Heiken Ashi Candlesticks Trading Strategy

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Heiken Ashi Candlesticks Trading Strategy

The first traders who ventured to technical analysis using charts were using bar charts. This is a method of charting prices by marking the open of price on the left side of a vertical bar and the close of price on the right side of the bar. This was the basic way of charting price movements during those days.

Then came the Japanese candlesticks. In this method, price is plotted as candlesticks that change color depending on where price closed in relation to the opening price. This is based on a method dating back to the 18th century used by Japanese rice traders. Now, this has become the standard among many traders.

Japanese traders are quite innovative when it comes to charting price movements. There is now a new type of price charting also developed by the Japanese. Heiken Ashi basically means “average bar” in Japanese. The Heiken Ashi Candlesticks is a method of charting price movements wherein the color of the bar depends on the movement of the average price.

The Heiken Ashi Candlesticks’ open and close price is plotted differently from the traditional candlestick. The “open” is based on the average of the open of the previous bar and the close of the previous bar. The “close on the other hand is based on the average of the open, close, low and close.

The Heiken Ashi Candlesticks is an excellent indicator to use as an entry and exit trigger for those trading with the trend. Because of the nature of the fast and responsive nature of the Heiken Ashi Candlesticks, it also works best for strong and fast-moving trends.

Heiken Ashi Candlesticks Indicator

The Heiken Ashi Candlesticks indicator is most suitable for short-term trending markets that have a very strong momentum.

In this strategy we will be identifying the direction of the short-term trend based on the 60-period Simple Moving Average (SMA) and the 30-period Exponential Moving Average (EMA). The trend will be based on how the two moving averages are stacked. The trend is considered bullish if the 30 EMA is above the 60 SMA, and bearish if the 30 EMA is below the 60 SMA. The two moving average lines should also have some separation between them to indicate a strong momentum. Price should also not be entering the area between the two moving average lines and should be rejecting the 30 EMA line every time it is near it.

Trades are then taken whenever the Heiken Ashi Candlesticks’ color changes indicating the direction of the current trend.

Indicators:

  • 60 SMA (Green)
  • 30 EMA (Gold)
  • Heiken Ashi (default setting)

Preferred Time Frames: 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The 30 EMA line should be above the 60 SMA line.
  • The moving average lines should be sloping up.
  • Price should be above both lines.
  • Price should retrace towards the 30 EMA line.
  • Enter a buy order as soon as the Heiken Ashi Candlesticks changes to green.

Stop Loss

  • Set the stop loss on the fractal below the entry candle.

Exit

  • Close the trade as soon as the Heiken Ashi Candlesticks changes to red.

Heiken Ashi Candlesticks Trading Strategy

Heiken Ashi Candlesticks Trading Strategy 2

Sell Trade Setup

Entry

  • The 30 EMA line should be below the 60 SMA line.
  • The moving average lines should be sloping down.
  • Price should be below both lines.
  • Price should retrace towards the 30 EMA line.
  • Enter a sell order as soon as the Heiken Ashi Candlesticks changes to red.

Stop Loss

  • Set the stop loss on the fractal above the entry candle.

Exit

  • Close the trade as soon as the Heiken Ashi Candlesticks changes to green.

Heiken Ashi Candlesticks Trading Strategy 3

Heiken Ashi Candlesticks Trading Strategy 4

Conclusion

The Heiken Ashi Candlesticks is one of the best entry and exit triggers for those trading on strong trending markets. It is quick and responsive and is less lagging compared to other technical indicators. This allows traders to capitalize on short-term price movements that could indicate a shift in the short-term trend.

However, this indicator is also quite susceptible to false signals during choppy market conditions. Traders who would want to use this as their main indicator should avoid trading during ranging and choppy markets. It is also best to combine this indicator with a complementary indicator to confirm trend direction and strength.

The strategy above just shows how the indicator could work well during such strong trending markets. It allows traders to capitalize on high yielding trades and allows for some small wins and a few losses every now and then.

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