Trading with Heikin

46
TRADERS´ Strategies
How to Use Multiple Moving Averages
Trading with
Heikin-Ashi Charts
Gradually Heikin-Ashi charts have found their way into the trading world.
Professionals have been using this method for several years now, but the
general public has as yet neglected it. Let us have a look at the world of
Japanese candlesticks and be convinced by their visual clarity.
07/2012 www.tradersonline-mag.com
In the year 2004 Swedish
trader Dan Valcu reanimated
the Heikin-Ashi charts after he
stumbled across this kind of
charting illustration during his
studies of the Japanese indicator
Ichimoku. After modifying this
variation of candlesticks he
noticed the impressive clarity as
it changed the chart of the classic
candlesticks based on a trend
following character. The simple
idea is the conversion of the four
typical candlestick-values – open,
high, low and close of one period.
These four values are altered with
the help of a simple arithmetic
average calculation – see
formula box on page 48 – and
subsequently provide visual trend
smoothing. You see the direction,
strength and intensity of a trend
in a single glance.
Application
The visual clearness of the
Heikin-Ashi charts helps to filter
the mostly confusing market
noise (compared to classic
candle charts). The result is
fast decision making with the
only disadvantage of a slightly
delayed signal. But as you
can participate in the trend
movements in forex very easily,
this method is excellent for daily
use. The practicable possible
combinations of these candles
– both with trend following
indicators like moving averages
and different oscillators – make it
possible to trade many strategies.
We will use a very simple, but
very efficient trading strategy
to explain this in the following
article.
Heikin-Ashi Charts
and Moving Averages
One principle of trend following
does not exclude the other – the
use of the Heikin-Ashi charts
with the moving averages proves
this. If you use a simple moving
average (SMA), an exponential
moving average (EMA) or a
weighted moving average (WMA)
plays an underlying role. Essential
is the additional information –
the superior trend phase that
the currency pair is in and the
(if you apply multiple moving
averages) separation in the sense
of an increasing or decreasing
momentum. At the beginning
you define for example eight
moving averages – with the EMAsettings 25, 30, 35, 40, 45, 55,
110 and 144. The first six moving
averages are applied in the sense
of momentum definition and the
last two illustrate the superior
respectively predominant trend
direction. Because of those
multiple moving averages, a short
peek at the chart clarifies the
correspondent momentum and
the dominant trend direction.
General Requirements
of the Setup
At first you search for currency
pairs that are trending. This can
be defined by comparing the
superior trend to the actual entry
time frame. For example, the
hourly chart (M60) defines the
trend definition and you trade the
15-minute chart (M15) and find
your entry signals in the M15 in
accordance with the hourly chart.
We pay particular attention to
the six moving averages 25 to
47
45 and 55 and their separation.
Moving averages that fan out as
shown in Figure 1 are the ideal
trend movement. The two lazier
moving averages serve the main
development and deliver an
additional signal of a sound trend
at cross over.
Christian Kaemmerer
Christian Kaemmerer is founder
of the web-service TA4YOU.com
and is self-educated in technical
analysis. He is always searching
for additional tasks in which to
apply his skill and expertise. His
main focus is forex.
07/2012 www.tradersonline-mag.com
Entry Setup – the Options
After the confirmation of an intact
trend we wait for the correction
(which starts earlier or later) and
try to trade this entry chance
following the trend. If a colour/
trend change of the Heikin-Ashi
candles in the M60 occurs (see
Figure 2), we take a closer look.
Now that the currency pair has
our full attention, we change to
the inferior time frame – in this
case M15 – and look for the
entry candle. In the M15 time
frame it is not mandatory that
the momentum moving averages
25 to 55 are separated; but the
superior two trend-defining
moving averages have to move
clearly in trend direction and
should not cross the price.
Entry Setup – the Observation
It is recommended to determine
the correction movement with the
help of Fibonacci retracements.
Thus, you can define possible
reversal points at the beginning of
the correction. The use of Fibonacci
retracements is not mandatory in
this setup, but the convenience of
this technical analysis tool is a plus
for every trading strategy. After
you have defined the highs and
lows of the previous trading period
(1-hour highs/lows or 4-hour high/
lows are recommended) in order
to apply Fibonacci retracements
with a minimum range of 45 pips
(see Figure 2), you wait for an entry
signal.
Entry and Stop Loss
Now you watch for a possible
reversal point within the
correction. The strength of
the Heikin-Ashi charts takes
effect now. Because of the
trend following character a
weakening or a reversal of the
downward movement (in the
case of a long setup) is indicated.
Neutral candles in this context
– ideally around the Fibonacci
retracements – confirm a new
upward movement. The only
thing missing is a bullish signal.
It is per definition (Table 1),
generated by a bullish HeikinAshi candle. If there is a good
risk/reward-ratio (RRR > 1.5), you
enter after the close of the candle
(after 15 minutes within the time
frame M15) at the open of the
new period to trade the initiated
renewal of the superior trend.
Clearly, there is never an entry
without a stop loss.
In our example (Figure 3) the
stop loss should be placed below
the previous low at 1.4035 USD.
The profit target can be defined
by Fibonacci extensions, price
F1) Multiple Moving Averages
Figure 1 shows the use of multiple Moving Averages to define
momentum. Which kind of Moving Averages you use as well as the
parameter settings play an underlying role.
Source: www.tradesignalonline.de
F2) EUR/USD Hourly Chart
Figure 2 shows the EUR/USD with the multiple Moving Averages (EMA)
25, 30 35, 40, 45, 55, 110 and 144. The intact price movement becomes
clear with the separating EMAs – the trend has positive momentum.
You can identify the likely continuation of the trend within the labelled
area because of the bullish Heikin-Ashi candle. The weak correction
to the 38,30% Fibonacci-retracement confirms the positive tendency.
Source: www.tradesignalonline.de
48
TRADERS´ Strategies
projections or pivot points. In
general you can also use the
calculated minimum target
according to the RRR.
T1) Formations of Heikin-Ashi Charts
Trend Characteristics
Uptrend
Downtrend
Trend is normal
Increasing green candles
Falling red candles
Trend becomes stronger
Increasing, longer green candles Falling, longer red candles
without lower shadow
without upper shadow
Trend becomes weaker
Green candles become smaller
with increasing lower shadow
Red candles become smaller
with increasing upper shadow
Consolidation
Smaller green candles with
upper and lower shadow
Smaller red candles with upper
and lower shadow
Trend Reversal
Very small green candles with
long upper and lower shadows
Very small red candles with long
upper and lower shadows
Five different possibilities indicated using Heikin-Ashi charts during an up- or down-trend.
Source: Manfred Schwendemann
Strategy Snapshot
Name of strategy:
Type of strategy:
Time frame:
Setup:
Entry:
Stop loss:
Take profit:
Trailing stop:
Exit:
Risk and
money management:
Average
number of signals:
Heikin Ashi Swings
Trend Following
15-minute and 60-minute chart
Identification of momentum, entry after correction in trend
direction if Heikin-Ashi signal occurs
Both fixed entry (signal candle) and discretionary entry
30 to 50 pips
1.5 times of the stop loss at minimum (for example 45 to
75 pips)
If strong momentum occurs, selling part of the position is
allowed
Both fixed exit (after earning 1.5 times the risk) and
discretionary exit at growing momentum
Depending on the personality of the trader; you should
never risk more than 0.75 per cent per trade
Three to five per day in the hourly chart in the 15 to 20
most liquid currency pairs
07/2012 www.tradersonline-mag.com
Exit Strategies
Because of the calculated risk/
reward, the minimum target can
be defined at 1.4135 USD. This
level is now the major point for
the further management of the
trade – in the case you trade
manually and want to trade a
possible future movement. In our
example the stop loss was placed
at 1.4035 USD, which means 40
pips based on the entry at 1.4075.
If you want a RRR of at least 1.5
your target is at 1.4135 USD at
minimum.
Of course, the market is not
interested in your profit or where
you want to exit your position.
Therefore you should trail your
stop loss after a minimum
movement of, for example 40
pips (based on the volatility of
the currency pair) to break even
to reduce risk. The risk is earned
already in our example and
depending on the future price
movement we can even sell part
of the position. In any way you
can only win with this risk-free
trade.
A convenient side effect of
this strategy is that you can
really relax mentally. In addition
you can apply resistances from
longer time frames (M60/M240)
or pivot points to determine
your future targets and let the
trade run – after exiting part of
the position having reached the
calculated minimum target –
even further.
Info
haOpent =
haCloset =
haHight =
haLowt =
t=
t-1=
haOpen(t-1) + haClose(t-1)
2
open(t) + high(t) + low(t) + close(t)
4
MAX {high(t), haOpen(t), haClose(t)}
MIN {low(t), haOpen(t), haClose(t)}
today (= current day)
yesterday
F3) Setup EUR/USD, 15-Minute Chart
Because of the change in colour in the M60 timeframe we look for the
entry and the suitable stop loss in the M15 timeframe. The M15 shows
a bullish trend movement because of the Heikin-Ashi candles. After
the close of the “perfect” long-candle we enter at the open of the third
candle at 1.4075 USD. The stop loss is placed at the previous low at
1.4035 USD and the profit target is calculated with the RRR of 1.5. It is
placed at 1.4135 and is reached at the following period. A profit of 60
pips was earned. Even though a split of the position would have been
more profitable, the trading plan was implemented successfully and
that is what counts when trading a strategy.
Source: www.tradesignalonline.de