How To Use Heiken Ashi Candles

by Eadfrith Scott
(London)

There is a well-worn phrase you hear all the
time in Forex trading which is “The Trend Is
Your Friend”. Now as nice as that sounds to
say, what does it actually mean? Well, simply
put if you can trade with strong up and/or
down trends in the market and let your profits
accumulate while possibly adding additional
positions as the trend unfolds, you stand to
make the most out of a long trend. In this
article we will look at the Heiken Ashi
indicator which comes as standard on most Meta
Trader 4 platforms and how it can help you
identify a) when a trend is beginning and b)
when it is running out of steam.

The term Heiken Ashi means “average bar” in
Japanese and it is basically a slightly
different way of drawing a candlestick chart.
Recall that a standard candle is drawn based
on the open price, the close price and the
high and low prices for that time period. By
contrast the Heiken Ashi candles are drawn
based on averages as follows.

Heiken Ashi Open is the midpoint of the
previous bar ((open previous + close previous
/ 2))

Heiken Ashi Close is the average price of the
current bar ((open + close + high + low)/4)

Heiken Ashi High is the highest value out of
the current high, the HA open and the HA close)

Heiken Ashi Low is the lowest value out of the
current low, the HA open and the HA close.

The resulting candles have the same
characteristics as standard candles sticks
(bodies with upper and lower wicks) but the
way they are calculated means you can read
more in to them in terms of what the trend is
doing. Some traders like to say they eliminate
“noise” which makes decisions on whether or
not to enter and close a trade simpler. The
way to look at the different Heiken Ashi
candle shapes is as follows:

1) Bullish candle with an upper wick indicates
a strong up trend
2) Bearish candle with a lower wick indicates
a strong down trend
3) Bullish candle with a lower wick indicates
a weak up trend
4) Bearish candle with an upper wick indicates
a weak down trend.
5) A candle shorter than the previous candle
indicates a slow down in the trend
6) A short candle with upper and lower wicks
indicates a change in the trend.

Some traders use the Heiken Ashi candles for
entry and exit signals, whereas others may
have a different system for entering a trade
and just use the Heiken Ashi indicator to let
them know when that trade is running out of steam.

One method of trading these candles is to wait
for a change of colour. This indicates that a
change in trend has taken place. You would
then stay in the trade until a change of
colour in the opposite direction. I don’t
personally advocate this as I think by
employing some other analysis you can reduce
the number of losing trades. There are lots of
ways to do this. Good old price action is
obviously a useful place to start.

If I am using the HA candles, what I typically
do is plot the candles on my chart at the same
time as the regular candlesticks. This allows
me to follow the price action and the HA trend
at the same time. If the current traditional
candles marry up to the notion that the trend
is changing, that would add weight to a
trading decision.

Support and resistance areas are also a good
help in your analysis – you would not trade
into supply or demand levels just because the
HA candle told you the trend was changing. It
is important to remember that Heiken Ashi
candles, just like any other indicator lag the
price action so you must not use them as a
means to bypass your technical analysis of the
actual price action candles.

Some traders I know add an oscillator onto
their chart to help refine entries. For
example you could add the Stochastic
Oscillator and if you get an overbought
reading in a downtrend, it could indicate a
stronger sell signal.

Other traders just open trades based on
another signal all together and only when the
trade is open do they look at the Heiken Ashi
candles. Doing this can help them maximise
profits by not exiting a trade too early. So
for example they might open a short trade and
after a few hours see the price action
stalling. Now normally this might make them
take profits; however the Heiken Ashi candles
may still indicate a strong down trend by
plotting bearish candles. So instead of taking
profits they may just let the trade continue
or even add additional positions.

Adding more positions is a fantastic way to
take advantage of a long trend that develops
and the Heiken Ashi candles can really help
you do this. This is perhaps their greatest
asset if used with proper money management.
Obviously not every trend lasts a long time
but if you can catch the long, several hundred
pip moves (or most of them) and have multiple
positions opened along the way you can really
start to see you balance increasing.

In my free weekly newsletter I talk about some
specific strategies that work really well with
Heiken Ashi Candlesticks. You can sign up to
receive this in the box above.

Hopefully this article has given you a useful
introduction into Heiken Ashi candles and how
they can help you make friends with the trend.

Eadfrith Scott writes on all aspects of Forex
trading at profit-with-forex.com.
He covers introductory topics like how to
start Forex trading all the way to using
complex indicators and sophisticated technical
analysis.

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