This article will explain what the Heiken Ashi daily strategy is, how it's used by professional traders, how to understand Heiken Ashi charts in order to inform your trading decisions, how to calculate the Heiken Ashi formula, and it will also provide you with some excellent Heiken Ashi Forex trading strategies.
What is the Heiken Ashi trading strategy?
- Heiken Ashi is trading strategy focused on the averages of candlesticks
- It involves using moving averages
- It informs on the best times to buy/sell
- It indicates when and where reversals and pauses may occur
'Heiken Ashi' is a Japanese word meaning 'average bars', and it is also a highly-used trading system whereby price information is averaged and then used to create candlestick charts, which are then used by professional traders for the purpose of removing what is known as 'market noise' (which is price data that can distort or affect the understanding of the market trend).
By using this strategy, it is expected that the trader will receive a far more accurate picture of the market, the trends within the market, and any potential movements in price.
Moreover, this strategy is regularly used by traders to establish the times when they should move on a trade (buy or sell), and the points when they should remain in the trade. This trading technique can also provide clues as to when reversals or pauses are likely to occur, which ideally will provide the trader with some time to adjust their position accordingly.
Arguably the main benefit and aspect of the Heiken Ashi strategy which sets it apart from other forms of Japanese candlestick techniques is the fact that it utilises moving averages, as opposed to high & low prices and opens & closes.
This means that this technique can provide traders with a clearer visual representation of the markets in regards to being able to identify and locate reversals and trends.
Heiken Ashi charts Vs traditional candlestick charts
- Heiken Ashi does not include market noise
- The technique is considered to be more reliable for making trading decisions
- Heiken Ashi chart bars start near to previous session candlesticks
In contrast to traditional candlestick charts that include the market noise which can distort the complexion of the markets, the Heiken Ashi charts do not include this data.
As a result, there will be more bars which represent the same colour (e.g. red for bearish, blue for bullish) and potentially greater distances/intervals between them.
This makes it much easier to figure out where the price movements have occurred, and therefore, and how to act upon them.
Heiken Ashi Charts differ to traditional candlestick charts in that the bars will not change colour for smaller moves, and will only change colour when a full change in direction has occurred, therefore making it slightly more reliable to base trading decisions upon.
Additionally, instead of the price starting on the level of the close from the previous trading window, Heiken Ashi charts tend to start and form at a point that is somewhere in the middle of the previous trading window's final candlestick.
Understanding The Bars
Broadly speaking, Heiken Ashi bars fall into three categories, and are as follows:
- Bullish Bars
- Indecision Bars
- Bearish Bars
For bullish bars, there will be a wick on the top of the bars, but there will be no wick on the bottom.
For indecision bars, the clue is in the name. Traders should disregard the colour of the bar and focus only on the wick of these bars. If there are wicks on both sides of the bar, it represents an indecision bar.
Bearish bars are the opposite of bullish bars, and therefore, the wick will be located at the bottom of the bar, instead of at the top.
The Heiken Ashi formula
The Heiken Ashi formula is calculated using data taken from open and closes from the previous trading period/window, together with open/close and high/low data retrieved from the current trading period/window.
The formula is as follows:
- Heiken Ashi Close = [Open(0) + High(0) + Low(0) +Close(0)] / 4
(values from the current window)
- Heiken Ashi Open = [HA Open(-1) + HA Close(-1)] / 2
(values from the previous window)
- Heiken Ashi High = Maximum [High(0), HA Open(0), HA Close(0)]
- Heiken Ashi Low = Minimum [Low(0), HA Open(0), HA Close(0)]
Heiken Ashi trading strategies
Locating strong movements
Typically, Heiken Ashi is used to locate points at which trends reverse and then become bearish or bullish (i.e. travelling in the opposite direction to where they were previously).
Due to this, as well as the fact that market noise has been filtered out of the charts, it means that the strategy is a lot more reliable as a result. Traders can therefore stick to the trend with the knowledge that they can trust the signal they are basing their trading decisions upon.
Moreover, traders who operate with mainly shorter positions will likely wish to exit their trades, whilst traders using longer positions will stick with their trades, or perhaps even add to them.
Small candles = Pauses & reversals
It is suggested that traders be wary when the 'small body' candles begin to emerge on their charts. Professional traders tend to use these candles in order to accurately assess the moments at which trends will pause or reverse, thereby enabling them to adjust their positions accordingly.
In addition, sometimes it is better to stick with the trend if it is indeed a pause, as this can occur often in certain markets, and these moments are where traders could mistakenly pull out of a trend, thereby losing an opportunity to be successful in a particular trade.
Searching for 'No Shadow' candlesticks
This is regarded as one of the best Heiken Ashi trading strategies in terms of performance. In this strategy, whenever there are instances of candlesticks with lower shadows, this is considered as a signal which suggests that there is a higher probability that a strong bullish trend is emerging. The larger the candles are, the stronger the trend is anticipated to be.
Put your knowledge of Heiken Ashi to the test!
Now that you understand the basics of Heiken Ashi, why not test your knowledge by practicing with a demo trading account with MTrading?
It's completely free to set up, and you can use real trading information whilst you trade in a virtual trading environment. But what does that mean?
Well, it's simple. You can trade in a virtual trading market, using virtual funds, but while still using real information from the live markets. It's your opportunity to hone your skills, and perfect your trading system before you make the decision to transition to the live markets.
Take full control of your trading experience, and only put your capital at risk when you are ready to make the switch!
Should you use Heiken Ashi or traditional candles?
This is entirely dependent on what type of trader you are (i.e. which techniques and systems you use, and what you pay attention to in the markets). For those who trade on short periods and enter and exit trades frequently, it is perhaps better to use more traditional Japanese candlesticks.
For long term traders, Heiken Ashi is arguably the better choice. Ideally, traders will use both types according to what is happening in the markets, in order to maximize their chances of success, and to minimize their risk.
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.