What Does Heiken Ashi Mean in Forex Trading

Heiken Ashi method - candlestick and candles
Bill Cascade   NEW 07/06/2019 00:00:00 Guides

As you get further into your Forex trading journey, you’ll come across many terms and definitions. All traders will at some point in their trading time have to look up unfamiliar trading concepts. Nowhere is this perhaps more obvious than when it comes to term Heiken Ashi.

When it comes to strategies and techniques that the trading world has to offer, many can sound entirely alien to you at this point! Just recall when you first heard about the Lazy River Strategy.

Here we attempt to explain the fascinating technique Heiken Ashi in further detail. This involves breaking down its parts for you.

Simplifying Heiken Ashi

In Japanese, Heiken Ashi means average bar. When utilized on the trading market, it’s referred to as a technique which averages price data. This then creates what is known as a Japanese candlestick chart. The result is a method which works to filter out market noise.

 

Breaking Down the Heiken Ashi Technique

The Heiken Ashi method relies much on Heiken Ashi charts. These charts were developed in the 1700s by Munehisa Homma. The intentions were to share those characteristics most associated with standard candlestick charts.

Heiken Ashi - Candlestick chart

Homma’s charts differ slightly by way of the values used to create each candle. Whereas standard candlestick charts use high, low, open and close - Heiken Ashi charts instead take a more modified formula. This formula is further based on two-period averages.

The result of Heiken Ashi is to offer a smoother of appearances on the charts. Ultimately, this assures a table for traders whereby it’s easier to spot trends and reversals. But it can also highlight, besides this, more obscure gaps and varied price data.

 

This method is constructed based on the averages of over two periods. This equals a Heiken Ashi candle formed in every period.

The Heiken Ashi Formula

Heiken Ashi - Mathematic FormulaThe Heiken Ashi method uses a modified formula. You may notice it's similar in characteristics to that standard of candlesticks charts. Yet, it also utilizes a rather modified formula to that of the COHL. That is, the close-open-high-low formula:

Close = ¼  (Open + Close + Low + Close)

(The average price of the current bar)

Open= ½ ​(Open of prev. bar + Close of prev. bar)

(The midpoint of the previous bar)

High= max [High, Open, Close]

Low= min [Low, Open, Close]​

How to Calculate Using the Heiken Ashi Method

Heiken Ashi charts can be used to analyze and make trading decisions. They also help to keep you trading once a trend begins. Calculating using this method is simple and involves completing several essential steps:

  • Once you have the first Heiken Ashi calculated, you can then continue to compute those Heiken Ashi candles as per the formula
  • Proceed to calculate the next close, and use the open, high, low, and close from that period.
  • Proceed to calculate the next open, using the prior open and the prior close.
  • Attempt to calculate the next high. Do this by choosing the current periods maximum low. Or, select the current periods Heiken Ashi open or close.
  • Attempt to calculate the next low. Do this by selecting the current periods maximum low. Or, use the current periods Heiken Ashi open or close.

What Using Heiken Ashi Can Tell You

Now you're clearer on how to utilize the Heiken Ashi method in your trading activities. So, you may be wondering exactly what it can tell you?

Undeniably, Heiken Ashi makes it easier to spot the necessary information needed to trade better. This includes such areas as price patterns, trends, and reversal points. Heiken Ashi charts are said to be typically more natural to read and thus interpret. This is primarily due to those colored candles which are more consecutive. This allows traders to identify those past price movements easier.

Such charts do not show gaps in their data. This is because current candles on Heiken Ashi charts gain their calculations from the previous candle’s information.

A significant attraction for many traders is Heiken Ashi’s ability to reduce those false trading signals. This is particularly valuable for those times whereby the market is sideways or even choppy. Therefore, those in the know utilize this method to avoid placing their trades during such times.

How to Use Heiken Ashi

Now that you know the basics and reasoning behind Heiken Ashi, you may want to begin putting it to use.

The great thing about this method is that it can be applied to any market. You’ll likely find that most of the charting platforms you access when trading have Heiken Ashi chart options. It’s easy to use Heiken Ashi in your trading endeavors. All you need to do is utilize primary signals here.

These are five indicators to identify buying opportunities and trends:

  1. A strong uptrend is indicated by those green or hollow candles that have no lower shadows. This means you can let your profits ride.
  2. Those green or hollow candles imply an uptrend. So, when you spot them, you may want to add to your exit short positions and long positions.  
  3. A trend change is indicated by those candles showing a small body. This is encircled by upper and lower shadows. Here you can wait for confirmation before you go long or short. Those more about risk-taking in the trading arena may choose to buy or sell here, though.
  4. A downtrend is indicated when the red or filled candles are present. At this stage, you may want to look at adding to your exit long positions and short positions.
  5. Indicating a strong downtrend, you can stay short until there’s a change in trend. This is when filled or red candles have no higher shadows.

Such signals work to make the process of locating trends and trading opportunities easier. Many with years of trading expertise claim these signals make it easier to deal with than that of traditional candlesticks. They achieve this because there is no continual interruption from false signals. Therefore, trends are more likely to be spotted easier.

Who is the Heiken Ashi Method Best Suited to?

As with many trading methods and techniques, not all will be the most suitable for every trader. Therefore, it’s worth noting here that this Heiken Ashi technique can also be limited in a few aspects.

Initially, this is a method which is said to take longer to develop. Though, those such as swing traders, for example, won’t find this as a problem. Day traders, however, may find this more problematic. This is because they don’t have the time to let their trades play out as such. Thereby they find Heiken Ashi charts not as responsive enough to utilize.

Some traders don't like how the actual daily closing price is not disclosed on a Heiken Ashi chart. Also, another technical analysis element missing here is that there are no price gaps.

Yet, some don’t consider these concepts a limitation in their own trading endeavors. If so, then the simplistic and visually easy to access the Heiken Ashi method may just be the one for you.

Final Thoughts on Utilizing the Heiken Ashi Method

We always recommend attempting a new trading technique on a trial basis with a demo account. This is before you run with it in real time. This way you can gather valuable information about its advantages and any disadvantages. Thus, you do so without losing your money beforehand. Only when confident with the method, incorporate it into your live trading activity.

Though terms such as Heiken Ashi appear complicated, on further inspection they aren't! They do indeed make sense when you understand the history and theories behind them.

Overall, the Heiken Ashi method makes accessing charts easier, can help you to spot trends and reversals easier, has a simple to use formula, can be applied to any market and can tell you a lot about the trading information in front of you.
 

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