Heiken Ashi Smoothed Indicator
The Heiken Ashi smoothed indicator is a modified version of the regular Heiken Ashi candlestick charts. A product of Japan, the Heiken Ashi charts are ancient and were brought to the West only a few decades ago.
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Prior to this, the Heiken Ashi charts were primarily used by the rice traders in Japan to trade rice at the Dojima trading exchange, which is considered to be one of the world’s oldest commodity trading exchange ever set up.
The Heiken Ashi charts are one of the many different chart types that are in use today. One of the more commonly used chart type is the Candlestick chart which has now become the defacto chart type when it comes to analyzing the markets of any type.
The Heiken Ashi charts also display price but in a different way.
Compared to the regular chart types, these customized charts show a rather different way of viewing the markets.
As one might know, it is all about perception and the use of Heiken Ashi charts shows exactly this.
Heiken Ashi charts are quite popular among traders and there are many trading strategies build around this type of charts, but they are not that widely used in the mainstream markets.
But at the end, it is all about one’s preference of the markets and what type of charts one would like to use. While you could use the regular Heiken Ashi charts, the modified version is slightly different compared to the regular or the default Heiken Ashi charts that you would find.
In this article, we take a look at the Heiken Ashi smoothed indicator and we will show you how you can apply this indicator and configure it to your preference. However, before going further, it is best to refresh ourselves with how the Heiken Ashi chart plots prices and its uses in the markets when analyzing the price of a security.
What is the Heiken Ashi chart type?
The Heiken Ashi is a type of chart used to analyze the price of a security. It belongs to the family of candlestick charts and was imported to the West from Japan. Unlike the regular candlestick charts, the Heiken Ashi candlesticks are used to understand the price trends.
This is done due to the way the price is calculated and displayed on the chart. Unlike the regular candlestick chart which shows the open, high, low and close of the price during a session, the Heiken Ashi chart takes a different view.
The open, high, low and close on the Heiken Ashi chart is calculated as follows:
Close = Open + High + Low + Close/4 – This is nothing but the average price of the session
Open = Open + Close/2 + Close – This is the average of the open and closing prices and the closing price of the previous session
High = Maximum value of the High, Open, Close
Low = Minimum value of the Low, Open, Close
What you can see from the above is that the Heiken Ashi price chart gives attention to both the high and the low as well as the closing prices. This leads to a different perspective on how the price is displayed on the chart.
Below is an example of the regular Heiken Ashi chart.
Regular Heiken Ashi chart
Now a days, there are many trading and charting platforms that allow you to use the Heiken Ashi chart as a default chart type. The MT4 trading platform also offers the Heiken Ashi chart but as an indicator. You will need to make some adjustments to the indicator and the existing chart in order to show the prices correctly.
The main benefit of using the Heiken Ashi chart is in its simplicity. Traders often complain about how the markets can get noisy and this volatility is often seen with the regular candlestick charts showing the long upper and lower wicks.
Trading such market activity can also be a bit risky to say the least. This is where an unconventional chart type such as the Heiken Ashi chart can help traders to understand when the markets are in a trend and when they are ranging.
The Heiken Ashi chart can be applied to any market and to any time frame. It behaves the same way as you would expect a regular candlestick chart to work.
Difference between regular Heiken Ashi and the Smoothed Heiken Ashi chart
When we already know that the regular Heiken Ashi indicator is a great way to visually see the trends in the price of a security, you might be wondering what the Heiken Ashi smoothed indicator is all about.
As you might already know, traders often try to take any existing indicator, tweak it a bit and then call it the next best indicator. In such perspective, the Heiken Ashi smoothed indicator is no exception as well.
You might come across claims that the Heiken Ashi smoothed indicator is a better indicator type compared to the regular Heiken Ashi indicators. While you can typically use the regular Heiken Ashi chart all by itself, the Heiken Ashi smoothed indicator is used as an overalay on the regular candlestick chart.
By doing so, traders believe that this will give a better perspective of the markets. It is often marketed as an indicator that it is a better way to determine the trends in the markets. Interestingly, the Heiken Ashi smoothed indicator is used as a regular moving average indicator.
When price is trading above the Heiken Ashi indicator, it is said to be bullish and when price trades below the Heiken Ashi indicator, it is said to be bearish. Regardless, many traders still flock to the Heiken Ashi indicator in search of their Holy grail system.
But the main difference between the regular Heiken Ashi indicator and the Heiken Ashi smoothed indicator is that the second type of indicator plots the Heiken Ashi candlesticks as a moving average.
Thus, you can see both the regular candlestick or bar chart alongside the Heiken Ashi smoothed indicator. This is not possible if you use the regular Heiken Ashi chart that is offered as a default indicator.
In this case, the Heiken Ashi indicator plots directly on the chart and the price itself. Therefore, you need to make some adjustments to the chart to hide the background price bars or candlesticks.
Installing and using the Heiken Ashi smoothed indicator on MT4
The Heiken Ashi smoothed indicator can be installed as a you would install any regular indicator. Once you move the file into your MQL, indicators folder, you can refresh your list of indicators so that the trading platform picks up this new indicator.
From here on, simply drag and drop the indicator onto your charts. You will be presented with the configuration window. In the first tab, you can adjust the settings, while the colors tab can be used to adjust the colors of the Heiken Ashi smoothed indicator to your preference.
Heiken Ashi Smoothed Indicator MT4 Configuration
The settings for the smoothed Heiken Ashi indicator is very simple. You can set the values of the two moving averages that are used. The MA Method means the type of moving average you want to use. 2 indicates an exponential moving average, while 1 indicates a simple moving average.
While these two moving averages are the most commonly used, you can also use values of 3 and 4 which are the smoothed and linear weighted moving average. There is no need to choose these other two types of moving averages as they will further dilute the price action for you.
Once the indicator is configured, this is how it looks on your chart.
Heiken Ashi smoothed indicator
If you closely observe the above chart, you will see that the Heiken Ashi smoothed indicator is basically derived from the moving average values. Therefore, this explains why the Heiken Ashi smoothed indicator plots as a moving average rather than on price directly.
The general rule of thumb is that the markets are in an uptrend when the smoothed Heiken Ashi indicator is bullish or green, and the markets are in a downtrend when the smoothed Heiken Ashi indicator is bearish or red.
Buy and sell signals are generated based on this rather simple observation. You can see that the smoothed Heiken Ashi indicator shows the rising and falling trends with relative ease. But this is something that even moving average show as well, with the exception of the lines compared to the candles that are shown from the smoothed Heiken Ashi indicator.
Heiken Ashi Smoothed Indicator uses
Traders have developed various trading strategies built around the Heiken Ashi smoothed indicator. One of the major rules of using this indicator is in determining the trends in the markets.
It is a widely accepted principle that the trends change when you see two or more Heiken Ashi smoothed candlestick in the opposite direction or color. This is where traders either prepare to take an entry in the direction of the trend or the color or they can use this to adjust their stops.
As a result, you can expect the Heiken Ashi smoothed indicator to work as the same way of using two moving averages. Bullish and bearish signals are generated when the moving averages mark a golden cross (the short term moving average cutting across the long term moving average to the upside) or the death cross (the short term moving average cutting across the long term moving average to the downside).
But as with any trading strategy, using just one indicator will not give you the market perspective. This is the same case with the Heiken Ashi smoothed indicator as well. You will probably need to use other technical indicators such as oscillators to determine the momentum in the price of a security.
Another common use of the Heiken Ashi smoothed indicator is that traders use it as a way to place their stops.
In this method, after you are in the market with an open position, the stops are adjusted to a few pips above or below the highs and the lows of the Heiken Ashi smoothed indicator.
This is a great way to trade the markets especially when the trend is strong. Instead of the traditional fixed risk to reward ratio, with the use of trailing stops, you are able to capture the market profits that come your way.
However, to the downside, any adverse movements such as strong pin bars could abnormally cut you out of a position. By this time, you are left with small profits due to the abnormal price action while the trend resumes.
This could lead traders into taking new positions but at a bad time during the trend and could risk losing much more than what you initially gained.
At the end, it is up to the trader to see what works for them and what doesn’t.
Heiken Ashi smoothed indicator – Conclusion
In conclusion, the Heiken Ashi smoothed indicator is a versatile trading indicator that can be used to build a new trading strategy or it can also be used to compliment your existing trading strategy.
The key is to not use this indicator alongside other indicators which depict the same market information. Therefore, if you are using moving averages, then this indicator doesn’t give you any additional information.
However, you can look at replacing the moving averages with this indicator. The Heiken Ashi charts are a great way to get a different perspective of the markets. It can help you especially when the trends are strong and can also depict ranging markets when you can see the Heiken Ashi candlesticks changing color but price trading flat.
As with any trading indicator or strategy, it is strongly advised that you first use this indicator on a demo trading account before you apply it to the real markets. You should first gain familiarity of using the Heiken Ashi smoothed indicator before thinking about how you can use this indicator in the real trading account.