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.
We will cover using Heiken Ashi with MetaTrader 4 Supreme Edition, so download it now if you want to try it out yourself.
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:openclose highlow.
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.
In the MetaTrader 4 Supreme Edition image above, we can see exactly how it works.
Basically, if the close is:below the open, it shows a red candleabove 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.
How to use Heiken Ashi indicator with MetaTrader 4
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.
You can do this risk-free with our demo trading account.
And don't forget:
...Heiken Ashi is just one of the comprehensive custom tools available via MetaTrader 4 Supreme Edition.
Identifying trends using Heiken Ashi patterns
As noted earlier, Heiken Ashi is intended to make trends easier to spot.
And one of the more common tools for seeing past volatility, is to apply a smoothing technique.
Afterall, prices can whipsaw up and down, without necessarily trending in any one direction….
...or they can whipsaw up and down while trending in a certain direction.
Either way, these price fluctuations confuse the true character of the market.
The values used to construct Heiken Ashi candlesticks, are averages.
Averaging helps to smooth out short-term price variations.
Yet in theory, shouldn't all candlesticks help present a clearer picture of whether you are seeing a bullish or a bearish trend?
Let's compare a normal candlestick chart to a Heiken Ashi version.
Below is a daily candlestick chart for USD/JPY.
And here is a chart for the same period but with Heiken Ashi candlesticks added on top.
Notice how much more consistent the indications of bullishness and bearishness are, with Heiken Ashi.
For example, there was an upward trend in USD/JPY throughout May, which shows on:the regular candlestick chart, as a number of red bearish candleson Heiken Ashi, as far fewer bearish candles over the entire period i.e. a clearer trend.
It is a similar case for the downward trend that occurred in June.
The normal candlestick chart shows more than twice as many bullish candles, as Heiken Ashi.
This is particularly noticeable in the first half of June, when Heiken Ashi had only bearish candles.
In contrast, the regular chart had a couple of bullish candles in this stretch that muddle the picture.
A Heiken Ashi trader looks for two particular signals, including a:hollow (white in the charts above) candle without a lower shadow, which is a particularly bullish signal. filled (red in the charts above) candle without an upper shadow, which is a particularly bearish signal.
Notice how the downward periods in early February and in the first week of April, begin with candles that have no upper shadow.
Some traders use Heiken Ashi in conjunction with momentum indicators, to further confirm the trend.
For example, a Heiken Ashi moving average strategy might:
...wait for the candles to cross over a 50-period moving average...
...as an entry signal.
You enter once the next confirming candle occurs.
That being a bullish candle if you were waiting to buy after an upward crossover - and vice versa.
Similarly, you could use Ichimoku cloud.
Ichimoku cloud a.k.a Ichimoku Kinko Hyo, is a candlestick-based, trend-following system.
It was originally designed with regular candlesticks in mind, but some traders use Heiken Ashi candles instead.
This Ichimoku Heiken Ashi combination can:enhance your strategy; and make it easier to stick with the trend.
You can read more about Ichimoku Kinko Hyo and other indicators in our education section.
...let's not forget that the flexibility of MT4 means...
...you can also download custom indicators by other users.
This lets you use a wide variety of Heiken Ashi implementations.
For example, you can download the Heiken Ashi oscillator.
The latter gives a separate chart beneath your regular one, that shows whether the Heiken Ashi candles are indicating a bullish or bearish signal.
Last words on Heiken Ashi indicator and strategy in Forex trading
Because they are based on averaged values, Heiken Ashi charts are less affected by short-term volatility.
Many traders find that this makes it easier to discern the market's price action i.e follow trends.
If you want more information, please watch the video below.