Heiken Ashi: How to Use the Heiken Ashi Formula
Are you familiar with the Heiken Ashi formula and indicator when trading the financial markets? The following article will explore the Heiken Ashi formula and indicator, providing traders with information on what it is, how to use the Heiken Ashi indicator with MetaTrader 4 Supreme edition, a useful Heiken Ashi trading strategy, how to identify market trends using Heiken Ashi patterns, and more.
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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 the Heiken Ashi. The main advantage of Heiken Ashi, is that it allows you to spot trends more easily.
What is the Heiken Ashi Formula and Trading Strategy?
Heiken Ashi comes from the Japanese term 'Heikin Ashi', meaning average bar. The Heiken Ashi indicator modifies how price values are displayed on a chart. Before we look at the specifics of the Heiken Ashi formula, let's quickly recap the basics of Japanese candlesticks. A Japanese candlestick represents four pieces of price data in visual form, including:
Below is a free webinar recording hosted by expert trader Markus Gabel, which will give us more detailed insight.
This is useful because it allows you to see multiple pieces of information for each time period, plotted on your chart.
Depicted: MetaTrader 4 (MT4) Supreme Edition - Candlesticks - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
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 graph (featured above), we can see exactly how it works.
Basically, if the close is:
- Below the open, it shows a red candle
- Or if it is 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 that 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 the Heiken Ashi formula comes in. It uses modified candlesticks to solve this problem. Heiken Ashi candlesticks are similar to conventional ones, but rather than using opens, closes, highs and lows, 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 the Heiken Ashi Formula and Indicator with MetaTrader 4
The good news is that it's easy to use the 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
- Choose Heiken Ashi
And as with any other candlestick chart, you set the time frame 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 achieve this with a risk-free with demo trading account. And don't forget: The Heiken Ashi formula is just one of the comprehensive custom tools available via MetaTrader 4 Supreme Edition.
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Identifying Trends Using Heiken Ashi Patterns
As noted earlier, Heiken Ashi is intended to make trends easier to spot. One of the more common tools for seeing past volatility, is to apply a smoothing technique. After all, prices can whipsaw up and down, without necessarily trending in any particular 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.
Featured below is a daily candlestick chart for USD/JPY:
Depicted: MetaTrader 4 Supreme Edition - regular candlestick chart - USDJPY Daily Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
And here is a chart for the same period, but with Heiken Ashi candlesticks added on top:
Depicted: MetaTrader 4 Supreme Edition - Heiken Ashi candlesticks - USDJPY Daily Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
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 candles. Whereas, on Heiken Ashi, it displays 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, compared with the 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 muddled the picture. A Heiken Ashi trader looks for two particular signals, including a:
- A hollow (white in the charts above) candle without a lower shadow, which is a particularly bullish signal
- A 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 would 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 a 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 popular indicators in our education section. But in the meantime: let's not forget that the flexibility of MT4 means that you can also download custom indicators provided by other users. This enables you to use a wide variety of Heiken Ashi implementations.
For example, you can download the Heiken Ashi oscillator. The latter provides a separate chart beneath your regular one, which shows whether the Heiken Ashi candles are indicating a bullish or bearish signal. 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).
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.