Heiken Ashi_EMA Forex Trading Strategy

Introduction

The strategy to be discussed today is one which is known as the Heiken Ashi forex strategy. The Heiken Ashi candle is a customized form of representation of price action using a specially coloured candlestick to plot the price action. A customized indicator will be used to plot the candlestick indicator on the price action. The essence of this strategy is to detect the trend of the currency pair in good time so that the trend can be caught much earlier than would otherwise be possible using conventional indicators.

The Heiken-Ashi indicator uses the opening and closing prices data from the prior time frame as well as the opening, highest, lowest and closing prices of the current time frame. The end product is that the Heiken Ashi candles are plotted on the conventional candlesticks and will therefore have to be coloured differently for easy recognition.

 Heiken_indic

 Indicators
The strategy makes use of the following indicators:

  1. Heiken Ashi indicator: This will be provided as a customized indicator. To get this indicator, simply click here to download it. Then add it to the Indicators folder on your MT4 Build 600 (and newer versions) platform.
  2. Customized MACD histogram indicator: This is a MACD indicator which has been customized and fitted with special parameters to enable it recognize a change in market bias, and showing the trader same by means of a change in colour. A blue color is bullish, while a red color is bearish. This indicator will be used very liberally with many of our strategies here. Click here to download it. After download, please add it to the Indicators folder of your MT4 Build 600 (and newer versions) platform.
  3. Exponential Moving Average set to the 21 day time period (21EMA). This will provide support to falling prices and resistance to rising prices.

The Strategy

The Heiken Ashi candles must be colour-customized so that they can be easily recognized and distinguished from the regular candlesticks. We will use blue for bull candles and red for bear candles.

The 21EMA is plotted on the chart as support-resistance for price action, depending on whether prices are falling (support) or rising(resistance). The essence is to ensure that all three indicators line up to produce a clear signal.

Long Trade
For a long trade, we look for the following parameters:

a) Blue Heiken Ashi candles.

b) Either a price bounce off the 21 EMA line, or price comes from below the 21EMA in such a manner that blue candle’s low rests on the 21EMA.

c) MACD histogram is blue colour.

These conditions are displayed in the chart that we have shown below:

Heiken_long

Long Trade for Heiken Ashi Strategy

As soon as the parameters align themselves, the entry is made at the open of the next candle where it bounces off the 21EMA line. An example is shown on the snapshot below:

Short Trade

For the short trade, we look for the following parameters to align on the chart:

a) Blue Heiken Ashi candles.

b) Either uptrending price action is resisted at the 21 EMA line, or price comes from above the 21EMA in such a manner that red candle’s high rests on the 21EMA.

c) MACD histogram is red colour. The snapshot below displays a scenario which will lead the trader to initiate a short trade.

heikenshort2

Short Trade for Heiken Ashi Strategy

The entry conditions for the short trade are fulfilled at points 1 and 2. Study the snapshot to see how the conditions align themselves. Traders should initiate the short trade at the open of the candle which follow the signal candle.

Stop Loss

The stop loss for the trade is set at some pips below the 21EMA when the long signal appears, or above the 21EMA when the short signal appears.

 Take Profit

You are allowed to leave the profit position open-ended as long as price does not turn to touch the 21EMA line. Once price turns from primary trend and starts to touch the 21EMA, you should watch the trade closely. A few times, the price may simply bounce and continue on its way, leading to lower lows or higher highs and more profit. But if price reverses and breaks above (short trade) or breaks below (long trade) the 21EMA, the trade should be exited.

 Precautions

The strategy will not work or produce good returns when the market is range-bound. You should therefore make sure that the currency pair is trending when using this strategy. A simple way to do this is to add the 7EMA indicator and watch its direction. Also watch out to see if the 7 EMA will cross over the 21EMA perfectly, or simply intertwine with it.  A definitive cross is indicative of a trending market, which is good for business. Intertwining between the 7EMA and 21EMA is not a good sign. This signifies a range-bound market and will not deliver good returns.

Conclusion

This is overall a good strategy which can deliver good returns, especially when the analysis of the trade is performed on the 4-hour or daily chart. Traders must ensure that the strategy is well rehearsed on a demo platform. The indicators can be downloaded from the links in the article.

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