USDOLLAR

Heiken Ashi

Heiken Ashi (HA), meaning “average bar” in Japanese is a charting technique that smooths out price action over time and makes the interpretation and following of trends easier. This is accomplished as HA bars incorporates preceding price action into each bar, effectively eliminating the erratic movement of standard Japanese candlesticks and locking in a directional bias into each bar much alike to a moving average.

HA bars are determined as follows;

haOpen                = (Open + Close)/2 of the previous HA Bar

haClose           = (Open + Close + High + Low)/4 of current period

haHigh            = max price reached during current period

haLow             = min price reached during current period

Where the Open, High, Low and Close referred to are of the current bar. The value of the open is always set as the midpoint of the body of the previous bar, whilst the close is the computed average of the current bar. The high and low are chosen as the highest- and lowest values of the set respectively. The difference between traditional Candlestick techniques and Heiken Ashi techniques are visibly clear by inspecting charts of each on the same instrument.

EUR/USD Daily Candlestick chart as at 2016/10/23

EUR/USD Daily Heiken Ashi chart as at 2016/10/23

If haClose is above haOpen then a bullish candle occurs (green candle), and if haClose is beneath haOpen then a bearish candle occurs (red candle). At first glance the Heiken Ashi chart looks more compact and smooth compared to the traditional Candlestick chart. Green candles display an uptrend and Red candles a downtrend. Gaps, which do not occur frequently in Forex but rather in other markets are eliminated as they are incorporated into the modified candle.

HA bar bodies illustrate the strength of the trend where longer bodies with shorter wicks signal strength in the trend and conversely smaller bodies with longer wicks signal weakness in the trend. In a bullish trend bars form that close upwards with wicks above it, as a series of higher highs and higher lows form. Emergence of bearish wicks signals possible trend reversal from the bullish trend. In a bearish trend bars form that close downwards with wicks below it, in a series of lower lows and lower highs. Emergence of bullish wicks signals possible trend reversals. Much alike to Candlesticks, Doji and spinning top patterns are strong signals of trend reversals.    

Due to the calculation of the open being based on previous candle price action makes HA a delayed indicator. The delayed property of the indicator adds to the significance of trend determination and reversal patterns, as a secondary confirmation thereof is already built into the HA bar, and will eliminate many false signals that may arise from standard Japanese candlesticks. The removal of these false signals will remove some errors that may occur from rushing into or out of the market.

HA is used in much the same manner as standard candlesticks with the added benefit of clearly defining trends and likewise to their candlestick counterparts should be used in tandem with other technical techniques to clearly establish key support and resistance levels and to portray the direction, momentum and speed of price action.

             

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