Introduction to the Modified Heiken Ashi Indicator
The word “Heiken Ashi” literally means “average bars” when translated from Japanese.
The Modified Heiken Ashi indicator is appropriately named as such as it modifies price candles based on the average price movements in order identify the direction of the short-term momentum.
What is the Modified Heiken Ashi Indicator?
The Modified Heiken Ashi indicator is a custom momentum technical indicator which is provides momentum direction and reversal indications by modifying the original open and close of a regular Japanese candlestick.
How the Modified Heiken Ashi Indicator Works?
The Modified Heiken Ashi indicator modifies the close of a candle by adding the open, high, low, and close of the candle, then dividing it by four. Essentially, the close price is changed to the average of the open, high, low, and close of the candle. The open of the candle is modified as the median price of the previous bar. This is done by adding the high and low of the previous bar, then dividing it by four. The highs and lows of the candle remain the same.
This is the basic computation of a Heiken Ashi indicator. However, this version of the Heiken Ashi has two methods for computing the modifications of the open and close.
The changes in the open and close of the candles causes the modified candlestick to change color only when momentum has reversed.
In the template used by this Modified Heiken Ashi indicator, the candlesticks are colored blue to indicate a bullish momentum, and red to indicate a bearish momentum.
How to use the Modified Heiken Ashi Indicator for MT4
This version of the Heiken Ashi indicator can be modified. It allows changes on the number of Count Bars, which essentially smoothens its reading of momentum. The higher the number of bars used, the smoother the Heiken Ashi bars would be, but it would also be less responsive to price changes.
It also allows for changes on the formula used. This can be changed on the “mode” variable on the indicator’s settings.
At its preset, the Modified Heiken Ashi indicator is geared towards detecting short-term momentum changes. As such, it works best as an entry trigger to a bigger picture trade setup.
Buy Trade Setup
When to Enter?
Identify a bullish trade setup. Open a buy order on a confluence of the bullish trade setup and the changing of the Modified Heiken Ashi bars to blue. Set the stop loss on the support below the entry candle.
When to Exit?
Set the take profit target on the next resistance line.
Sell Trade Setup
When to Enter?
Identify a bearish trade setup. Open a sell order on a confluence of the bearish trade setup and the changing of the Modified Heiken Ashi bars to red. Set the stop loss on the resistance above the entry candle.
When to Exit?
Set the take profit target on the next support line.
Conclusion
The Modified Heiken Ashi indicator can be a very useful indicator. It would be an excellent trade entry trigger as it would allow traders to be very precise with their trade entries provided that the trade setup used is a high probability trade.
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