The Heikin Ashi candlestick and its purpose in forex trading

The Heikin Ashi candlestick and its purpose in Forex trading

Feb 20 • Forex Trading Articles • 516 Views • No Comments

We love to experiment as traders, if we didn’t have that capacity for intellectual curiosity and experimentation, then it’s highly unlikely we’d discover markets to invest in, or trade forex. Naturally, as part of our voyage of discovery, we begin to play around with all the component parts that make up what we’d describe as our “trading chart”. We’ll experiment with: time frames, indicators and patterns.

We should embrace that immersion into the deep world of trading methods; you have to go there to come back, without that full range of experiences we can’t possibly discover what works and more importantly what works for us. There are undoubtedly many trading methods that will reap rewards, if underpinned by extremely careful money management, ensuring you’re enjoying the tightest spreads available.

As we firstly discover and secondly evolve our trading, our attention immediately focuses on what price does, let’s refer to it as “the four Ws”: what, when, where, why? The representation of how price moves is generally observed through bars, lines, or candlesticks. Many traders settle on candlesticks or bars because (as opposed to line charts) they also represent what’s happening, or has recently happened in the markets we trade. However, there are subtleties within these three most used price graphics that are worthy of investigation to discover if they work for you. One is the use of Heikin-Ashi. Many experienced, successful traders and analysts refer to simplicity and aiming for stress free trading. As a simple, refined, visual, to aid stress free trading, the HA candlestick method should be considered.

 

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In Japanese, Heikin translates as “average” and “ashi” translates as “pace”, Heikin-Ashi therefore represents the average/pace of price movement. Heikin-Ashi (HA) Candlesticks do not behave and are not interpreted like standard candlesticks. Bullish or bearish reversal patterns generally containing 1-3 candlesticks are not identified. HA candlesticks should be used to identify trending periods, reversal points and standard technical analysis patterns.

Heikin-Ashi Candlesticks can provide traders with the opportunity to filter out noise, get ahead of potential reversals and to identify chart patterns, many aspects of classical technical analysis can be applied by using HA. Traders typically utilise Heikin-Ashi Candlesticks when identifying support and resistance, or to draw trend lines, or for measuring retracements, momentum oscillators and trend indicators also compliment the use of HA candles.

The HA candlesticks are calculated using the following formula:

Close = (open + high + low + close)/4.
High = maximum of high, open, or close (whichever is highest).
Low = minimum of low, open, or close (whichever is lowest).
Open = (open of previous bar + close of previous bar)/2.

With HA candlesticks the body of the candle does notalways correspond with the actual open or close, unlike with regular candlesticks. With HA the long shadow (wick) illustrates more strength, using standard chart candlesticks strength would be indicted by a long body with little or no shadow.

HA is preferred by many novice traders who want to filter out the complicated, translation technique required to read standard candlestick patterns. One of the main criticisms is that HA formations can lag behind the signals given out by standard candlesticks. However, the contrary position is that HA is less likely to encourage traders to exit trades too early or micro manage their trades, given the more smooth appearance and arguably consistent signals of the candles.

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