Heiken Ashi Momentum Forex Trading Strategy

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Heiken Ashi Momentum Forex Trading Strategy

Momentum trading is one of the fastest ways to make money out of the forex market. It is often a quick trade exploiting short momentum bursts. It is usually a quick in and out type of trade lasting for several candles, although the duration of the trade may vary depending on the time frame being traded on.

Momentum trading is often a quick burst coming from a market contraction phase. Many traders would think of a contraction phase as a tight ranging market. However, retracements could also be considered as a contraction phase. The benefit of trading on retracements is that it not only is a contraction phase, it also is a resting phase during a trend.

Heiken Ashi Momentum Forex Trading Strategy thrives on strong trending market conditions. It trades on momentum bursts coming from a retracement during such strong trends.

Heiken Ashi Candlesticks

The standard Japanese candlesticks was revolutionary when it was first introduced in the Western trading community. This price charting technique, first developed by Japanese rice traders, allowed traders of any commodity, stock, currency or trading instrument to visually identify patterns of price movements which could indicate where price might be moving. However, although this technique is very useful, in today’s fast paced trading, traders are often caught trapped on trades because they made trading decisions based on sudden price fluctuations that does not necessarily mean a trend reversal.

The Heiken Ashi candlesticks, which means “average bars” in Japanese, helps traders avoid trading abruptly in such situations. It allows traders to visually identify the highs and lows of a certain candle, while changing color only when the short-term trend has already changed.

The Heiken Ashi open and close differs from the open and close of the standard Japanese candlesticks. The close price is based on the average price of the current bar. On the other hand, the open is the median of the open and close of the previous bar.

Heiken Ashi Smoothed Indicator

Although the Heiken Ashi Smoothed indicator is also an average bar like the standard Heiken Ashi candlesticks, the two are very different from each other.

The Heiken Ashi Smoothed indicator is more related to the Exponential Moving Average (EMA) compared to the standard Heiken Ashi candlesticks.

The Heiken Ashi Smoothed indicator also creates bars to indicate trend direction. The bars are color blue during an uptrend and red during a downtrend. During an uptrend, a bar with longer wicks indicate a strong uptrend, while during a downtrend, a bar with a full body indicates a strong downtrend.

While the standard Heiken Ashi Candlesticks are more suitable for short-term trends and momentum price movements, the Heiken Ashi Smoothed indicator is a very reliable mid-term trend indicator.

Trading Strategy

This trading strategy is a momentum trading strategy that is suitable for very strong trending markets.

To identify the trend direction, we will be using the Heiken Ashi Smoothed indicator. Trend direction will be based on the color of the bars. We will also judge the trend visually by looking at the slope of price action and the length of the wicks during an uptrend, or the size of the body of each bar during a downtrend.

As soon as we ascertain that there is a strong trend in place, we will wait for price to temporarily retrace. This retracement would cause the Heiken Ashi Candlesticks to temporarily change color, while the Heiken Ashi Smoothed indicator remains the same.

We will then wait for the Heiken Ashi Candlesticks to change to the color of the existing trend. As soon as the candle closes, we will place a buy stop entry order on the high of the candle on a bullish trade setup, or a sell stop entry order on the low of the candle on a bearish trade setup. If the next candle breaches the previous candle, then we would have confirmed that a strong momentum is in place.

Indicators:

  • Heiken Ashi (default setting)
  • Heiken_Ashi_Smoothed (default setting)

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

Currency Pairs: major and minor pairs

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Heiken Ashi Smoothed indicator should be printing blue bars.
  • The Heiken Ashi Candlesticks should be printing green bars.
  • Price action must be trending up.
  • Price should retrace towards the Heiken Ashi Smoothed bars causing the Heiken Ashi Candlesticks to temporarily change to red.
  • As soon as the Heiken Ashi Candlesticks revert to green, set a buy stop order on the high of the candle.
  • Wait for the next candle to trigger the buy stop order.
  • Cancel the order if the next candle does not trigger the buy stop order.

Stop Loss

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

Exit

  • Trail the stop loss on the low of the last two candles until price triggers the stop loss.

Heiken Ashi Momentum Forex Trading Strategy

Heiken Ashi Momentum Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Heiken Ashi Smoothed indicator should be printing red bars.
  • The Heiken Ashi Candlesticks should be printing red bars.
  • Price action must be trending down.
  • Price should retrace towards the Heiken Ashi Smoothed bars causing the Heiken Ashi Candlesticks to temporarily change to green.
  • As soon as the Heiken Ashi Candlesticks revert to red, set a sell stop order on the low of the candle.
  • Wait for the next candle to trigger the sell stop order.
  • Cancel the order if the next candle does not trigger the sell stop order.

Stop Loss

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

Exit

  • Trail the stop loss on the high of the last two candles until price triggers the stop loss.

Heiken Ashi Momentum Forex Trading Strategy 3

Heiken Ashi Momentum Forex Trading Strategy 4

Conclusion on Heiken Ashi Momentum Forex Trading Strategy

This trading strategy works very well during strong trends and momentum price movements.

Traders who can catch such trending market moves often find themselves gaining huge profits on such trades. Yields could be very high on some trades, especially when the trend continues for a long time.

However, these trending market moves do not come very often. The market trends only between 15% to 30% of the time. Traders should have the discipline not to trade on conditions where the market is not clearly trending.

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