Any Heikin-Ashi strategy is a variation of the Japanese candlesticks and are very useful when used as an overall trading strategy in markets such as Forex.
Unlike the regular Japanese candlesticks, heikin-ashi candlesticks do a great job of filtering out the noise we see with Japanese candlesticks. They are also able to highlight the trend of the market much easier than other plotting methods.
The Heiken Ashi candlestick chart looks similar to its counterpart but the calculation of the candlestick gives it the different look.
- Looking at standard candlestick charts, each candlestick has four different prices: open, high, low & close. Each candlestick that is formed has no relationship except opening price (except in some cases) to the candlestick that came before it.
- A Heikin ashi candlestick is calculated using some information from the previous candlestick:
For those who need the details, here is how each Heikin-Ashi candlestick is calculated:
- Open price: Heikin Ashi candlestick is the average of the open and close of the previous candlestick
- High price: Chosen from the one of the high, open and close price of which has the highest value.
- Low price: Chosen from the one of the high, open and close price which has the lowest value
- Close price: The average of the open, close, high and low prices.
What that means is that each candlestick is formed on the heikin ashi chart is related to the previous one. The advantage of this is that, it smooths out the noise in standard Japanese candlestick patterns.
You can see how “cleaner” the heikin ashi candlestick chart is compared to the usual Japanese candlestick chart.
A few things to keep in mind:
- Because each candle relies on the previous candle for the calculation, it would be difficult for traders who trade gaps as a trading strategy
- Recent price will not be reflected in the last candle due to the averaging calculation used by the Heikin Ashi candlestick
- Strong buying pressure will generally not have lower shadows (wicks)
- Strong selling pressure will generally not have a upper shadow. You can clearly see this on the chart above.
- If you start to see upper wicks on down HA candles and lower wicks on up HA candles, be alert for a weakening trend.
Most charting platforms will have the option to plot price movements as a heikin-ashi candlestick. You can access that feature through your charting properties window.
If you are using Metatrader (MT4 indicator downloads), you can download the Heiken Ashi smoothed indicator by clicking here.
Heiken Ashi candlesticks charts are used in the same manner as a normal Japanese candlesticks. We can quickly list 3 items that will allow you to understand the power of the HA candlesticks.
- Monitoring the presence of upper or lower shadows as described earlier can indicate the strength of the trend.
- The color of the heiken ashi candlestick is supposed to indicate the overall trend direction of the market.
- By following the trend direction as indicated by the colors of the candlesticks, you can potentially avoid being wrong footed during whipsaw price action.
Within brief: Heiken Ashi candlestick chart patterns permit you to stay using the overall trend through allowing your to prevent the sound or the actual minor variances of price that’s prevalent inside a standard candlestick chart!
We’ve determined why HA might be considered better than Japanese candle lights so let’s consider those factors and style a trading system close to them.
We uses the regular pullback trading method and make use of the colors from the Heikin Ashi candles along with the shadows to assist deliver the trading indicators.
Our chart settings could be any time period but remember that trading signals about the higher period frames might deliver much more profits ultimately.
For our sample trading strategy, we will use the foll lowing:
In the following chart, the 20 EMA shows the major trend on this daily chart. When we have the color shifts in the Heikin Ashi, until price patterns and 20 EMA show change of trend, we still look for shorting opportunities.
- Using what we know, these candles show a down trending market and given little in the way of upper shadows, we will consider this a strong trend.
- Green candles show up and price rallies up and over the 20 EMA right into a zone that was once support. Will it be resistance? Sell stop the low of the first red Heikin Ashi candle to appear.
- Price consolidates and slides sideways into the 20 EMA. This is NOT A PULLBACK TRADE! Price rejects, puts in a lower rejection, draw a bear flag, position before the break of support at first red candle
- Nice rally into 20 EMA and previous support zone. Large red candle. You may opt to pass on this trade due to the size of this candle.
- Another rally up to 20 EMA and same zone as #4. Nice short trade.
Management Of These Forex Trades
We should place the stop loss whenever we enter the trade and in this instance, a range above the actual pivots highs will be a decent place. You don’t want to buy just past the pivot as you’ll be a target of cease hunts every once in awhile.
You may set revenue targets in the pivot levels the occur prior to the pullbacks. You may also make the most of among the best things regarding Heikin Ashi trading and that’s to make use of the same leave method while you do records. You may exit your own trade when the color flips.
If you prefer a more energetic management throughout the trade, try out trailing your own stop as well as tightening it once the presence associated with upper dark areas (in a good downtrend) show about the HA candle lights as this suggests weakness.
I will let you know there is absolutely no best strategy however there’s a best trading strategy for you personally!
Some traders could find the easy strategy just a little too….. easy. These traders may require a bit more framing from the market to assist in their own trading. These traders could find the subsequent strategy more for their liking.
- 9 exponential moving average must cross 18 exponential moving average up.
- Price has to extend from the EMAs (think of a rubber band).
- Wait to see if you a bearish heiken ashi candlestick starts forming and heading back to touch the ema lines. If you see this happening, you should sit up and take notice because a buy setup may be just around the corner.
- Your actual buy signal is that bullish heiken ashi candlestick candlestick that forms after that those bearish heiken ashi candlesticks in step 3 has touched the ema line(s)
- Open a buy order at market.
- For your stop loss, place it above the low of the buy entry signal heiken ashi candlestick.
For selling, just do the exact opposite of buying:
- 9 exponential moving average must cross 18 exponential moving average down.
- Price has to stretch from the ema lines.
- Wait to see if a bullish heiken ashi candlestick starts forming and heading back to touch the ema lines. If you see this happening, you should sit up and take notice because a sell setup may be just around the corner.
- Your actual sell signal is that bearish red heiken ashi candlestick candlestick that forms after that those bullish candlesticks in step 3 has touched the ema line(s)
- Open a sell order at market.
- For your stop loss, place it above the high of the sell entry signal heiken ashi candlestick.
- Set your profit at set at 2 or 3 times your risk. For example, if you risked 30 pips, then set your profit target at 60 pips or 90 pips.
- Another way to set profit target is to identify previous swing highs for profit target for buy orders and previous swing lows for your profit target for sell orders. But here’s the thing: you have to switch to the normal candlestick chart to do this.
Note, for this trade management, you have to switch to a normal candlestick chart to do these
The best way to get more profitable pips out of a strong trend is to trail stop your trades using subsequent lower swing highs for sell trades and higher swing lows for buy trades.
- If your sell trade is profitable and price has moved favorably, place your trailing stop a few pips behind those consecutively decreasing tops o lower swing highs as the price moves lower.
- similarly, if your buy trade is profitable, place your trailing stop a few pips behind those consecutively increasing bottoms or higher swing lows as price moves higher.
The reason behind using the actual trailing stop by doing this is so you give the marketplace room in order to breathe which means you do not really get halted out too early.
This Forex trading strategy works once the market is actually trending but once the its not really trending, you might get stopped away with fake setups. You MUST understand price motion and structure to prevent being cut up within those marketplaces.
Stop loss might be large so make sure you use an effective position dimension model to put your cease. You might elect to make use of the Japoneses candlestick chart to put your stop after which switch to your Heikin Ashi with regard to management.
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