Financial journalist Dan Valcu on his website says that in the summer of 2003, when studying the methodology of Ichimoku Kinko Hyo, he accidentally discovered diagrams with an unusual trend picture developed by an unknown stock trader.
Attempts to adapt this method to Japanese candles turned out to be so profitable that the program code of the indicator Heiken Ashi was developed prior to the presentation in the press.
In 2004, the article «Using The Heikin Ashi Technique» was published for the first time in the February issue of the journal «Technical Analysis of STOCKS & COMMODITIES». Later, the author continued exploiting Heiken Ashi for a long time, conducted training and wrote a number of articles (see interview).
The method and is now relevant and profitable, constantly there are new modifications of indicators appear, therefore.
let’s look at it in detail:
Special graphic bars of a Heiken Ashi are a special technique for visual estimation of trend parameters (availability, direction and strength) based on averaging the price fluctuations of the previous timeframe.
The calculation procedure changes a traditional type of price bars and creates «synthetic» candles at the expense of which the diagramme turns out more smoothed. Thus, speculative and irregular movements are removed from the usual price schedule, which is especially important for Forex as the most volatile of all financial markets.
All methods of technical analysis on the Heiken Ashi charts are also applied to «regular» candles (see Using Graphic Tools).
However, the color, shape and key points of such bars (max/min, open/close prices) do not correspond to real ones, therefore they cannot be used as parameters for opening a deal. They can only be used for analysis in order to obtain an optimal assessment of the situation on the market.
It is believed that traditional Japanese candles give a maximum of price information: prices max/min and open/close for the billing period.
At the same time, no calculations are made − only real data is displayed on the graph. Exactly ordinary Japanese candles are a source of information for the indicator Heiken Ashi, which displays bars of the standard type − with the body and shadow, and the color of the bar corresponds to the direction of the trend.
Key points when forming «synthetic» bars are calculated so:
It is assumed that in these formulas the concepts «Open», «High», «Low» and «Close» refer to the current bar; prefix «ha» − to the calculated data of Heiken Ashi.
Characteristic of the diagramme of Heiken Ashi is that on the sure ascending trend the majority of «bull» candles has no lower shadow; respectively − on the descending trend the majority of «bear» candles has no upper shadow. On diagrammes of Heiken Ashi there are no price gaps as the new candle always opens at the level of the middle previous (also see here).
What this means is:
The indicator «draws» bars with some deceleration (and trading signals are late too!), as the prices for creation of the current candle of Heiken Ashi depend on the prices of the previous candle.
This «built-in» lag simultaneously is the main advantage and the only drawback of the Heiken Ashi technique for different kinds of traders. This indicator warns against premature «false» inputs and «false» breakdown levels. Therefore, it is simply indispensable when working with volatile assets, for example, yen cross-pairs, such as EUR/JPY or GBP/JPY.
Today by the means of the graphics indicator, Heiken Ashi candles are integrated into all available systems of a technical expertise and are established according to the normal scheme. In the standard version only colour settings are offered.
The difference between the bars of the indicator and ordinary candles is visible visually: Heiken Ashi ignores small price movements and shows only the main trend. There are versions of the indicator with additional anti-aliasing parameters that make the graphical picture more user-friendly.
For the Heiken Ashi chart it is possible to use average methods of the candle analysis, but with some features − let’s look at it in detail.
The basic rules were offered still by the author of the first version of the Heiken Ashi indicator ("Heiken-Ashi: How to Trade without Candlestick Patterns"). So:
A few more standard schemes:
If conditions are observed for a strong trend, then we open a deal with StopLoss 1-2 points above/below the min/max of the previous candle, earlier opened transactions − hold and then move after the price.
If consolidation or reversal is formed − close the open position necessarily (manually − if it does not close on their own), and to open a new deal − do not hurry.
In this case, we necessarily analyze signals from additional filters (moving averages or oscillators − see Using Indicators), and when a candle of the opposite color appears, you can open the position in the opposite direction.
Market analysis using the Heiken Ashi chart is recommended for assets with stable volatility and trading periods of at least M30. Signals require mandatory confirmation from additional instruments, for currency assets stable strategies are obtained with classical oscillators, for example, Stochastic Oscillator.
General scheme: the first signal is obtained from Heiken Ashi candlestick patterns, and if at the same time the oscillator leaves the overbought/oversold zone, then the signal is considered reliable and a deal can be opened at the next bar. (Here is another strategy).
The Heiken Ashi indicator is effectively used in systems with a classic MACD − the fact that its signal is late makes the input more reliable (here video on strategy).
Complete with trend indicators the technique of Heiken Ashi allows to avoid premature closing of the transaction on rollbacks against a trend (see strategy with HMA).
Options of a strategy with Parabolic SAR are most popular:
Indicator is steady against short market fluctuations, perfectly see mid-term and long-term trends on the diagramme, but it is impossible to look for points of entry in the market only by means of Heiken Ashi technique, otherwise during the periods of a flat any transactions will give only «a stable loss».
We use Heiken Ashi only as a part of complex trade strategy.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester 3 for free.
In addition, you will receive 16 years of free historical data (easily downloadable straight from the software).
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