How to Use a Heikin-Ashi Chart?

What is the Heikin-Ashi indicator?

Heikin-Ashi translates as an “average bar” in Japanese. The formula averages out the price movements of a typical candlestick chart. Since Heikin-Ashi takes an average of the price movements, this chart type shows trends and trend reversals more clearly than standard candlestick charts.

Heikin-Ashi is useful for short-term trading strategies, whether day trading or swing trading. It can be used in any market, including Forex, stocks, commodities, and indices. This chart type and indicator helps traders to spot trends and stay in winning trades. However, before using it, traders must understand how it works, as averaging prices can also produce pitfalls.

Regular candlestick chart.png

Regular candlestick chart

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Heikin-Ashi Chart

In this article, we will discuss how to install Heikin-Ashi indicator in MetaTrader 5, how does Heikin-Ashi formula works, how to spot trend reversal and confirm trend momentum by using this indicator, and what are advantages and disadvantages of using Heikin-Ashi.

The Heikin-Ashi Formula

Let’s look at how the Heikin-Ashi (HA) chart is created. There are four separate calculations for the open, close, high, and low of each Heikin-Ashi candle.

The HA close is the average of the actual high, low, open, and close price for the period for the asset.

  • (High + Low + Open + Close) / 4

The HA open is the average of the prior Heikin-Ashi candle open and close.

  • (Prior HA Open + Prior HA Close) / 2

The HA candle high is the highest of the three price levels:

  • The current high price
  • The current HA open price
  • The current HA close price

The HA low is the lowest of the three price levels:

  • The current low price
  • The current HA open price
  • The current HA close price

How to set the Heikin-Ashi Indicator with MetaTrader 5

The good news is that it's easy to use the Heikin-Ashi with MT5. Especially since it's available as a default custom indicator. To use it, all you have to do the following steps:

  • select 'Insert' and then 'Indicators'
  • select 'Custom' from the list of indicators
  • choose Heikin-Ashi indicator

Heikin-Ashi indicator installation.jpg

Heikin-Ashi indicator installation

As with any other candlestick chart, you set the timeframe to whatever you choose. If you select a daily chart, the Heikin-Ashi values are defined for the day's open, close, high, and low. If you choose an hourly chart, the Heikin-Ashi values are defined for each hour's open, close, high, and low.

The best way to get comfortable using an indicator is to take a hands-on approach and practice using a demo trading account.

How to use the Heikin-Ashi indicator

While Heikin-Ashi is a chart type, it is also a technical indicator as it takes actual price levels of the underlying asset and then converts those prices based on the Heikin-Ashi formula.

Heikin-Ashi's price values will vary from those on a candlestick chart. The current price on a candlestick chart represents the most recent transaction or bid price, but the current price on a Heikin-Ashi chart is the current calculation of the HA close price. These numbers can sometimes be different.

Traders typically use Heikin-Ashi to smooth out price data, see trading patterns, and better define trends and reversals. However, the prices seen on the chart are often not tradable as the actual price of an asset could be different. It is a good idea to keep an eye on the actual price and the Heikin-Ashi indicator to get the best of both worlds: real-time data, confirmation, and analysis.

Heikin-Ashi Indicator Signals

The Heikin-Ashi technique reflects the trend prevailing in the market through indicator signals. There are two main aspects of the Heikin-Ashi indicator signals: trend strength and trend reversal.

Trend Strength

The first aspect is measuring the strength of the trend. To succeed, a trader should follow the trend to profit from it if the trend is strong. Hence, it is essential to define the trend direction correctly.

Bullish trend: Many consecutive blue candlesticks without lower shadows show a strong signal for an uptrend.

Bearish trend: Many consecutive red candlesticks without upper shadows show a strong downtrend signal.

_No lower shadow No upper shadow_.png

Trend Strength Signal

Chart patterns: Traders can use continuation chart patterns, such as wedges, flags, and triangles, with Heikin-Ashi indicator the same way they do with the regular candlestick chart. For example, if the candle breaks above the upper boundary of a fallen wedge on a bull market, the uptrend will likely persist. On the contrary, if candles drop below the bottom line of the rising wedge on a bear market, the price will continue to decline.

Breakout.png

Heikin-Ashi Continuation Pattern

Trend Reversal

A trend reversal signal helps determine the time to exit a previous trend-following trade and enter a new trend. A trader can avoid losses and profit by entering a new trade instead by identifying a reversal signal.

Doji candlestick: A candlestick with a small body and long shadows. It always signals the presence of market uncertainties. When it comes to the Heikin-Ashi, it signals a trend reversal.

Doji.png

Heikin-Ashi Doji Candle

Chart patterns: Traders can use reversal chart patterns, such as wedges, flags, and head and shoulders, with Heikin-Ashi indicator the same way they do with the regular candlestick chart. For example, if the candle breaks above the upper boundary of a fallen wedge on a bear market, the bear trend will likely finish. On the contrary, if candles drop below the bottom line of the rising wedge on a bull market, the price will reverse and decline.

Buy on breakout.png

Heikin-Ashi Reversal Pattern

Heikin-Ashi Strategies

Below are some Heikin-Ashi strategies that traders can use to benefit and increase their profits and margins.

Identify Candlesticks with No Shadows

Identifying candlesticks with no lower shadows is a credible signal that a strong bullish trend is starting. This strategy is one of the prime Heikin-Ashi strategies because of its record performance and success rate.

The greater the sequence of candlesticks with no shadows, the stronger the expected trend will be. Equally so, identifying candlesticks with no upper shadows, traders should expect a new stable downward bearish trend to continue.

Candlesticks with Small Bodies Indicate Trend Pauses or Reversals

The emergence of candles with small bodies signals traders a trend is about to pause or reverse. Hence, when traders notice this, they might close their old positions or open new positions in response to an ending trend.

However, traders should be cautious as the trend might be pausing and not necessarily reversing. In that case, a trader must find additional confirmation if a reversal is coming or just a trend pause.

Identify chart patterns

Chart patterns appearing using the Heikin-Ashi indicator work the same as on a regular candlestick chart. However, these patterns are typically considered reliable and rarely wrong on the Heikin-Ashi indicator.

Hence, traders can ride the trend until a reversal signal appears. With the emergence of a bullish trend, traders with short positions may exit, while those with long positions should increase and consolidate their positions.

Benefits of the Heikin-Ashi Technique

Accessibility

Heikin-Ashi is one of the most accessible indicators without installation and can be found on any trading platform.

High chart readability

It is easy to interpret as any trader can read the candlestick patterns. Heikin-Ashi candlesticks are better deciphered than traditional candlestick charts. Hence it's easier to identify market trends and patterns.

Reliability

Heikin-Ashi is a very reliable indicator, providing accurate results. It uses historical data, which is also quite dependable.

Filtering of market noise

The indicator filters out market noise and reduces minor corrections making the signals more transparent. The smoothing effect makes it easier for trend identification. Markets are full of noise nowadays; hence, with the help of noise reduction, the Heikin-Ashi technique helps traders plan their entry and exit points more efficiently.

Ability to combine with other indicators

The Heikin-Ashi indicator can be combined with other technical indicators to give even stronger signals on market movement.

Timeframe tolerant

The technique can be used on any time frame from hourly, daily, monthly, etc. However, bigger time frames are more reliable.

Limitations of the Heikin-Ashi Technique

Time gap

The use of historical prices where the base signals of the Heikin-Ashi indicator are based on means that there is a time lag involved.

Lack of price gaps

Most traders use price gaps to analyze price momentum, trigger entries, or position stop-loss orders. Although Heikin-Ashi lacks price gaps, traders can counter such a limitation during a trading session by temporarily switching to traditional candlesticks.

No full price information

Heikin-Ashi data is averaged. Hence, it does not show actual open and close prices. It may not work well for day traders or scalpers with more active securities.

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