One of the major selling points for the forex trading market is its volatility. After all, when prices don’t move, there is little money to be made and certainly no excitement to be had. However, the multiple moves of a currency pair’s price action, particularly in the jittery market conditions experienced recently, can cause microtrends: small, generally unpredictable and unprofitable price movements that often last no more than three or four time periods. This “market noise” can clutter a chart and confuse the reader; using candlesticks can help filter out that noise, but an averaging indicator helps even more.

Heikin ashi (Japanese for “average bar”) is a lagging indicator designed to either overlay or replace the candlesticks or bars on a chart. It uses the average of previous bars to filter out the noise, creating a cleaner image that helps trends, consolidations, and support and resistance levels to stand out against the price action of a currency pair, and therefore making chart-reading if not trading easier overall.

A heikin ashi chart works the same, and is interpreted similarly, to a candlestick chart. The same chart formations, such as Elliott waves and Fibonacci retracements, are applicable, as well as candlestick arrangements such as bearish or bullish engulfing candles or doji.

There are five basic types of heikin ashi bars; they are:

• positive bars (usually coloured either hollow, white, or blue by the charting service), which indicate an uptrend;
• positive bars without lower “wicks” or tails, which indicate a strong uptrend (buy signal);
• doji, which are positive or negative bars with long wicks above and below, signifying market indecision and a possible trend reversal;
• negative bars (usually coloured black or red), which indicate a downtrend; and
• negative bars without upper wicks, which indicate a strong downtrend (sell signal).

Heikin ashi works well with a moving average envelope. Because each heikin ashi bar is an average of certain values from the previous time period’s prices, the “open” position on a heikin ashi bar (the high end of the solid part of the bar in a bear market, or the low end of a positive bar in a bull market) actually marks the midpoint of the previous bar. When the heikin ashi bar opens outside of the moving average envelope, it can be considered a strong entry signal, particularly if confirmed by an oscillator such as RSI or MACD.

As an example, compare the two charts. This is the hourly chart for the U.S. dollar/Mexican peso, with a typical candlestick chart on the top and a heikin ashi bar chart below, and a five-period moving average envelope atop.

Note how the heikin ashi smoothes the trendline, making it easier to spot trend reversals as they happen. Note also that the candlestick chart has multiple false exit points, in particular at the beginning of the downtrend on 18 January, that are averaged out on the heikin ashi chart. The entry points, as the bars open outside of the yellow moving average envelope, cannot be missed.

There is no “Holy Grail” of forex trading that will make every trade profitable, however, heikin ashi and other averaging indicators can assist traders in breaking the market noise barrier.