What is it?

Heikin-Ashi chart looks like the candlestick chart but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different from the candlestick chart.

In candlestick charts, each candlestick shows four different numbers: Open, Close, High and Low price. Heikin-Ashi candles are different and each candle is calculated and plotted using some information from the previous candle:

            1. Close price: Heikin-Ashi candle is the average of open, close, high and low price.
            2. Open price: Heikin-Ashi candle is the average of the open and close of the previous candle.
            3. High price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the highest value.
            4. Low price: the high price in a Heikin-Ashi candle is chosen from one of the high, open and close price of which has the lowest value.

Heikin-Ashi candles are related to each other because the close and open price of each candle should be calculated using the previous candle close and open price and also the high and low price of each candle is affected by the previous candle.

Heikin-Ashi chart is slower than a candlestick chart and its signals are delayed (like when we use moving averages on our chart and trade according to them).

This could be an advantage in many cases of volatile price action.

This day trading strategy is very popular among traders for that particular reason.

It’s also very easy to recognise as trader needs to wait for the daily candle to close. Once new candle is populated, the previous one doesn’t re-paint.
You can access Heikin-Ashi indicator on every charting tool these days.
Lets see how a Heikin-Ashi chart looks like:

 

heinken-ashi4

How do I trade with it?

On the chart above; bullish candles are marked in green and bearish candles are marked in red.

The very simple strategy using Heikin-Ashi proven to be very powerful in back test and live trading.
The strategy combines Heikin-Ashi reversal pattern with one of the popular momentum indicators.

My favourite would be a simple Stochastic Oscillator with settings (14,7,3). The reversal pattern is valid if two of the candles (bearish or bullish) are fully completed on daily charts as per GBPJPY screenshot below.

 

heikin ashi

 

SHORT SETUP
Once the price prints two red consecutive candles after a series of green candles, the uptrend is exhausted and the reversal is likely. SHORT positions should be considered.

LONG SETUP
If the price prints two consecutive green candles, after a series of red candles, the downtrend is exhausted and the reversal is likely. LONG positions should be considered.

FILTERS
The raw candle formation is not enough to make this day trading strategy valuable. Trader needs other filters to weed out false signals and improve the performance.

MOMENTUM FILTER (Stochastic Oscillator 14,7,3)
We recommend to use a simple Stochastic Oscillator with settings 14,7,3.

I strongly advise you read Stochastic Oscillator guide first.

Once applied, it will show the overbought/oversold area and improve the probability of success.

 

heiken-ashi2

A Trader would now:
Enter long trade after two consecutive RED candles are completed and the Stochastic is above 70 mark
Enter short trade after two consecutive GREEN candles are completed and the Stochastic is below 30 mark.

STOP ORDER FILTER
To further improve the performance of this awesome day trading strategy,other filers might be used. I would recommend to place stop orders once the setup is in place.
In the long setup showed in the chart below, the trader would place a long stop order few pips above the high o the second Heinkin-Ashi reversal candle.
The same would apply to short setups, trader would place a sell stop order few pips below the low of the second reversal candle.

 

heikin ashi 3

 

Accelerator Oscillator filter

As another tool you could use the standard Accellarator Oscillator. This is pretty good indicator for daily charts. It re-paints sometimes, but mostly it tends to stay the same once printed. Every bar is populated at midnight. How to use it? After Heikin-Ashi candles are printed, confirm the reversal with Accellarator Oscillator.

For Long trades: If two consecutive GREEN candles are printed, wait for the AC to print the  green bar above the 0 line on the daily charts

For Short trades; If two consecutive RED candles are printed, wait for the AC to print the red bar above the 0 line on the daily charts

day trading strategies ac

RULES

The reversal pattern is valid if two of the candles (bearish or bullish) are fully completed on daily charts as per GBPJPY screenshot below. Don’t enter the market straight after a volatile price swing to one direction. It important to consider fundamental news in the market. I would advise to avoid days like:

            1. Bank Holiday
            2. NFP
            3. FOMC
            4. Central Bankers speeches.

Money management:

            1. Move position to break even after 50 pips in profit.
            2. Move stop loss at the major local lows and highs or if the opposite signal is generated. Let your winners run.
            3. Stop loss 100 pips flat or use local technical levels to set stop losses.
            4. Every trader is advised to implement their own money management rules.

Strategy examples and screenshots

Strategy doesn’t generate much setups, but when it does, they are usually important market tops or bottoms.  See some sample trade setups before and after.

To get the ready MT4 templates for the setups below please CLICK HERE TO DOWNLOAD

You can then unzip it and place them in your MT4 and have the below charts ready

Date: 22 May 2013

Trade: Long
Price in: 1.2922
Price out: 1.3215
Result: +300
heikenashi3

Date: 21 June 2013

Trade: Short
Price in: 1.3215
Price out: 1.3087
Result: +130

keikenashi4

Date: 31 October 2013

Trade: Short
Price in: 1.3686
Price out: 1.3505
Result: +170
heinken ashi5

 

 

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The swing day trading strategy

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