Candlestick evolved - Heiken Ashi. This candle smoothing indicator might be the most important contribution of Japanese technical traders to forex chart reading. Being able to read and analyse candlestick and chart patterns can be one of the most profitable tool for forex trader.
Anatomy of Heiken Ashi forex indicator
Indicator is formed similar to standard candlestick, however, it uses specific calculation method for candles to be considered bullish or bearish. By using previous open/close data and comparing it to current open /high / low /close Heikin Ashi indicator achieves smoothing effect on price noise. This results in new type of candle, that is able to better describe the trend, but it is also more reliable in predicting price reversal.
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Heiken Ashi calculation
Close of Heikin Ashi is calculated by averaging open, close, high and low for current candle
Heikin Ashi close =(Open(0) + High(0) + Low(0) + Close(0)) / 4
Current Heikin Ashi open is calculated by averaging previous Heikin candle open and close
Heikin Ashi open= (HA-Open(-1) + HA-Close(-1)) / 2
Current Heikin Ashi high is maximum reached in one of the three data sources: current high, current Heikin Ashi open and close.
Heikin Ashi high = Maximum of the High(0), HA-Open(0) or HA-Close(0)
Current Heikin Ashi low is minimum reached in one of the three data sources: Current low current Heikin Ashi open and close
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Using Heiken Ashi forex indicator
Deciding whether to exit or remain in opened position.
White candles with narrow bottom wick are sign of strong and healthy uptrend. If in buy position let your profits go, if however you are caught in sell position – exit immediately. White candles (bullish) are signalising uptrend.
Red candles with narrow upper wick, are sign of strong and healthy downtrend. If in sell position let your profits go, if you are caught in buy position – exit immediately.
Narrow candle of any color with tall upper and lower wick, might signalise trend reversal. Therefore, it is good point for entry and exit. It is also possible to consider next formed candle or look at other tools (such as Moving average or relative strength index) for clue.