One of the more important techniques that technical traders need to master, is spotting market trends.
However, spotting a trend can be difficult because of market volatility.
Traders have developed a number of techniques to help see past short-term price fluctuations.
For example, they can use a smoothing technique.
There are a number of indicators designed to do this, including Heiken Ashi.
The main advantage of Heiken Ashi:
…is that it allows you to spot trends more easily.
What is Heiken Ashi trading strategy?
Heiken Ashi comes from the Japanese term Heikin Ashi, meaning average bar.
Heiken Ashi indicator modifies how price values are displayed on a chart.
Before we look at the specifics of Heiken Ashi trading system, let’s quickly recap the basics of Japanese candlesticks.
A Japanese candlestick represents four pieces of price data in visual form, including:
This is useful because it allows you to see multiple pieces of information for each time period, plotted on your chart.
The high is represented by the candlestick’s upper wick or shadow.
The low is represented by the lower wick or shadow.
The body of a candlestick represents the open and close.
Basically, if the close is:
- below the open, it shows a red candle
- above the open, it shows a blue candle.
Each candle provides information about the relationship between the open and close.
In other words:
…it shows whether the price finishes the period lower or higher than when it began.
A rudimentary line of thinking is that a filled candlestick (red in our chart above), is bearish.
The close being lower than the opening, suggests downward pressure on the price.
The same line of thinking suggests a hollow candlestick (blue in our chart above), is bullish.
The close being higher than the opening suggests upward pressure on the price.
Want to know the catch?
In periods of volatility, there are alternating bullish and bearish candles as the price oscillates.
The movement makes it difficult to see the trend.
This is where Heiken Ashi comes in.
It uses modified candlesticks to solve the problem.
Heiken Ashi candlesticks are similar to conventional ones:
…but rather than using open, close, high and low…
…they use average values for these four price metrics.
The Heiken Ashi formula used to derive these average values is as follows:
- open = (open of previous bar + close of previous bar)/2
- close = (open + high + low + close)/4
- high = the maximum value from the high, open or close of the current period
- low = the minimum value from the low, open or close of the current period.
The good news is that it’s easy to use Heiken Ashi strategy with MT4.
Especially since it’s available as a default custom indicator.
To use it, all you have to do is:
- select Insert and then Indicators
- select Custom from the list of indicators; and
- choose Heiken Ashi.
And as with any other candlestick chart, you set the timeframe to whatever you choose.
If you choose a daily chart, the Heiken Ashi values are defined for the open, close, high and low of the day.
If you choose an hourly chart, the Heiken Ashi values are defined for the open, close, high and low of each hour.
MT4’s default colours are:
- red for bear candlestick bodies and shadows of bear candlesticks
- white for bull candlestick bodies and shadows of bull candlesticks.
The best way to get comfortable using an indicator, is to take a hands-on approach and play around with it.