The word “Heiken Ashi” is a Japanese word that means an “average bar.” The indicator is popularly used for determining trends and future prices. It works best with candlestick charts, especially when trading securities. For instance, traders use the indicator as a guide to leave or continue trading, mostly based on the concept of the present trend.
Trend prediction is a wonderful market strategy that all traders use for effective trading. Predicting the trend gives you an upper hand in securing profits during a trade.
In this article, you will learn the five primary signals incorporated in Heiken-Ashi, as a technical indicator. Each signal plays a significant role in determining a trade’s success or misfortune. All traders try as much to limit loss during a trade: the Heiken-Ashi indicator not only gives you insight about the trade but also improves gain and limits loss.
To top it all, Heiken-Ashi is suitable for all trading markets. Are you a Forex, Stock, or day trader? There are more opportunities if you learn the Heiken-Ashi indicator, and more of these are analyzed here. In this article, you will learn about the Heiken-Ashi formula and strategy, how to go about it, and the disadvantages. The technical indicator is never suitable as a “self-made” indicator for any trade: it is best used as a combo with other technical indicators.
You will learn more about the Heiken-Ashi indicator, especially why you should not use the indicator alone.
What is the Heiken-Ashi indicator?
The Heiken-Ashi indicator is a specialized technique to filter off trading noise. Noises are information or actions that mislead or cause misconception of the actual data. Price fluctuations and corrections are among the factors contributing to the noise. Noise impacts are widely observed at the end of the trade. Traders often think they are on the right path; however, they realize they missed the road because of misconceptions, among other noise effects.
The technical indicator does not only reduce noise in trading; it also improves the authentication of values, well, when it is used alongside other indicators. Another value of the Heiken-Ashi indicator is its clear route when figuring out what drives the trend. Noise, as mentioned earlier, is among the factors that reduce clarity in detecting the reason a trend moves in a certain direction.
The technical indicator reduces noise and improves the background reasons for a trend’s action. In other words, when a trend moves (let’s say up), the Heiken-Ashi tells you why the trend is moving in that direction. You can easily predict the action since you know the trend (and the underlying reason).
By definition, the Heiken-Ashi indicator applies two-period averages in detecting trends and suggesting underlying actions and movements. The indicator is similar to candlestick charts; however, the indicator is without low/high & open/close candlesticks charts.
The Heiken-Ashi is preferable, interpretable, and easy to use since it incorporates a clear appearance (unlike candlesticks) – thus, price data, reversals, trends, and obscured gaps are easily interpreted. In other words, the Heiken-Ashi is popular and mostly known for analyzing trend direction better than the typical candlestick.
Understanding and applying Heiken-Ashi
Again, the Heiken-Ashi tells you more about the trend than the usual candlestick since it is easy to interpret. For instance, a strong uptrend occurs in the presence of hollow candles (white or green) without lower shadows. Hollow candles + (no) lower shadows = strong uptrend.
Conversely, a strong downtrend occurs in the presence of filled candles (black or red) without upper shadows. Filled candles + (no) upper shadows = strong downtrend.
Heiken-Ashi is a great indicator because it pays since colors are involved, unlike most indicators that use price/trend position to pinpoint the trend action. It is possible to misinterpret these indicators, especially if you use them daily. However, the Heiken-Ashi comes with a lesser burden during interpretation.
The Heiken-Ashi detects reversal as much as it detects trends. The most crucial thing is the identification of each – that is, reversal and trend – they are mostly identifiable. You may interpret reversal Heiken-Ashi candlesticks as the typical candlesticks since they are similar in action and are characterized by upper and lower shadows (long) with bodies (small). The combination of the long and small characters improves interpretation and judgment.
Although the Heiken-Ashi follows the typical candlesticks, no gaps are present in this indicator – this is because the previous candle is the main factor that is applied in calculating the current candle.
Another important thing about the Heiken-Ashi is the clear version of price pattern, trends, and reversal: they are easy to spot even in a skewed version of the chart; this is due to the presence of two periods that smoothen the price information.
Past price movements and changes in the chart are other cases worth consideration. Unlike the typical candlestick, the Heiken-Ashi improves technical interpretation because it uses an advanced method to address frequent changes in the candle chart and review past price movements easily. Wrong reading, identification, and interpretation reduce data authentication, damaging your profits. What is trade without profits? And this is why the Heiken-Ashi is worth studying. Now, let us consider the Heiken-Ashi formula.
Heiken Ashi Formula
The typical candlestick formula comprises open/close & low/high values in calculating the needful – although the Heiken-Ashi follows the same principle, it is highly modified and shows a more accessible way to figuring the values without difficulties. For example, the Heiken-Ashi used the modified COHL (close/open/high/low) instead of the typical OHLC (open/high/low/close) candles.
Using the Heiken-Ashi formula
- By applying the formula, you should create one Heiken-Ashi (HA) candle with a period. For instance, you can create the HA close price by applying the high/low/open/close candles. When creating the first HA open, the open and close are applied; the low is the first HA low, and the high is the first HA high.
- Now, you can apply the formulas to get the necessary values. For instance, you can deduce the value of HA candles/formula since you deduced the values of the first HA.
- Calculating the next “close” (continue computing) requires the “high/low/open/close” deduced from the previous period.
- Calculating the next “open” (continue computing) requires the “open/close” deduced previously.
- Calculating the next “high” (continue computing) requires the “present period’s HA close or open” or the “max of the present period’s low” deduced from the previous period.
- Do note that the HA’s “open and close” are not similar to the period’s “open and close,”, especially for the last two steps above.
Heiken Ashi Strategies
The strategy covers the interpretation of uptrend and downtrend: the Heiken-Ashi strategy is quite straightforward compared to other indicators because it involves colors in the charts. Other strategies include the identification of new trends or the reversal of existing trends. More techniques are linked to each strategy, which is worth studying. Here are the noteworthy Heiken-Ashi strategies.
The strong bullish or bearish strategy
When the Heiken Ashi changes from red (bearish) to green (bullish), it’s an indication that the price may turn higher. You might need to exit if you’re in a short position. On the off chance that you’re in a long position, you might increase your position.
You’ll see areas of a strong trend if you notice a ton of green shaved bottoms. Maintain long until the Heiken-Ashi candlestick changes from green to red. This is the most widely recognized procedure for the Heiken-Ashi strategy, for example, to recognize the start of a descending trend or uptrend. Signal marks of Heiken-Ashi are typically considered truly dependable and are seldom off-base.
Subsequently, traders continue productively because of the indicator’s credibility. With the rise of a bullish trend, traders with short positions might exit, while those with long positions should increment and merge their positions.
The trend reversal strategy
Candlesticks with little bodies showing upper and lower shadows demonstrated a potential trend inversion. Open a situation inverse the latest thing since the trend might be finishing. Remember that if the following candlestick changes, it doesn’t generally spell almost certain doom for a trend; it could be delayed.
The development of candles with little bodies signals traders ought to know about and pay heed to. These candles flag when a trend will delay or the opposite. Consequently, when traders notice this, they move to open new situations because of a closure trend.
Nonetheless, traders ought to be wary as the trend may be stopping and not turning around. Expertise is required concerning the investor to decide whether it is actually a reversal coming or simply a trend delay.
No shadow candlestick strategy
Distinguishing candlesticks without shadows is an entirely credible sign that a solid bullish trend is beginning. This methodology is one of the prime Heiken-Ashi techniques due to its record execution and achievement rate.
The more prominent the arrangement of candlesticks without any tails, the more grounded the normal trend will be. Similarly, traders should expect another stable descending bearish trend to proceed by recognizing candlesticks if there are not any upper shadows.
Best indicators to use with Heiken Ashi
One more way to deal with utilizing the Heiken-Ashi is to utilize specialized indicators like the moving average, Bollinger bonds, and the Relative Strength Index (RSI). Utilizing these markers is like how they are utilized in conventional candlesticks.
For instance, using the Bollinger bonds, the indicator is a 20-day simple moving average with 2 standard deviations. In this manner, the cost will stay in the lower band in a solid descending trend. Simultaneously, if it crosses the center line, it may be deciphered as the beginning of the reversal.
Combines with other indicators
The Heiken-Ashi indicator can be joined with other specialized indicators to give considerably more grounded signals on market development.
High outline comprehensibility
It is not difficult to decipher as any trader can peruse the indicator. Heiken-Ashi indicator are preferred unraveled over customary candlesticks; consequently, it’s simpler to recognize market patterns and developments.
Heiken-Ashi is possibly the most available indicator that requires no establishment and can be tracked down on any trading stage.
Heiken-Ashi is an entirely solid indicator, giving exact outcomes. It utilizes verifiable information, which
The method can be utilized at any time, from hourly, day to day, month to month, and so on. In any case, greater periods are more dependable.
The indicator sifts through market noise and diminishes little rectifications making the indicator more useful. The smoothing impact makes it simpler as a pattern distinguishing proof. Markets are brimming with noise these days; subsequently, with noise decrease, the Heiken-Ashi method assists traders with arranging their entry and exit positions effectively.
Delay is included since the Heiken-Ashi indicator depends on the historical prices as the sole signal.
Absence of price gaps
Most traders use price gaps to break down price force, trigger sections, or position stop-loss orders. Although Heiken-Ashi needs price gaps, investors can counter such restrictions during an exchanging meeting by exchanging briefly conventional candlesticks.
Incomplete price data
Heiken-Ashi information arrives at the midpoint; consequently, it does not show open and close prices. This may not function admirably for day investors with additional dynamic securities.
Key points summary
- The word “Heiken Ashi” is a Japanese word that means an “average bar.” The indicator is popularly used for determining trends and future prices.
- Heiken-Ashi indicator applies two-period averages in detecting trends and suggesting underlying actions and movements. The indicator is similar to candlestick charts; however, the indicator is without low/high & open/close candlesticks charts.
- A strong uptrend occurs in the presence of hollow candles (white or green) without lower shadows. Hollow candles + (no) lower shadows = strong uptrend.
- A strong downtrend occurs in the presence of filled candles (black or red) without upper shadows. Filled candles + (no) upper shadows = strong downtrend.
- The Heiken-Ashi detects reversal as much as it detects trends. The most crucial thing is the identification of each – that is, reversal and trend – they are mostly identifiable.
When the Heiken Ashi changes from red (bearish) to green (bullish), it’s an indication that the price may turn higher.