Heiken Ashi: The Trading Indicator Guide

Trading Indicator

Trading requires knowledge and the ability to make wise decisions. One of the many difficulties traders encounter is with utilizing the candlestick chart.

Candlesticks are used as indicators and are a great help for traders to up their trading deals. Different types of strategies are continuously developing to help traders use candlesticks for their benefit. One of the most known strategies is the Heiken Ashi.

What Is Heiken Ashi?

Heiken Ashi, or sometimes called Heikin Ashi, is a technique or strategy used for trading. It is sometimes referred to as Heiken Ashi candles, Heiken Ashi technique, and Heiken Ashi indicator by different traders.

Literally meaning “average bar” in Japanese, Heiken Ashi is used with the candlestick charts. No matter the name, its purpose remains the same. It is an indicator and a tool that represents and visualizes the market price data in charts. Utilizing this technique, market trend signals are quickly identified, and the chart can forecast price movements.

Why Use Heiken Ashi?

Heiken Ashi poses many benefits for all traders. It can help them in gaining more trading opportunities and earn more. Benefits of Heiken Ashi include:

  • Easy accessibility
  • Reliability
  • Ability to combine with other indicators
  • Market noise filter
  • Easy to understand

Trading with Heiken Ashi

The Heiken Ashi is just another form or method of looking at candlestick charts that traders can use for detecting trading opportunities. The Heiken Ashi displays the prices differently from the other candlestick charts and makes it easier for traders to identify trends correctly.

Formula

Since the Heiken Ashi is technically used to smoothen out the market and remove market noise, it is an excellent indicator as it makes reading charts easier, and that’s why it requires a formula.

The Heiken Ashi uses a COHL formula that stands for Close, Open, High, and Low. These are components that affect the shape, size, and direction of the bars on the chart. The formulas for each component are shown below:

  • Close (indicates the average price of the current bar) = (Open + High + Low + Close) / 4
  • Open (indicates the average of the previous bar) = (Open of the Previous + Close of the Previous) / 2
  • High = highest value of the recent high, open, and close
  • Low = lowest value of the recent low, open, and close

Data obtained can be of various timeframes, which will then have a significant impact on the shape of the graph.

Constructing the Chart

The Heiken Ashi Chart is constructed the same way as the regular candlestick charts. Heiken Ashi chart candles use the color red and green to indicate trends. Red during the downtrend and green for the uptrend. The change in trend can be observed whenever there’s a change in color with the Heiken Ashi candles.

It also shows some differences with traditional candlestick charts. Such as how smooth it looks and how it displays a clearer picture of the fluctuation of prices. The Heiken Ashi chart has smoother displays compared to other charts since it uses average values. It also has successive bars of the same color, making it more straightforward and transparent to determine price movements.

Heiken Ashi Signals

The Heiken Ashi reflects what trends are prevalent in the market using indicator signals, and it has two main factors: trend strength and trend reversal.

Trend Strength

The first factor is measuring the strength of the trend. Small consolidations and corrections are hardly visible on the chart due to the indicator’s smoothing effect. That’s why when trading with the Heiken Ashi technique, it is best to use a trailing stop. The trailing stop will widen the rewards of trading within the trend.

Traders are highly recommended to stay in the trade if the trend is strong to benefit from it. Below are the different kinds of Heiken Ashi trends:

  • Bullish Trend. Consecutive green candlesticks show a strong uptrend signal without lower shadows.
  • Bearish Trend. This is the opposite of the Bullish Trend. Consecutive red candlesticks show a strong downtrend signal without upper wicks.
  • There are three types of triangles: ascending, descending, and symmetrical triangles.

If the indicator breaks above the upper borderline of the ascending or symmetrical triangle, the upper trend will continue. If the candles fall below the bottom line of the descending triangle, the downtrend will strengthen.

Trend Reversal

This signal helps traders in determining if it’s time to exit a previous trend-following trade and enter a new trend. It allows traders to avoid losses and enter a new trade immediately.

Doji Candlestick. It has a small body and long shadow, and it signals if there are uncertainties in the market. And with Heiken Ashi, it signals a trend reversal.

Wedges. Wedges are like triangles, and there two types of wedges, rising and falling. Rising wedges require traders to wait until the candlestick breaks below the indicator’s bottom line. Falling wedges require traders to wait for the price to break above the upper line, and the downtrend will reverse.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.