Forex trading involves using different indicators to analyze the currency market before making a move. Some of the trading strategy indicators are complex, and they take too much time to read the charts and formulas. However, some technical indicators show traders the latest trends and potential currency reversals within the shortest time possible. One such strategy is the Heikin Ashi trading technique.
What Is Heikin Ashi Technique?
The Heikin-Ashi trading technique, developed in the 1700s by Munehisa Homma, represents and visualizes the market price data using candlestick charts. The charts, which are very similar to the traditional Japanese candlesticks, help traders forecast current and future price movements by identifying the market trend signals. Heikin is a Japanese name meaning balance or average, while Ashi means foot or bar.
Thus, the technique is simply an average bar that uses the currency average price. The technique is also a favorite with several traders because it filters out the market noise using average price data. Unlike the traditional candlesticks, Heikin Ashi bases its modified formula on moving averages while the traditional candlesticks base theirs on Open, High, Low, and Close prices.
Without market noise, traders can get more explicit illustrations of the direction and trends of the market, which in turn helps them determine price movement potential. The technical trading indicator assists the traders in identifying when to hold or pause a trade and tell if there is any likelihood of price reversal about to occur. With this knowledge, traders can make adjustments to make profits with their chosen positions or avoid loss-making trades.
Heikin Ashi Formula
Like the traditional Japanese candlestick formula, the Heikin Ashi technique formula has the same four parts. However, in Heikin Ashi, the calculation of the open and close prices is different. Heikin Ashi OPEN is the same value as the previous candle’s midpoint, meaning that every new candle in the technique starts from the middle of the last candle.
The Heikin Ashi CLOSE equals the average value that you get between open, close, high, and low. The HIGH is the period’s actual high (the highest value at the time), while the LOW is the absolute low (the lowest value). The formula looks like this:
|High = Maximum of High, Open, or Close (whichever is highest)|
|Low = Minimum of Low, Open, or Close (whichever is lowest)|
|Open = [Open (previous bar) + Close (previous bar)] /2|
|Close = (Open + High + Low + Close) / 4|
Pros and Cons of the Heikin Ashi Trading Technique
- Using the technique makes the signals more transparent because it filters market noise, reducing minor corrections. The quiet environment makes it easier for the traders to identify the market trends and movements and efficiently plan their entry and exit points.
- A simple one-minute strategy does not need any installation process making it easy to use for all forex traders irrespective of their trade levels.
- It is easily accessible, as you can find it on many forex trading platforms.
- The charts have high readability making interpretation of the patterns and identifying the market trends and movements much more straightforward than reading traditional candlesticks.
- Unlike some technical indicators, the Heikin Ashi is timeframe tolerant, and you use it hourly, daily, monthly, or yearly. Using bigger timeframes with the indicator provides you with more reliable information.
- You can also combine it easily with other technical indicators for stronger market movement signals and better decision-making.
- The Heikin Ashi technique does not provide forex traders with all the price information like actual open and close prices that they need for the most effective trading because they use averaged data.
- The technique bases its signals on the historical price movements and trends, leading to a time gap or time lag.
- Unlike many other technical indicators, Heikin Ashi lacks price gaps that help to analyze essential things such as trigger entries and price momentum. It also fails to show the position of stop-loss orders. However, traders can switch to traditional candlesticks temporarily to counter the price gap limitations.
Wrapping it up
One reason some traders chose the Heikin Ashi trading technique as their indicator is its simplicity. You do not need to be an expert in reading the candlestick chart, and even though it lacks all the additional details that some traders would rather have on their charts, it does a great job of identifying the market trends and movements. What makes it even appealing is that you can use it alongside other indicators for more robust signals.