When we trade Forex using price action to establish trade setups, we often talk about "looking directly at price" to make trading decisions.
But technically, what we are really looking at is a graphical representation of price in the form of our candles or bars.
Different price patterns are identified by looking closely at the open, close, high, and low of candlesticks.
But have you ever thought about how those parameters are calculated? Are traditional candles or bars ideal representations of price? Or is there a different type of candlestick which might be more ideally suited to price action trading?
That is what Heikin-Ashi charts can bring to your trading. In this guide, we will discuss what Heikin-Ashi candlesticks are and how you can use them to enhance the price action trading methods you are already using.
What are Heikin-Ashi candlesticks?
Heikin-Ashi candlesticks can replace the traditional candles you are using now. Their open, high, low, and close are calculated differently.
The simplest way to explain the intent and value of these candlesticks is to look at their name.
From Japanese, Heikin-Ashi translates to “average bar.”
Much as moving averages are calculated by incorporating data from previous candlesticks, Heikin-Ashi candlesticks work the same way.
The result? You get a “smoothed-out” version of a chart which filters out some of the meaningless whipsaws which might otherwise mislead you while you are trading.
To draw a Heikin-Ashi version of a normal candlestick, a Forex trading platform does the following calculations:
HA Close is the average of the actual High, Low, Close, and Open.
HA Open is average of the previous candle's HA Close and HA Open.
HA High is the maximum of the current actual High, current HA Close, and current HA Open.
Ha Low is the minimum of the current actual Low, current HA Close, and current HA Open.
Or, if you are looking for Heikin-Ashi formula:
Most modern Forex trading platforms provide some option to display Heikin-Ashi charts. In MetaTrader 4 and MetaTrader 5, it is available in a form of a custom indicator bundled with the platform. It is called Heiken Ashi there and the candles are displayed on top of the normal chart — white & red in MT4 and blue & red in MT5 by default.
For the desktop version of cTrader, there are third-party custom indicators for Heikin-Ashi available from third-party sources. Web version of cTrader features a native Heikin-Ashi chart style with blue and red candles by default. NinjaTrader supports a Heikin-Ashi chart style with green and red candles by default. Simple trading platforms, like AGEA's Streamster usually do not support any form of Heikin-Ashi at all.
Heikin-Ashi candlesticks vs. traditional candlesticks: How they differ?
Compared to your traditional candlesticks, Heikin-Ashi candles:
Have a smooth appearance.
Feature less “back and forth” in terms of blue and red colours on up or down trends. Up trends tend to be solid blue and down trends tend to be solid red.
Use an average for the “current price,” rather than the actual current price (it is recommended that you display both).
Price action problems Heikin-Ashi charts help to solve
Here are some of the pain points in your trading which Heikin-Ashi may be able to help with:
Do whipsaws fake you out a lot, causing you to get out of trades which you should have stayed in? With the smoother appearance of Heikin-Ashi charts, a lot