The Heikin-Ashi chart looks very similar to your usual Japanese candlesticks, which are an extremely popular and convenient technical analysis tool. However, Heiken-Ashi is calculated based on a unique formula, which is completely different from the standard one. Today, I’m going to tell you how the Heiken-Ashi bars work, and how they differ from Japanese candlesticks, how to read their signals, and how to trade in the Forex market.
The article covers the following subjects:
What Are Heikin-Ashi Candlesticks?
“Heikin Ashi” means “average bar” in Japanese. Interestingly, there is no correct spelling of this phrase in the Latin alphabet. Some well-known traders and publications use “Heikin-Ashi”. Others use “Heiken-Ashi.”
The indicator is used to filter out market noise. This stems from the unusual design of the Heikin-Ashi candlestick – it is built by averaging four parameters: open, close, max, and min (maximum and minimum price values).
To put it differently, the standard Japanese bar chart is redrawn into an average form with minor price fluctuations smoothed out. Therefore, for simplicity’s sake, Heiken-Ashi can be called a kind of candlestick moving average.
The upper part of the EUR/USD chart shows traditional Japanese candlesticks, and the lower part shows Heiken-Ashi. By comparing them visually, you can see that the lower chart is smoother. It shows no gaps, and many bars are opened closer to the middle level of the previous bars.
By the way, you can only access Heikin-Ashi charts in the online terminal. You can open it in any browser without logging in. In the MetaTrader 4 platform, this tool looks like an indicator placed over a chart. I’m going to describe how to use it below.
Heikin-Ashi is often used as a trend indicator. Moreover, the Price Action reversal patterns developed for traditional candlesticks can give powerful signals as well.
Another feature of the indicator is the latency in calculations. New Heiken-Ashi bars are only formed after the following Japanese candlesticks appear on the chart. Therefore, the tool is very efficient for highly volatile assets on small timeframes.
Some of the currency pairs that fit the description are CAD/JPY, GBP/JPY, and GBP/JPY. For these pairs, Heikin-Ashi will effectively remove noise and prevent false breakouts and trend reversal signals.
What Is the Heiken-Ashi Indicator?
In MetaTrader 4, you can add Heikin-Ashi charts for free since it’s included in the standard set. So, you don’t need to download it elsewhere.
The tool works best with a moving average. This way, it will not be drawn on top of Japanese candlesticks. On the contrary, it will make the chart easier to understand and show smoothed candles of the Heiken-Ashi indicator.
For comparison, here is what the Heikin-Ashi candles look like in the online terminal. Comparing this chart and MT4, you can see that Japanese candlesticks have been completely replaced on the price chart.
How Does Heiken-Ashi Work?
Heikin-Ashi smoothing is performed by averaging four parameters of Japanese candlesticks: open, close, max, and min.
Each of these four parameters is formed as follows:
Open – (open of previous bar + close of the previous bar)/2.
Close – (open + high + low + close of the current bar)/4.
Max (or High) – the highest value of the current period’s high, or the current period’s Heikin-Ashi open or close.
Min (or Low) – the lowest value of the current period’s low, or the current period’s Heikin-Ashi open or close.
Now you know how to calculate Heikin-Ashi bars. Therefore, you understand that the extremum of HA-bars can vary in both directions compared to…