conclusion of a trend; it might simply be a halt.
By alerting traders when the price is changing direction, the Heikin Ashi provides its own trade signals. It changes colour and direction, from red to green or green to red. Green candles show buying pressure (a bullish trend), while red candles show selling pressure (a bearish trend). Using a moving average indicator to filter these signals can help to ensure that trades are only taken in the dominant trend direction.
A 50-period simple moving average (SMA) and a 12-period SMA are added to the following EURUSD daily chart. As you can see, there are some smooth trends and choppy periods that the simple moving average line ignores.
During trending periods, a few simple criteria might have helped collect profits:
Heikin Ashi charts apply to any timeframe, and the calculation is applied to every period of your choice. Swing traders typically look at hourly, four-hour, or daily charts. The possible strategy discussed above might be applied to stocks, forex, commodities, or stock indexes.
Look at another example, this time including another chart. When trading a volatile asset, traders should look for a separation between the Heikin Ashi candles and the SMAs. If the asset is less volatile, such as a stock index, separation becomes less critical since it occurs less frequently.
The chart above depicts potential entry points. Not everyone made a significant profit, and others made small losses. Several significant profit trades used the exit techniques of the HA changing colour or the HA crossing and closing on the other side of the shorter SMA.
Scalping is a short-term trading strategy in which the trader enters and exits deals quickly, sometimes multiple times daily. Scalping in forex is a typical market of this strategy. While Heikin Ashi charts may be used for any period, scalping with them might be difficult since the HA charts do not show the exact asset price at this time.
The HA charts are calculated using a formula. Every penny, pip, or tick counts when making fast-paced trades; therefore, knowing the exact price is essential.
A short-term trend reversal pattern occurs when the Heikin Ashi chart changes from red to green or green to red. Larger reversal patterns have the potential to be more trustworthy. Head and shoulders, rounded bottoms, and triple and double tops and bottoms are all Heikin Ashi reversal patterns.
When a reversal pattern appears, it may be traded like a candlestick variation. You may also use a moving average exit and exit when the price crosses the moving average (like the 50-period) in the opposite direction of the trade. On a four-hour USD/CAD chart, we can see a head and shoulders reversal.What is free margin in forex? - Important account statistic — 2023
A short entry is taken when the price breaks below the head and shoulders reversal pattern. The trade is closed when the price crosses over the 50-period SMA or when the price hits the profit target for a head and shoulders pattern. For a target at 1.33, the projected target is the pattern’s height (about 1.37 — 1.35) subtracted from the breakout point (near 1.35).
Heikin Ashi charts and indicators help smooth out price volatility, making it easier to recognise and trade trends. However, when a Heikin Ashi trade signal happens, the accurate price may differ significantly from what the most recent HA close indicates.
Some trade signals may become outdated as a result of this. For example, suppose a Heikin Ashi signal indicates to buy a stock for $5, but the price has already gapped higher and is trading at $7. The discrepancy between the trade signal and the actual price may be too high, rendering a potential trade unprofitable.
Because HA charts are based on average price movements, they are also difficult to use for determining stop-loss levels. These can be effective, but the risk is unknown at the outset of the trade.
A conventional candlestick chart is necessary to limit the risk with a predetermined stop-loss level. This way, the stop-loss may be set based on the price levels and patterns that the price made.
Before using Heikin Ashi effectively in trading, traders, like any other technical indicator, must first grasp how it works and its merits and drawbacks.
A trade setting takes longer to create since the Heikin-Ashi approach incorporates price information from two periods. This is usually not an issue for swing traders who have the time to let their transactions play out. However, day traders who seek to capitalise on swift price moves may find Heikin-Ashi charts helpful.
The averaged statistics also obscure essential price information. Many traders regard daily closing prices as necessary, yet the real daily closing price is not visible on a Heikin-Ashi chart. The trader sees the HA closing value on average. The trader must know the true price, not simply the HA averaged values, to limit risk.
Price gaps are another essential aspect of technical analysis that Heikin-Ashi charts lack. Many traders use gaps to analyse price momentum, set stop-loss levels, and initiate trades.
Heikin-Ashi Candlesticks are a flexible tool for chartists that can filter volatility, predict reversals, and identify classic chart patterns. All aspects of classical technical analysis may be applied to these charts. Chartists can use Heikin-Ashi Candlesticks to identify support and resistance, draw trend lines, and measure retracements. Volume indicators and momentum oscillators are also effective.
Heikin Ashi is useful for short-term trading strategies such as day trading and swing trading. It may be employed in any market, including forex, stocks, commodities, and indices. This chart type and indicator can assist a trader in identifying trends and staying in winning trades.