Advantages of Using the Heiken Ashi Charts in Forex Trading


Heiken Ashi charts were originally invented in Japan, this name is translated from Japanese as ‘average bar’. They are somewhat similar to traditional candlesticks, but each of them is calculated by a different formula. Basically the Heiken Ashi candles open at the midpoint of the previous candlestick and their closing price is an average of the high, low, open and close price of a given currency pair.
Correctly identifying trends is one of the essential skills traders need to succeed in Forex. However, because of significant fluctuations in the market some of them, especially beginners, struggle to spot potential uptrends and downtrends. This is where Heiken Ashi comes into play. The main advantage of this indicator is that it makes identifying trends much easier.
For better visualization let us compare two charts. The first one is the weekly EUR/JPY chart with traditional candlesticks:
Heiken Ashi MT5The second chart displays EUR/JPY price action during the same period, but instead uses Heiken Ashi candlesticks:
Understanding Heiken Ashi candles
As we can see from those two charts, during this period EUR/JPY experienced both uptrends and later even lengthy downtrends. However, it seems clear that the Japanese candlesticks are more efficient at clearing market noise and make identification of trends much easier.
Another benefit of using Heiken Ashi candles is that it helps traders to measure the strength of the trend. During strong uptrends or downtrends, the closing price of the Japanese candlesticks have very little or no shadows.



Understanding Heiken Ashi Candles

Before we move on to the benefits and strategic applications of trading with Heiken Ashi, there is a basic question; what are Heiken Ashi candles? How are they constructed? Well, the essential formula for those Japanese candles is as follows:
  • Heiken Ashi Open = (Open previous candle + Close previous candle) / 2
  • Heiken Ashi Close = (Open + Close + High + Low) / 4 
  • Heiken Ashi Low = Min (Low, Open, Close)
  • Heiken Ashi High = Max (High, Open, Close)
So basically, the opening of the new Heiken Ashi price action is placed on the midpoint of the previous candle. For example, if one day USD/JPY opens at 105 and closes at 106, then for the next session the candle will open at 105.50. Now let us move on to the next essential formula for Heiken Ashi Close.
Here we can see that the closing mark is calculated as an average of the open, close, high and low price of a given currency pair. For example, suppose that USD/JPY opened at 105, had reached a daily high of 105.80, daily low of 104.90 and closed at 105.30. The sum of those 4 values is 421, by dividing this number to 4 we will get 105.25. Therefore the Heiken Ashi candlestick for this pair will close at 105.25. However, there is one final piece of the puzzle with low and high.
To complete the candlestick a trader must set low and high indicators. In case of low, he or she must choose between daily low, Heiken Ashi Open or Close, whichever is the lowest number. In the case of setting High, a trader must select either daily high, Heiken Ashi Open or Close, depending on which one represents the highest value.
The essence of the Heiken Ashi formula is that it aims to filter out all daily market noise and false signals and present a trader with a clear picture of the direction of the currency pairs.

Why use Heiken Ashi

As we have seen from the previous charts, it is usually much easier to identify the potential trends with Heiken Ashi candles, rather than more traditional candlesticks.

From the second chart, we can observe EUR/JPY trends during the last couple of years. By April 2017, the pair was trading near the 116 level and there are also 2 red candles, representing a decline. However, after that, the situation changed significantly, we have 5 quite long green Heiken Ashi candles, with the Euro appreciating and reaching as far as 123 mark.

This uptrend was interrupted 3 times, by small red candles, representing an indecision and consolidation. However, in each case, the Euro resumed its appreciation, until EUR/JPY reached a high watermark by the end of January 2018, when the pair was trading at 134 level.

This is the point when the trend began to change. Instead of 2 or 3 small red candles, after January 2018 we have 8 consecutive red candlesticks, which marked the beginning of a reversal. EUR/JPY entered a long term downward trend which might be still active today. Obviously it was not just the case of straight-line descriptions. In fact, as we can see from the second chart there were at least 4 occasions when Euro rallied and recovered some of its losses, however, after that the trend resumed.

Since during this period, the heavy majority of Heiken Ashi candlesticks were red, it points to the fact that the long term downtrend might be intact. Nowadays, EUR/JPY is back to 116-117 mark, which means that the pair has given up all of its gains since April 2017.

So as we can see, Heiken Ashi charts can be a very helpful tool for identifying trends, which is so necessary for successful trading. However, this is not the only benefit the Japanese candlesticks can have. Here not only the color but also the actual shape of candles can give us some clues about the strength of the trend.

Returning to the second EUR/JPY chart, we can notice that the red candles during the initial Euro uptrend, were very much Doji shaped small candles with large upper and lower lines. This can be interpreted as a sign of indecisions and it may not be considered as a strong sign of reversal. So, sure enough, the uptrend continued for several months.
The trend change took place in January 2018, however by that time the Heiken Ashi chart patterns have changed considerably in several ways. Instead of one or two red candles, we have 8 consecutive candlesticks.
Also, most of those red candles were much longer and without an upper shadow, which represents a strong selling pressure. We can also notice that when red candles became smaller with larger upper shadows, then the trend temporarily stopped, the pair recovered, then consolidated and resumed a downtrend.
So as we can see from the above example in many cases Heiken Ashi can be really helpful not just for the purpose of trend determination, but also for measuring its strength and by extension, detecting potential reversals.

Heiken Ashi Forex trading strategy

We have already discussed the basics and advantages of those Japanese candlesticks, however, the next obvious question is: how to use Heiken Ashi in Forex trading?
The basic Heiken Ashi strategy is as follows: a trader can check Heiken Ashi charts of several currency pairs and look for ones where there is a clear uptrend or downtrend. As mentioned before, for example, several green candles with little or no downward shadows can be a sign of an upward trend. Therefore in those cases, traders might consider opening a long position.
On the other hand, a number of red candles with little or no upward shadows can represent a form of downward trend. Consequently, traders might prefer opening a short position.
Finally, several short candles with large shadows on both sides can be a sign of indecision and consolidation. Therefore, this might be a good Heiken Ashi exit indicator, one where traders might consider closing trades and locking in payouts.

Limitations of Heiken Ashi

Despite all of its advantages, Heiken Ashi candlesticks do have their own limitations and imperfections. There can be several cases when the Japanese Candlesticks might be a bit late to show the trend changes or alternatively give out some confusing signals.
 To illustrate those arguments,s let us take a look at this daily USD/JPY chart:
How to use Heiken Ashi in Forex trading
As we can see from the chart above, from September 2019 until February 2020 the USD/JPY was in long term uptrend. This all changed at the end of the winter when the pair fell sharply, as a result, we have 12 consecutive long red candles. So far everything seems rather clear.
However, after that point, the candles start to get confusing. As we can see from the chart, the 12th red candlestick is followed by a relatively medium-sized green one and then consequently we have a small red candle with long shadows. So at this point, many traders would be confused. One green candlestick in isolation is hardly a sign of a major reversal. However, if a trader kept the sell position open, then he or she might be faced with some serious losses.
From 102 level the pair has risen to well above 110 mark. Obviously, by the time 3 long green candles have shown up in the chart, most people would have guessed that the trend was changing, however by that time USD/JPY has already reached 105 level, so it might have been late for many traders.
This example demonstrates that although Heiken Ashi candles are useful in many ways, they are not 100% infallible sources for technical analysis. In fact, those recent surprising fluctuations with USD/JPY took place during the time when COVID-19 concerns started to affect the market and also the US Federal Reserve made serious adjustments to its monetary policy. Therefore traders might be more successful if they combine their Heiken Ashi chart observations with the Fundamental analysis.
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Heiken Ashi Trading Strategy - Key Takeaways

  • The greatest advantage of using the Heiken Ashi strategy is that it makes it much easier to identify trends. The basic method is very simple, a number of Green candles grouped together can represent an uptrend, when several consecutive red lines are usually a sign of a downtrend. This simplicity is especially helpful to beginners, who might struggle with analyzing typical candlestick patterns.
 Heiken Ashi MT4
  • Heiken Ashi formula differs from traditional candlesticks in several ways. Its opening price is placed in the middle of the previous candle and the closing price is calculated as an average of open, close, high and low of a given currency pair.
  • Like any other Forex indicator, Heiken Ashi candlesticks do have their limitations. In some cases, they might be late showing a trend reversal, which can lead to some losses. Also, Heiken Ashi might not be the most useful tool for scalping and day trading.

FAQ: Heiken Ashi Trading Rules

How can a trader access Heiken Ashi candlesticks on the MT4 platform?

In order to access Heiken Ashi candlesticks on the MT4 platform, a trader must click on the ‘indicators’ menu, which is located on the upper part of platforms, signified by the green plus sign. On the menu, a user must select the ‘custom’ category and then click on ‘Heiken Ashi’. After that, the Japanese candlesticks will be displayed on the chart.
Alternatively, the trader can select this feature on the navigation box on the lower left part of the screen. Heiken Ashi candles are also available on the MT5 platforms.

What are signs of trend reversal with Heiken Ashi candlesticks?
When in the given trend the Heiken Ashi candlesticks are becoming smaller and have longer shadows this might point to either period of consolidation or reversal. Therefore traders might have to wait for more signs for better clarity. If this is followed by solid candles of the opposite color, then this might represent a trend change. Obviously none of those methods above can guarantee a 100% accuracy, so it might be preferable to combine this analysis with other fundamental and technical indicators.

What are some of the most common mistakes traders make when trading using Heiken Ashi?

The first very common mistake is to trade Japanese candlesticks with high leverage. As we discussed before very often they can predict the direction of trend quite accurately, however, if the trader uses 1:400 leverage, then he or she has a very small margin for error. In fact, if he or she opens a long position on a given currency pair, it only takes a 0.25% decline for the entire position to be wiped out. So this might not be advisable.
There are many traders who try to use scalping strategies with Heiken Ashi charts, however, there are a significant number of professionals who believe that because of their characteristics and imperfections, Heiken Ashi is potentially better to be used for Swing and long term trading.
Finally, there are some traders who are only focusing on Heiken Ashi charts and might neglect other technical and fundamental indicators. This can eventually lead to some serious mistakes and consequently to severe losses.

How useful are Heiken Ashi charts for Long term traders?

As we have seen from our 2nd and 3rd charts, there are many instances where Heiken Ashi candles can identify trends that could last for weeks or even months. Therefore Japanese candlesticks can be a handy tool for those traders with a larger time frame in mind. However, for long term trading, it might be even better to combine Heiken Ashi with 200-day moving averages, economic indicators, and other indicators.

When was Heiken Ashi invented and who was its author?

Homma Munehisa, an 18th-century Japanese rice merchant is widely regarded as an inventor of candlestick charts. During the ancient times and the middle ages, the rice and other grocery products were traded only on the spot price. However, during the second decade of the 18th century, a new futures market emerged in Japan for rice. Basically, people could buy coupons, which promised the delivery of rice in the future. As it is well known, this product was as popular in East Asia as Bread was in Europe and America.
Munehisa had his trading station in Osaka, however very soon he developed a network of informants in other cities, in order to get the latest prices from those markets. Later during his life he wrote three books on market psychology and trading strategies.
He recorded rice prices regularly, including the ones during the opening and closing of the market, as well as noting daily high and low prices. Later he started drawing bars, observing patterns and giving them names. Munehisa mentioned in his works that trader’s emotions have the largest effect on prices and consequently mastering the psychological side of the market is essential to success in trading.
Obviously such in-depth knowledge and experience gave Munehisa a significant advantage over other merchants. In fact, some sources believe that at one point Tokugawa Shogunate, an effective ruling dynasty of Japan, hired him as a financial adviser and eventually even granted him the title of Samurai.

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