Heiken Ashi trading strategy

Apr 15, 2020

Quite often, trading the trend gets complicated due to price action that makes the trader exit the trade quite early; this is a common problem many traders encounter in the course of doing business. In this article, our area of concentration includes a practical approach on how to tackle this problem. Also, how to trade the trend using the Heiken Ashi trading method, and a lot more.

Heiken Ashi trading strategy

In Japanese, the meaning of Heiken is Average, while Ashi is pace. So basically, Heiken Ashi essentially captures and tells us about the pace of price. During trending markets, this indicator is handy and gives insight into trends and momentum. Heiken Ashi can be used as a charting method or as an indicator with candle charts, bar charts, or any other charting technique. The significant advantage with the Heiken Ashi trading strategy is that it filters out noise from the trend and helps the trader to identify trending moves better. Heiken Ashi technique takes the average of two periods; this substantially reduces the volatility of price movements and gives out a clear trend.

heiken ashi trading strategy

Traders calculate the Heiken Ashi using the formula below:

  • Heiken Ashi – Close = {Open(current) + High(current) + Low(current) + Close(current)}/4
  • Heiken Ashi – Open = {HA-Open (previous day) + HA-Close (previous day)}/2
  • Heiken Ashi -High = Maximum {High(current), HA-Open(current) or HA-Close(current)}
  • Heiken Ashi -Low = Minimum {Low(current), HA-Open(current) or HA-Close(current)}

Heiken Ashi Price Action Strategy

Quite often, it becomes difficult for traders to analyze the strength of the trend, and this, in turn, makes planning a trade difficult. However, trying to understand the market price action is a lot easier using Heiken Ashi. There are three simple rules for price trend analysis.

[quote]The size of the Heiken Ashi candlestick is very critical in price trend analysis. In the Heiken Ashi trend analysis, there are two types of candles: the initiation candle and the continuation candle.[/quote]

The Initiation candle is the one that sets the tone of trend and defines underlining momentum for the price. It is why the initiation candles are the most important in trend analysis and price action trading. On the other hand, continuation candles are one that reaffirms the direction of trends and is useful to increase position in the direction of the trend.

A relative comparison of bullish and bearish candles determines who remains in control of the market. As a rule of thumb, if you see price moving up and absence of initiation candle within that move, then always suspect the underlining trend. An upward move has to begin on the back of strong Heiken Ashi candles, also whenever you are looking to short sell in a market, always do so after you spot strong initiation candles on the chart.

In the process of analyzing a stock strength, initiation candles have to be confirmed by continuation candles, and confirmation is more important when the price is moving lower. When the price is moving higher, confirmation is essential, but at times it can come 2-3 candles later, but in the downtrend, make sure you are looking for confirmation at each stage.

Heiken Ashi Candles

There are five Heiken Ashi candles:

  • Bullish candles with no tail;
  • Trend continuation candles representing a continuation of the uptrend;
  • Indecision candles with upper and lower shadows. Represent pause/trend change;
  • Weak Bearish candles. Continuation of the downtrend;
  • Strong Bearish candles. Representing downtrend.

It is important you note that the size of the body, shadow, and range determines the strength (whether it Bullish, Bearish or a neutral candle.) in Heiken Ashi, you have to learn to ignore irrelevant candles, and you have to focus on candles that help you to determine the path of least resistance.

Heiken Ashi Daily Strategy

Heiken Ashi candlesticks have to be used differently on a shorter time frame chart, and for trend analysis, you would require a higher time frame chart. To use Heiken Ashi for short-term trading like daily trading, you need to bear in mind the following:

The first bottom formed has to be on the back of high momentum, a precise wide range of candles should be visible. Secondly, the second price bottom should be formed on the back of low momentum, and most candles should be narrow range candles. And, thirdly, you enter the trade when you spot a long tail Heiken Ashi candle by keeping the low of a previous bottom as a stop loss. This a risky strategy as you are not waiting for the initiation candle and confirmation candle.

On a shorter time frame chart, by the time you wait for initiation and confirmation candle, 80% of the move would already be done. Therefore you cannot wait for too many confirmation signals as you have a limited time frame on your hand. Consequently, you need a different approach on a shorter time frame and a different approach on a longer time frame.

Trading with Heiken Ashi double bottom on daily time frame is relatively easy. Don’t underestimate this simple method. You should be careful with time frame selection; it is always better to use it with a higher time frame first before applying it to a lower time frame.

Heiken Ashi Daily Strategy

Heiken Ashi Forex Strategy

In the use of Heiken Ashi candlesticks for forex trading, there are three basic applicable rules:

  • Check for trend initiation candles at the beginning of trending move: if initiation candles are not visible move to the next instrument, note, however, that initiation candles set the foundation of strength and the stronger these candles are, the better it is for the overall trend.
  • For taking a trade, you need to assess the strength of candles to determine who remains in control, for the strength of candles, you need to refer to a range of candles as this indicates trend and momentum.
  • Initiation candles have to be confirmed with continuation candles because without confirmation, you risk entering early, and this could impact your profit potentials.


Heiken Ashi Scalping Strategy

Scalping is a method in which a trader monitors a short-term time frame closely and enters and exits in a matter of seconds. The main objective is to make small but frequent trades typically on the one minute to five minutes timeframe. Just because its fast does not mean it is always profitable. When scalping, it is imperative to take note and be aware of liquidity, session changeovers, and critical news releases.

There is a need for undivided attention throughout the trade from open to close. It requires active market sessions and a highspeed, reliable internet connection. The most effective scalping takes place around critical technical levels that are capable of providing a momentum move in either direction.

When using Heikin Ashi for scalping, you should note that as candle bodies get weaker/smaller or change color, = reversal or correction is possible. Consider closing or reducing position as change is at hand/future uncertain. The stronger the trends have a NO WICK. For uptrends, no downside wick – trend is strong, initiate a trade, or stay in a trade until a down candle or bottom wick appears. Reverse for downtrends – no upside wick – trend is strong.

Heiken Ashi Patterns

There are five specific rules applicable to Heiken Ashi, and these rules are applied in Heiken Ashi intraday trading strategy, short term trading, swing trading, and positional trading.

  • Green candles with no lower shadows indicate a strong uptrend. When you spot this on Heiken Ashi chart, be in the trade and don’t think about profit-booking, you might want to add to your long position and short exit position. Always look for consistent directional candles on the chart, this would signify strong uptrend in price, and then you can participate in the direction trend, always ignore the indecision candles as far as trend is reliable as it just indicates pausing trend.
  • Candles with a small body and shadows are indecision candles. Indecision candles require more confirmations in subsequent days. Always seek confirmation in the form of follow-through price action. Series of indecision candles always signifies pause in the market, which may likely precede a trending move. At all times, you must look for confirmation when these candles show up.
  • Red (black) candles with no upper shadow represent a strong downtrend. When you spot this on Heiken Ashi chart, be in the trade, and don’t think of profit booking, you might want to add to your short-term position and long exit position.
  • Candles with a long lower shadow represent buying interest. Always take note of these candles and excess price action after you spot these candles on the Heiken Ashi charts.
  • Candles with long upper shadow represent selling interest. Be cautious with the existing long position if you spot such candles on the chart. After a prolonged up move, if you spot this candle with long upper shadow, this resents selling at higher levels, and the price usually moves lower, pending further confirmation.


If you like this strategy, you might also be interested in this Trading with the Relative Strength Index

Conclusion

Heiken Ashi has the advantage of removing unnecessary noise from the trend and helps to identify trending moves better. In the Heiken Ashi, the trend is smoother. The effect of one session is limited to psychology, and this helps in not exiting the trade early. Heiken Ashi can be used on a stand-alone basis or as an indicator. If you fancy a top-notch reversal trading strategy, then the Heiken Ashi technique is almost an unbeatable choice.

author

NSBroker Analytics Team

Expert Traders From NSBroker specialize in forex trading and have been successfully helping people profit from the markets for the past 9 years. Our traders consistently blog about the state in which the markets are at. Learn how to profit via forex trading with NsBroker.