Chart Analysis and Trading With Heikin-Ashi Candlesticks Indicator

Heikin-Ashi technique

Heikin-Ashi is a charting technique that creates candlestick charts similar to the traditional Japanese candles. Charts constructed with the heikin-ashi method have “more balanced” candles and enable traders to identify trends more quickly.
Heikin-Ashi chart looks like standard candlestick chart, but with lots of noise removed and with much fewer irregularities, preventing traders from taking many of the false signals.
This is achieved using a different method of calculating and plotting candles on the chart.

How is heikin-ashi chart constructed

Each candlestick in the traditional candlestick chart is defined with the four different values: Open, Close, High and Low price. When the candle is drawn, next one is independent and has no any correlation with the previous candles.
Heikin-ashi technique calculates Open, Close, High and Low price for the current candle using some information from the previous candle: 

  • Close price is the average of open, close, high and low price of the current standard candle
  • Open price is the average of open and close from the previous heikin-ashi candle
  • High price is the highest value chosen from the high price of the current standard candle and open and close price of the current heikin-ashi candle.
  • Low price is the lowest value chosen from the low price of the current standard candle and open and close price of the current heikin-ashi candle

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haClose = (O+H+L+C)/4 
haOpen  = (haOpenPrevBar + haClosePrevBar) / 2 
haHigh  = Maximum(H, haOpen, haClose) 
haLow   = Minimum(L, haOpen, haClose) 

O, H, L, C = current candle open, high, low and close prices 
haClose, haOpen, haHigh, haLow = current heikin-ashi candle prices 
haOpenPrevBar, haClosePrevBar = previous heikin-ashi candle open 
and close prices
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How does heikin-ashi chart looks like

Candles in the heikin-ashi charts are related to each other. The first thing to notice is that each candle always opens in the middle of the previous candle body. High and low prices are depending on open price, so it makes them too dependant on the previous heikin-ashi candle.
This makes heikin-ashi chart a bit similar to a moving average.

Let’s see how the heikin-ashi chart looks like compared to the candlestick chart. Below are two EUR/USD charts for the same period, first shows standard Japanese candlestick chart and second is heiken-ashi chart for the same period.

EUR/USD Japanese Candles Chart
EUR/USD Japanese Candles Chart
EUR/USD heikin-ashi chart
EUR/USD heikin-ashi chart

How to read signals on heikin-ashi chart

There are five important patterns on the heikin-ashi chart that trader should be able to recognize:

  1. Normal trend
    • Uptrend is identified with raising white bodies
    • Downtrend is identified with falling red bodies
  2. Very strong trend
    • Uptrend is identified with long white bodies without down shadow
    • Downtrend is identified with long red bodies without upper shadow
  3. Trend weakening
    • Uptrend white bodies are shortening and lower shadows are emerging
    • Downtrend red bodies are shortening and upper shadows are emerging
  4. Consolidation
    • Smaller white bodies with both upper and lower shadows
    • Smaller red bodies with both upper and lower shadows
  5. Change of trend
    • Uptrend will probably when there is a very small white body with long upper and lower shadows
    • Downtrend will probably change when there is a very small red body with long upper and lower shadows

White and red bodies are used for drawing bullish and bearish candles in the heikin-ashi indicator that comes with Metatrader 4 trading platform. Depending on your platform or indicator settings, colors can be different. In the above description, white bodies represent a bullish trend, while red bodies represent a bearish trend.

Heikin-ashi signal examples

Normal uptrend, reversal, and strong downtrend:

Heikin-ashi patterns example: consolidation and strong downtrend
Heikin-ashi patterns example: consolidation and strong downtrend

Consolidation and strong down trend:

Heiken-ashi chart example: normal uptrend, reversal and strong downtrend:
Heiken-ashi chart example: normal uptrend, reversal, and strong downtrend:

Conclusion

The heikin-ashi makes charts more readable and trends more recognizable than the standard Japanese candlesticks.
The main drawback of this technique is the delay behind standard candlestick chart because heikin-ashi is sort of the moving average. The good part of the delay is that it eliminates lots of the false signals.
The heiken-ashi indicator is not the silver bullet and should be used in combination with some other indicators that will confirm traders decisions.


What’s next

In the following post, I will show how to set up and use the heikin-ashi indicator in the Metatrader 4 platform.

What is Forex?

Forex is the acronym for Foreign Exchange a marketplace where all currencies are traded. The trading in the Forex is comprised of speculating on, or investing in the current exchange rate or the current price of the currencies. Much like investors who trade shares but with currencies instead of shares. In essence investors of the foreign exchange currencies can try and make informed predictions about the fluctuations in price of a foreign currency. And in turn make a profit much like investors trading shares.

The daily turnover for the Forex market comes from two sources. Foreign Trade which is the buying and selling of products in foreign countries. And the conversion profits of converting one currency to another all this accounts for 5% of the total turnover of the Forex market. Speculation accounts for 95% of the total turnover of the Forex market with the most trading being done in the most liquid currency pairs. Examples would be the US Dollar, Euro, British Pound and Canadian Dollar along with many others. These currencies are often referred to as “the Major s” and account for 85% of the daily Forex trading.

The Forex market is active 24 hours a day, 5 days a week and is accessible to anyone anywhere  (even to you at home). With an average turnover of US$4 trillion Forex is the most traded financial market in the world. And unlike other financial markets in Forex investors can respond to the fluctuating prices of currency immediately. No matter whether it is day or night this is a big reason why the Forex market is the most traded market in the world and active since the Forex marketing became publically accessible.

The fundamentals of Forex are basic, you try to buy a currency at its lowest and try to sell when it’s at its highest. The margin in-between the two prices is your profit or loss depending on how the day went. There is also another method used in the Forex referred to as “short selling”. In which you make a profit by selling a currency at its nearest high and buying it when it’s low. But in a short term of time this will make you less of a profit. But if you make a large number of trades in a short period of time using this method you can make larger profits. Perfecting the art of successfully trading in the Forex takes time and practice. As it’s about learning about all of the factors that affect the price of a currency and what fluctuations they can have in the value of the said currency. This can include a host of things to take into account from national economic outlook to political change or unfortunate disaster. All can have a drastic effect on the value of a currency as a Forex trader it is essential to be able to read these as indications to the fluctuation in the value of a currency.

Thus Forex is considered a high risk for private investors as the level of unpredictability of a currency make Forex trading not for the light hearted. But instead for someone with both the skills and tools to connect the dots. Having said that the Forex is now more public than ever as investors can come in with small amounts of money and short sell to make profits. This has led a lot of people to venture into the world of Forex trading as accessing the Forex market is now mostly done through software. This means unlike before when people had to go through many brokers or financial institutions the process of Forex trading is direct. However if you wish you can trade through a broker as they will help you execute trades and give you advice and tips. Option worth considering when foraying into the Forex market for the first time.

So to sum up Forex is the trading of currencies much like with shares in which investors try and sell at high and buy at low. Either by going long and buying a currency at low and waiting until it rises in value over a some period of time. Or, by short selling and selling a currency at the current market and hoping to buy it later at low.