This is the second article in our Heiken Ashi series. If you haven’t already we suggest that you check out the first article about the Heiken Ashi Indicator. In that article, we covered the background of the Heiken Ashi indicator, how it is calculated, and how it looks on a chart. Heiken Ashi is said to remove the “noise” from candlesticks and to behave much like the smoothing properties of a moving average. Traders use Heiken Ashi to determine the relative strength of a trend and to pinpoint key turning points in price behavior.
The Heiken Ashi indicator/application tool takes the basic candlestick information, the open, close, high, and low, and then “smoothes” the erratic portions of the chart in much the same fashion as would a moving average. Traders can then make a better-informed decision without the distractions caused by volatile price action.
How to Read a Heiken Ashi Chart
The Heiken Ashi application reconstructs candlesticks based on mathematically smoothing calculations that are fixed. The “red” bars signify that Sellers are dominating the market, and “white” bars suggest that Buyers are dominant. The Heiken Ashi bars are superimposed over the traditional candlesticks to give a complete presentation. Although it may take time to become familiar with the new chart presentation, one can immediately recognize the price momentum building on each of three downturns that tested the obvious support level at 82.54 for the “USD/JPY” 15-Minute chart.
The key points of reference are when color changes occur, signifying a shift in momentum between Buyers and Sellers. Trends are easier to follow and stick with, especially when another indicator is used for confirmation. The Heiken Ashi indicator works well when support and resistance levels are evident.
As with any technical indicator, a Heiken Ashi chart will never be 100% correct. False signals can occur, but the positive signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Heiken Ashi bars must be developed over time, and complementing the Heiken Ashi tool with another indicator is always recommended for further confirmation of potential trend changes.
In the next article on the Heiken Ashi indicator, we will put all of this information together to illustrate a simple trading system using Heiken Ashi analysis.
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