HeikinAshi is a Japanese trading indicator and a type of financial chart, the name of which translates as “medium bar”.
Heikin-Ashi charts are similar to candle charts, but differ in a smoother and smoother appearance, since they capture a range of price movements, rather than each individual price fluctuation, as traditional candles do.
The indicator was developed in the 1700s by Munehisa Homma, who is also the author of candle charts.
These charts are actively used by traders and investors to analyze and predict price movements.
Many traders use multifunctional variants of price charts in their practice, such as Japanese candlesticks and bars, which provide extensive information about the movement of quotations:
they create a visual picture of the market situation at each time interval; They allow you to predict price behavior in the near future based on the recognition of candlestick patterns (which also applies to bars).
The accuracy of the analysis and forecasts depends on various factors, including the level of market noise. In trading systems, participants tend to filter this noise using additional tools such as trend indicators. Romanian financial analyst Dan Valcu has proposed a new way to display quotation charts, which is initially able to eliminate high-frequency fluctuations in the market.
This alternative method is called Heiken Ashi and is distinguished by its method of constructing price bars. Its main feature is the use of prices not only for the current, but also for the previous trading period.
Visually, candlesticks on this indicator are almost identical to traditional Japanese ones:
they have a body limited by the calculated opening and closing prices (Open and Close);
they can be ascending (Open < Close), traditionally white, or descending (Open > Close), red;
they can have upper and lower shadows when the highs and lows of the candle go beyond the body
Building Heiken Ashi Candles
Heiken Ashi (HA) candlesticks are a method of visualizing price movement that uses averaged values to smooth out market noise. This approach allows traders to better assess the current market situation and identify trends. Below are the basic formulas used to build Heiken Ashi candles:
The closing price of the candle in the interval with the ordinal number i is equal to the Weighted Price:
Close_ha[i] = (Close[i] + Open[i] + High[i] + Low[i]) / 4.
The opening price is defined as the average price on the previous Heiken Ashi candle:
Open_ha[i] = (Open_ha[i-1] + Close_ha[i-1]) / 2.
The maximum represents the largest of the opening and closing prices of the current HA candle and the maximum of the current period of the candle chart:
High_ha[i] = Max(Open_ha[i], Close_ha[i], High[i]).
The minimum price is determined similarly, but uses the lowest value and minimum of the current period of the candlestick chart:
Low_ha[i] = Min(Open_ha[i], Close_ha[i], Low[i]).
As a result, the following conclusions can be drawn:
The sequence of Open prices in Heiken Ashi candles is equivalent to the average for two periods with a shift of one bar. This avoids the use of integral formulas, which in turn reduces the delay of the indicator in relation to the price chart.
The body of the Heiken Ashi candle reflects the difference between the real weighted price of the current period and the average price of the previous one. This parameter can be interpreted as the strength of the current price momentum.
Candle shadows are formed when the real highs (High) or lows (Low) exceed the calculated values.
This chart format allows you to quickly and effectively assess the market situation in just one glance.
How to interpret the Heiken Ashi chart
The analysis of the Heiken Ashi chart is based on the specifics of candle formation. Here are the key points for understanding their behavior:
- A continuous series of candlesticks in one direction indicates the presence of a stable trend.
- A decrease in the length of the candle bodies may indicate a decrease in the interest of market participants in the current movement, a weakening of the price impulse and an increase in the probability of correction.
- Candles that do not have shadows directed against the main body show a strong and well-defined tendency.
- The shadow of the candle, directed in the opposite direction from the body, indicates the growing interest of traders in opening positions against the current trend.
- Short candlesticks (so-called doji) with long shadows in both directions indicate a high probability of changing the direction of movement or going into a sideways movement (flat).
How to use the HeikenAshi indicator
The Heiken Ashi indicator is included in trading systems as an effective tool for trend analysis. However, its use has its own characteristics.
In particular, for MT4, which is widely used by many forex traders, and for MT5, which is gaining popularity in stock trading, traders have to resort to third-party indicators. The creator of the platform, MetaQuotes, does not yet consider it necessary to add Heiken Ashi as a separate type of graph or include it in a set of standard analysis tools.
In this terminal, Heiken Ashi candles are built on top of one of the standard price charts. This is not very convenient, since the imposition of candles (if Japanese candles are selected as a working option) complicates the perception of information.
There are several ways to improve the display quality:
In the color scheme settings, set the color of the price chart in the same way as the background. In this case, the trader will receive a clean Heiken Ashi chart in the quotation window. However, most of the standard indicators from the delivery package will not be able to work with it. Instead, you will have to download and connect (or write yourself) extended third-party versions that can work with the prices of this chart.
Build a bar price chart. It has almost no effect on the display of Heiken Ashi candlesticks and shows the characteristic prices of periods (Open, Close, High, Low).
Build a price chart in the form of a line (it is drawn at the closing prices of periods). This is convenient for those who build their trading systems with reference to the end of the previous bar and the beginning of the current one.
Place the Heiken Ashi chart at the bottom of the price chart. In this case, the trader gets access to all the information of the standard chart and the results of its processing by this indicator. Such versions of Heiken Ashi can also be found from third-party developers.
The situation with the indicator for QUIK, which has become the standard among Russian traders and investors, is even more complicated. The creator of the platform also does not respond to requests from users to include Heiken Ashi in a set of standard representations of the price chart. The built-in development tools do not allow the formation of candlestick graphic objects on the chart. Therefore, third-party indicators in Lua (the programming language for QUIK) often have rather strange shapes that are inconvenient to work with. The situation can be improved by indicators with alerts that signal significant changes in the behavior of the Heiken Ashi chart. However, such an analysis using machine methods is complex and, accordingly, difficult to implement.
Trading signals and recommendations for working with Heiken Ashi
The Heiken Ashi indicator is often considered as a tool for determining the trend, but experienced traders also use it to receive trading signals:
The first full-bodied candle (rising or falling) with a single shadow in the direction of movement. This may signal the beginning of a trend movement, both upward and downward. After the appearance of such a candle, traders are advised to look for entry points into the market in accordance with the direction indicated by the Heiken Ashi candle.
A candle with a long body and both shadows. This may be a signal of the beginning of a correction. In this case, it is recommended to close some of the positions opened in the direction of the trend, or move the Stop Loss order.
A doji candle with a short body and long shadows. This is considered a sign of the end of the trend or its reversal. Traders are advised to close open positions and look for entry points in the opposite direction.
Experienced traders rate the signals received with the help of Heiken Ashi as less reliable, which implies the need for confirmation from other sources.
A simple strategy is that a signal is considered valid if it is confirmed on at least the next two candlesticks. For example, a position is opened on the third full-bodied candle of the same color as the signal one. However, it should be borne in mind that due to the delay of the Heiken Ashi, the trader may miss a significant part of the movement.
In combination with Heiken Ashi, various indicators such as Stochastic or MACD oscillators are often used. In this case, the oscillators serve as a source of signals, and the Heiken Ashi candles confirm them. You can also use non-indicator systems such as Price Action or traditional candlestick analysis.
Interesting approaches:
Using the Heiken Ashi multi-time frame indicator, which allows you to recognize long-term trends in the older periods of the chart.
The use of candlesticks based on the data of not two, but a larger number of adjacent bars, which increases the lag, but improves the filtering ability.
The calculation of the prices of Heiken Ashi candlesticks is not based on the real prices of periods, but on their values, smoothed using moving averages.
In general, the Heiken Ashi chart is a useful tool for analyzing the market situation and forecasting price movements. It helps to smooth out market noise, is easy to use and is suitable even for novice traders.
