by Eadfrith Scott
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 maximize 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. 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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