Trading in line with the trend is one of the most popular and preferred forex trading strategies because most profits and losses are generated during these times. But, quite often, traders exit a trade thinking that the trend is over and the market is going to move in another direction, only to discover later that this wasn’t the case. This often leads to lot of missed opportunities, frustration and anger.
One strategy that helps avoid this situation is the Heikin Ashi Strategy, which makes use of Heiken Ashi candlestick charts that look like the Japanese candlesticks but are completely different. Let’s find out more about them and how they help forex traders.
In a normal candlestick chart, each candlestick has four different prices, open, high, low and close. Another feature is that each candlestick is separate from the others and has no relationship with them. This is where the Heiken Ashi candlesticks differ, since each Heikin Ashi candlestick is calculated using some information or data from the previous candlestick.
The opening price of each Heiken Ashi candlestick is the average of the open and close of the previous candlestick. The high price of the new candlestick is the highest of the high, open and close prices of the previous candlestick. Similarly, low price of the new candlestick is the lowest of the high, open and close prices. And, at the end, the close price is the average of the open, close, high and low prices of the previous candlestick.
The use of the previous candle’s high, low, open and close prices smoothens out the small price fluctuations to highlight price trends. So, another feature that differentiates Heiken Ashi candlesticks from the normal candlesticks is that the colour of the former indicates the overall trend direction of the market, while ignoring the intermediate trend direction. So, when traders use these patterns to make their trading decisions, they are able to avoid the noise or the minor fluctuations in price.
These easy-to-chart candles can be used to take a position but it is always better to use it in combination with other tools to increase the probability of making successful trades. While bullish candles are marked in green, bearish candles are depicted in red. We need to remember that when prices are trending up, Heiken Ashi bars will have no lower shadow, and when prices are trending down, no upper shadow is present. The next thing to note is that Doji-like bars, with both lower and upper shadows, indicate possible turnarounds.
According to the Heiken Ashi trading strategy, once two consecutive red candles are visible after a series of green candles, it indicates that the uptrend has been exhausted and there are chances of a reversal. In such a scenario, traders should consider taking short positions.
Similarly, if two consecutive green candles are formed after a series of red candles, it indicates that the downtrend is exhausted and a reversal is likely. In a scenario like this, traders should consider taking long positions. Placing of stop orders is advisable to manage the risk associated with the market moving in a different direction than envisaged. In addition, usage of other filters or tools will help traders to weed out false signals and improve the performance.
Certain things need to be kept in mind while using Heiken Ashi candlesticks for trading. First, since each candlestick is calculated on the basis of the previous one, traders who use trade gaps as a trading strategy will find it difficult to do so. Another thing to remember is that the recent price will not be reflected in the last candle because of the averaging calculations done in Heiken Ashi candlesticks.
So, the Heiken Ashi candlestick strategy, when used along with Exponential Moving Averages or EMA or any other indicators, can help traders move along the overall market trend, but is not at all useful when the market is not trending.
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