Forex Trading With Heiken Ashi Indicator
The Heiken Ashi indicator is an alternative to Japanese candlesticks to display the candlestick chart. Candlesticks of this indicator differ in appearance, drawing algorithm and more powerful signals of possible trend changes.
This tool became famous among traders in 2004, after its publication in a specialized trading magazine. Its work is based on the principle of averaging the price fluctuations of the previous time range. This tool works without any unnecessary market noise, highlights the trend well and significantly improves the trading signals.
The Heiken Ashi indicator algorithm calculates the main points using the following formulas:
- Open (opening price) is the arithmetic mean between the opening price and closing price of the previous candlestick.
- Close is the arithmetic mean between the opening, closing and closing prices of the previous candlestick.
- Low (local minimum) - is the arithmetic mean between the minimum price, opening price and closing price of the previous candlestick.
- High (local maximum) is the arithmetic mean between the maximum price, opening price and closing price of the previous candlestick.
Trading signals of Heiken Ashi
The most convenient periods for working with this indicator are in the timeframe range from M5 to H1. FinmaxFX would also like to remind you that the indicator allows you to better see the trend, determine its strength and direction. When considering its main signals, take into account that instead of white candlesticks "by default", black candlesticks are used in our description.
So, let us consider the five main signals of this tool:
- A black candle that has no shadow "against the trend" indicates a strong upward trend, the stability of this direction of the price. You can also not be afraid of any force majeure situations in the market in the near future.
- A black candle with a small shadow means that the trend is still stable, the market reversal is obviously not planned, but possible.
- A red candle with no shadows "against the trend" indicates a stable downward trend with a tendency to continue in the same direction.
- A red candlestick with a small shadow shows a waning downtrend with a possible market reversal. You need to be careful and watch the chart.
- Dodge candlesticks that appear on the chart are a signal of market reversal.
Shortcomings and useful properties of Heiken Ashi
The disadvantages of this trading instrument include the following factors:
- Like all indicators working on the principle of averaging, this instrument is also lagging behind. Therefore, it is undesirable to use it on timeframes older than H1 and younger than M5. Its lagging signals may be too "short" for trading outside the specified timeframe range.
- This indicator is not reliable enough for its use in trading as a separate system. Like other technical indicators, it gives good signals to open positions, but in pairs with other instruments.
In contrast to the above mentioned disadvantages, Heiken Ashi candlesticks have a number of useful advantages for the trader:
- By dampening the volatility of currency instruments, it helps transform sharp price jerks into a smooth and dynamic movement that is easy to read by a trader.
- It is equally well used in short and long term trading because it effectively "filters" low-frequency market fluctuations and false price movements, absorbing extraneous market noises.
- Its "lag" is ideal for trading cross rates that are characterized by high volatility.
- The indicator builds a candlestick chart, for the analysis of which you can use all technical tools, methods and techniques. The technical analysis of a Heiken Ashi chart is no different from that of a Japanese candlestick chart.
- Candlesticks of this tool give good trend visibility, which allows the trader to open good positions, staying in the main trend longer.
In addition to all these advantages, many traders like this tool, because its chart is more demonstrative and easy to read.
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