TRADING THE HEIKIN ASHI WAY

The Heikin Ashi technique for construction of a price chart was first introduced in 2004 by Dan Valcu in his Journal “Technical Analysis of Stocks & Commodities”. The literal translation of the Japanese word “heikin” means “balance” or “middle” and “ashi” literally means “band” or “sometimes”. The candles which are produced by using this technique are pretty different from your usual forex candlesticks.

Objective – the objective of the Heikin Ashi technique is to simplify the way that the graphics are perceived and to smooth out any irregularities which may appear as gaps, strong bullish or bearish candles for example. (Fig. 1)

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It is possible to obtain the pure form of Heikin Ashi candles only if you have a clear line display price chart. If, on the other hand, the candles are displayed alongside Japanese candlesticks it will make the chart very difficult to read. (Fig. 2)

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The Heikin Ashi Formula used in constructing an indicator

When constructing an indicator it is important to use the modified opening price, the high, the low of the bar as well as the closing price, we shall call this Open, High, Low, Close – you calculate the modified prices as follows:

HaClose = (O + H + L + C) / 4
HaOpen = (haOpen [previous bar] + haClose [previous bar]) / 2
HaHigh = the maximum value (H, haOpen, haClose)
HaLow = the maximum value (L, haOpen, haClose)

O H L C indicates the current bar price respectively – open, high, low, close.

The Heikin Ashi indicator features

If there is a strong upward trend there will be no lower shadows in the candles. If you go back to the formula you’ll realize the reasons for this – using the Heikin Ashi technique (HA) the opening price of the current bar becomes the minimum at the bar and is always found in the middle of the previous bar body HA, although the actual real minimum for this trading period is always found above haOpen. This works to the contrary when there is a