What does the Heikin Ashi strategy mean in Forex?

Forex traders use different charting techniques and indicators to construct reliable strategies that can lead to profits.

The Heikin-Ashi charts are a subset of candlestick charts that use different calculations when generating bars, which gives them a smoother appearance.

This difference has prompted many traders to come up with unique strategies. The strategies are geared specifically toward the use of Heikin-Ashi charts, which can make it easier for them to spot trends and have better visual clarity when applying indicators.

Core features of the Heikin-Ashi strategy

• Heikin Ashi strategy for Forex traders is based on Heikin Ashi charts that smooth out the price charts to make trend formations and price patterns easier to spot
• Heikin Ashi candlesticks use a combination of the open-close data from the previous period and the open-high-close-low data from the current period
• Doji is a candlestick pattern that is commonly used in the Forex Heikin Ashi strategy
• Long downward candles with small upper shadows show a strong selling pressure, while long upward candles with small or no lower shadows show a strong buying pressure
• A downside to using the Heikin-Ashi charts is that some price data can be lost in the smoothing

How does Heikin Ashi work in forex?

To get a clear picture of how traders can use the Heikin-Ashi charting technique in forex, we must clearly define what Heikin Ashi is and what indicators and strategies can be used to take advantage of this charting method.

Heikin-Ashi definition

Heikin-Ashi is a charting technique developed in Japan and translates to “average bar” in Japanese. As the translation suggests, the technique averages out the price movements of a traditional candlestick chart.

Heikin-Ashi differs from a typical candlestick chart in a few ways:

• Typical candlestick charts show the opening and closing prices as the tucker parts of the candle. The upper and lower shadows show the highs and lows. These represent the exact open, close, high and low prices without any alterations
• The Heikin-Ashi charts also show the open, close, high and low values. However, these values are not the exact values from the current trading session, but an average of current and prior timeframes, which makes the chart appear smoother

We can compare the price charts of the EUR/USD pair using standard candlesticks and the Heikin-Ashi chart below.

Standard candlestick chart:

Heikin-Ashi chart:

Heikin-Ashi formula and calculation

To calculate the Heikin-Ashi values, let’s look at the formula:

Heikin-Ashi Close = (Open0 + High0 + Low0 + Close0)/4

Heikin-Ashi Open = ((HA Open(-1) + HAI Close (-1))/2

Heikin-Ashi High = Max (High0, HA Open0, HA Close0)

Heikin-Ashi Low = Min (Low0, HA Open0, HA Close0)

Where:

Open0, High0, Low0, Close0 – Current period values

Open(-1), High(-1), Low(-1), Close(-1) – Prior period values

HA = Heikin-Ashi

To calculate Heikin-Ashi, follow these steps:

• Use a single period to calculate the open, high, low and close Heikin-Ashi values
• On the first candle is ready, it is possible to calculate the rest of the chart
• To find the next closing value, use the open, low, high, close values from that period
• To find the next open value, use the prior open and close values
• To find the next high, use the maximum value of the current period’s high, or the open/close values of the current period’s Heikin-Ashi
• To find the next low, use the maximum value of the current period’s low, or the open/close values of the current period’s Heikin-Ashi
• Keep in mind that the HA open and close refer to the calculation done on the 3rd and 4th steps

Heikin-Ashi and moving averages

A common strategy used with Heikin-Ashi charts is the 50 and 12-period simple moving averages. After applying the SMAs, here’s how the strategy works:

• Buy only when the HA has been green for a few consecutive candles, the HA is above the 50-period SMA and is directed upwards
• HA must be above the 12-period SMA with some space between the two
• Exit trades when the HA turns red
• You could also exit when the HA is below the 12-period SMA
• Short when the HA has been red for a few consecutive candles, the HA is below the SMA, which is directed downwards
• HA must be below the 12-period SMA with some space between the two
• Exit trades when the HA turns green
• You could also exit when the HA is above the 12-period SMA

Using doji with Heikin-Ashi charts

Doji is often used with Heikin-Ashi strategies. Doji is a small candlestick with open and close prices that are virtually equal. When using doji with Heikin-Ashi charts, a doji in a downward trend may not necessarily mean a bullish run. Doji can serve as a starting point for a trend reversal, which would be the required confirmation for traders.

Doji can serve an important function in determining when the buying/selling pressure is indecisive, because this can mark the start of a turnaround on the market. The effects of using doji are more easily identified on the Heikin-Ashi chart.

Heikin-Ashi reversals

Reversals on the Heikin-Ashi chart happen when the chart turns from red to green, or vice versa. Long-term reversals on HA are more reliable, as there is more price data to go by. The reversal patterns on HA are the same as the regular candlestick chart – double tops/bottoms, rounded bottoms, head and shoulders, etc.

Traders can use a moving average to exit when the price travels through the moving average in the opposite direction of the trade.

50-day moving averages are advisable for Heikin-Ashi reversals.

Pros and cons of the Heikin-Ashi strategy in forex

To understand whether the Heikin-Ashi technique is useful to them, traders should consider the advantages and disadvantages associated with using this charting method.

Pros

• Unlike most indicators and other charting techniques, traders don’t need to worry about the time periods used with Heikin-Ashi charts
• Using Heikin-Ashi slows down the market, which can eliminate the majority of false signals – leaving traders with more concrete data
• Less retracement and false signals means more straightforward trend formations on the chart
• Heikin-Ashi strategies can detect strong trends and traders need not worry about their validity

Cons

• Slowing down charts is only beneficial for trends. Traders run the risk of missing reversals or not identifying them in time
• Using Heikin-Ashi is less beneficial for short-term traders due to smoothed price bars

Example of Heikin-Ashi in forex trading

To better understand how the Heikin-Ashi chart works in practice, let’s look at the Heikin Ashi strategy example.

Heikin-Ashi and doji in conjunction provide reliable buy and sell signals. Traders can enter the market when doji signals a reversal and exit when the Heikin-Ashi changes color.

The low reached on 25 October, followed by a reversal caused doji to send buy signals, which was followed by a longer buying pressure. Heikin Ashi Forex strategy is generally used by swing and position traders.

FAQs on the Heikin-Ashi strategy in forex

How effective is Heikin-Ashi strategy in forex?

The Heikin Ashi strategy Forex traders use, can be useful for traders with a longer time frame in mind, as the technique smoothies out the chart, which makes it easier to spot trend formations and place other indicators more accurately.

Do Forex day traders use Heikin Ashi strategy?

Day traders and scalpers do not benefit from using the Heikin-Ashi technique, as they need to make decisions quickly and need raw price data, which is smoothed by the Heikin-Ashi charts. Some data can be lost due to this feature, which could be a dealbreaker for day traders. Heikin Ashi trading FX strategy is used by swing and position traders.

Is Heikin Ashi strategy any good?

Heikin-Ashi can be beneficial for traders that are less inclined to alter their decisions frequently in the short term and want an unobstructed view of the trends forming on the market, which Heikin-Ashi is designed to provide.