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Heikin-Ashi vs Candlesticks: Which One to Use in Forex Trading

Forex trading requires using different techniques. They help to bring your Forex strategies to a new level. Besides, FX traders must be well familiar with Forex charts to detect the most favorable market entry or exit points.

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While candlesticks are among the most popular patterns, the same charts can be used when applying a Heikin-Ashi technique that is also based on technical analysis. In this article, we will explain the difference between traditional candlestick Forex chart patterns and Heikin-Ashi.

Heikin-Ashi Meaning Explained in Forex trading

What is Heikin-Ashi and why should one ever use this TA technique? In Japanese, the term can be translated as “the average bar”. It is used much the same way as traditional candlesticks when trading currency pairs, crypto, commodities, stocks, and other assets.

The main benefit of this particular technique is the ability to make complex Forex charts more user-friendly. With Heikin-Ashi, beginner traders find it easier to read Forex charts. What’s more, they find it simpler to research and analyze different market trends.

Heikin-Ashi helps to cut out the trading noise significantly. In simpler words, one can sort out potentially profitable signals faster.

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Heikin-Ashi vs Traditional Candlesticks

The two concepts are visually the same. Heikin-Ashi is a smoother version of a traditional candlestick pattern. However, Heikin-Ashi uses modified candlestick formulas that help to create distinct visual trends that are much easier to read and recognize.

As stated earlier, Heikin-Ashi visually looks smoother. Traders can easily define a trend on a chart avoiding the market noise:

  • Uptrends remain green.
  • Downtrends remain red.

As you can see, there is nothing difficult in reading these types of charts. As a result, the process of identifying the asset strength becomes easier.

Another factor to take into account is that the asset price can be different on a Heikin-Ashi and candlestick chart. Candlesticks usually rely on the closing price. Oppositely, Heikin-Ashi uses the price average to display.

How to Trade with Heikin-Ashi

If you are looking for a simpler way to trade, Heikin-Ashi can be a good option thanks to its simplified visual interpretation. Here are a few factors you need to pay attention to:

  1. A strong uptrend is depicted with green candlesticks with zero lower wicks. It may be a signal for traders to exit their current short positions or increase their long positions.
  2. Small bodies usually indicate a trend change with wicks on top and bottom of a candlestick. It is a great tool for those who use conservative Forex strategies, as they can confirm the signal before entering with either a short or long position on the trend change.
  3. Red candles indicate the downtrend, which is a signal to exit a long position or increase a short position. If you see red candles with no upper wicks, it indicates the strength of the downtrend. So, those with short positions can wait for a chance to maximize their potential profit.

The key advantage of using Heikin-Ashi is the lower risk of generating false signals if compared with other technical indicators and methodologies. This is what makes the approach perfect for beginners.

Using Heikin-Ashi with other Technical Indicators

Just like any other technical indicator, Heikin-Ashi will help you make the most of it when used in conjunction with other tools, for example, support and resistance levels. Of course, none of the given techniques can guarantee 100% success. However, it will definitely improve your winning chances.

Meanwhile, you should also take into account some limitations brought by Heikin-Ashi. They include the following.

Conservative Forex Trading

The main downside is that Heikin-Ashi refers to a conservative way of trading. Some investors may consider it too careful. Besides, it requires more time to set up and develop a trade. So, if you are a scalper and high-frequency Forex trader, this strategy will make no sense.

Inaccuracy

The inaccurate price information is another obstacle some traders can bump into. As stated earlier, Heikin-Ashi can show a different asset price compared with traditional candlesticks. It does not take into account the actual currency prices and uses the average level instead.

Missed Price Gaps

Last but not least, Heikin-Ashi misses the price gap. Well, some traders consider it an advantage rather than a downside, especially when it comes to crypto trading.

The Bottom Line

Heikin-Ashi is a great technique for those who find traditional candlestick charts too difficult. It offers a smoother visual interpretation of typical patterns and suits the conservative way of Forex trading. Heikin-Ashi is used to indicate the trend and its strength as well as avoid market noise.

At the same time, it will never suit high-frequency traders and scalpers keeping in mind some extra limitations such as inaccurate price data and missed gaps.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.