Heiken-Ashi Candlesticks

Open  = (Open of previous bar + Close of previous bar) / 2
Close = (Open + High Low + Close) / 4
High  = maximum of High, Open, or Close
Low   = minimum of Low, Open, or Close

Heiken-Ashi candles are related to each other, because the close and open price of each candle should be calculated using the previous candle close and open price and also the high and low price of each candle is affected by the previous candle. So Heiken-Ashi chart is somehow like a moving average, but it is much more than that, because it gives more information.

Compared to the traditional Japanese candlestick charts the Heiken-Ashi charts are more easily read, provide clearer picture of the market and allow easy trend spotting. What is good about this method is that it’s included into the standard set of the MetaTrader 4 indicators. You can find it there under the Custom submenu.

Heikin-Ashi candlesticks must be used with caution with regards to the price as the body doesn’t necessarily sync up with the actual open/close. Unlike with regular candlesticks, a long wick shows more strength, whereas the same period on a standard chart might show a long body with little or no wick. Depending on the software or user preference, Heikin-Ashi may be used to chart the price (instead of line, bar, or candlestick), as an indicator overlaid on a regular chart, or an as indicator plotted on a separate window.

Why Heiken-Ashi is Better for Trading?

Dow Jones Industrial Average (January - June 2011) | Candlesticks

Dow Jones Industrial Average (January - June 2011) | Heiken-Ashi

As already mentioned, Heiken-Ashi eliminates the market noise and so it is much better for trading, both for reversal and also continuation signals to follow the trends.

Lets see how the Heiken-Ashi chart looks like and compare it with the candlestick chart above and beside. The upper part is candlestick chart and the lower part is Heiken-Ashi chart:

Different candles in a Heiken-Ashi chart

1. Bullish candles
   When the market is Bullish, Heiken-Ashi candles have big bodies and long upper shadows but no lower shadow. Look at the big uptrend in the chart. As you see almost all of the candles have big bodies, long upper shadows and no lower shadow.
2. Bearish candles
   When the market is Bearish, Heiken-Ashi candles have big bodies and long lower shadows but no upper shadow. Look at the big downtrend in the chart. As you see almost all of the candles have big bodies, long lower shadows and no upper shadow.
3. Reversal candles
   Reversal candles in the Heiken-Ashi charts look like Doji candlesticks. They have no or very small bodies, but long upper and lower shadows. Look at the reversal candles in the chart.

Here I will tell you how to use Heiken Ashi in trading the trends. You can see the example Heiken Ashi chart on the right. As you see, blue bodies are the uptrend candles and the red bodies are the downtrend candles. The upper shadows are usually absent on the downtrends and the lower shadows are absent when the trend is going up.

There are 5 Heiken Ashi scenarios for trends:

Heiken-Ashi Explained

1. Trend is normal.
   Rising blue bodies signal ascending trend and falling red bodies signal descending trend.
2. Trend is getting stronger.
   Rising longer blue bodies with no lower shadows for ascending trend; falling longer red bodies with no upper shadows for descending trend.
3. Trend is getting weaker.
   Candle bodies become shorter and for ascending trends lower shadows occur, for descending trends — upper shadows.
4. Trend consolidation.
   Small candle bodies with both upper and lower shadows.
5. Trend is changing/reverse.
   Very small candle body with long upper and lower shadows (not accurate signal). Changing in bar color mark a potential reverse.

In real practice, traders usually use other trend indicator for changing/reversal confirmation. Some trend indicators are Average Directional Index (ADX) and MACD. You can read it in Trend Indicators for more detail.

How can you use the Heiken-Ashi chart in your trades?

Heiken-Ashi is the main thing that some traders use. Heiken-Ashi is great for trading all currency pairs, especially volatile ones like GBPJPY and EURJPY. It is a strong and reliable indicator for intraday trading and scalping with small time frames like 15min, 5min and even 1min. On the other hand, it is also perfect to ride the big and continuous trends in the big time frames like daily and 4 hours.

Heiken-Ashi is also a good indicator and trading tool for new traders, especially those who have a lot of problem with controlling of their emotions. Heiken-Ashi helps you to be patient and take only the good and profitable trade setup. It eliminates the market noise and forms strong and profitable trade setups.

However, like any other indicator and trading system, you have to know how to use this indicator. To have the best result, I have combined Heiken-Ashi with some other critical and important indicators.

Metatrader 4 Indicators