Heiken Ashi: How to Use the Heiken Ashi Formula

Are you familiar with the Heikin Ashi formula and indicator when trading the financial markets? The following article will explore the Heikin Ashi formula and indicator, providing traders with information on what it is, how to use the Heikin Ashi indicator with MetaTrader 4 Supreme edition, a useful Heikin Ashi trading strategy, how to identify market trends using Heikin Ashi patterns, and more.

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 Heikin Ashi. The main advantage of Heikin Ashi, is that it allows you to spot trends more easily.

Heikin Ashi: An Introduction

Heikin Ashi comes from the Japanese term 'Heikin Ashi', meaning average bar. The Heikin Ashi indicator modifies how price values are displayed on a chart. Before we look at the specifics of the Heikin Ashi formula, let's quickly recap the basics of Japanese candlesticks. A Japanese candlestick represents four pieces of price data in visual form, including:

• Open
• Close
• High
• Low

This is useful because it allows you to see multiple pieces of information for each time period, plotted on your chart.

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.

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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 Heikin Ashi formula comes in. It uses modified candlesticks to solve this problem. Heikin 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 Heikin 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

Heikin Ashi: Formula and MetaTrader Indicator 

The good news is that it's easy to use the Heikin 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 Heikin Ashi

And as with any other candlestick chart, you set the time frame to whatever you choose. If you choose a daily chart, the Heikin Ashi values are defined for the open, close, high and low of the day. If you choose an hourly chart, the Heikin 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 Heikin Ashi formula is just one of the comprehensive custom tools available via MetaTrader 4 Supreme Edition.

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Heikin Ashi Strategy: Trends and Patterns

As noted earlier, Heikin 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 Heikin 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 Heikin Ashi version.

Featured below is a daily candlestick chart for USD/JPY:

And here is a chart for the same period, but with Heikin Ashi candlesticks added on top:

Notice how much more consistent the indications of bullishness and bearishness are, with Heikin 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 Heikin 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 Heikin Ashi. This is particularly noticeable in the first half of June, when Heikin Ashi had only bearish candles. In contrast, the regular chart had a couple of bullish candles in this stretch that muddled the picture. A Heikin 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 Heikin Ashi in conjunction with momentum indicators, to further confirm the trend. For example, a Heikin 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 Heikin Ashi candles instead.

This Ichimoku Heikin 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 Heikin Ashi implementations.

For example, you can download the Heikin Ashi oscillator. The latter provides a separate chart beneath your regular one, which shows whether the Heikin Ashi candles are indicating a bullish or bearish signal. Because they are based on averaged values, Heikin 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).

Interested in bolstering your trading skills further? Why not tune in to one of our free webinars and discover new strategies and trends with our in house experts! Click the banner below for more:

Other articles you may find interesting:

• How to Use the Momentum Indicator
• Overview of the Best MT5 Indicators
• How To Use the Ichimoku Kinko Hyo Indicator in MetaTrader 4

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