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This Heiken Ashi & 50-EMA Strategy Is The Best Kept Secret In Day Trading - YouTube
Channel: The Secret Mindset
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Heiken Ashi charts are very powerful when
combined with price action analysis.
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The idea is simple: you look for the emergence
of new trends, or for the reversal of already
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existing ones.
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In today’s video I will share a trading
strategy I’ve been back testing lately with
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promising results, strategy with is mainly
price-action based, using Heiken Ashi charts,
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one exponential moving average and the rising
wedge pattern.
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Heiken-Ashi candles essentially capture the
pace of price.
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What I like about Heikin Ashi charts is that
candles don’t change colour until the trend
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changes, and as a result, these charts generally
have longer runs of green or red candlesticks.
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There is a tendency with Heikin-Ashi for the
candles to stay red during a downtrend and
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green during an uptrend, whereas normal candlesticks
alternate color even if the price is moving
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dominantly in one direction.
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Another major advantage is that Heikin Ashi
charts provide much simpler interpretations
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as there are not as many patterns as there
are with candlestick charts and the averaging
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of the open and close prices means that trends
are easier to identify.
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In essence, Heiken Ashi make trends easier
to spot and helps traders to remain longer
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in trade.
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Each of the Heikin Ashi bars start from the
middle of the bar before it, and not from
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the level where the previous candle has closed.
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This is a major factor between the standard
and HA candlestick patterns.
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And this is important to know because in this
way, you filter noise, foreshadow reversals
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and identify more easily classic chart patterns.
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There are five primary signals that identify
trends and trade opportunities:
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• green candles signify an uptrend
• green candles with no lower “shadows”
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indicate a strong uptrend
• candles with a small body surrounded by
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upper and lower shadows indicate a trend change
• red candles indicate a downtrend
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• red candles with no higher shadows identify
a strong downtrend
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The second component of the strategy is the
rising wedge.
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The Rising Wedge is a bearish pattern that
begins wide at the bottom and contracts as
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prices move higher and the trading range narrows.
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While the rising wedge is mainly a reversal
pattern, this formation can also fit into
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the continuation category.
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As a continuation pattern, the rising wedge
will still slope up, but the slope will be
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against the prevailing downtrend.
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As a reversal pattern, the rising wedge will
slope up and with the prevailing up trend.
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Regardless of the type (reversal or continuation),
rising wedges are bearish.
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The rising wedge can be one of the most difficult
patterns to accurately recognize and trade.
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While it is a consolidation formation, the
loss of upside momentum on each successive
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high gives the pattern its bearish bias.
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However, the series of higher highs and higher
lows keeps the trend mainly bullish.
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What we need to identify is the final break
of support.
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Also, the rising wedge chart pattern forms
when price consolidates between two converging
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support and resistance lines.
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In this case, the support and resistance lines
both have to point in an upwards direction
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and the support line has to be steeper than
resistance line.
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The third component of our strategy is an
exponential moving average, mainly to confirm
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the wedge breakout that we intend to trade.
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We will use an exponential moving average
because it exhibits a lower lag than a simple
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moving average, which makes it better for
identifying how the price behavior may be
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changing.
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The choice of moving average length is largely
dependent on the time frame you’re analyzing
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and your trading style.
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A 50 EMA or 100 EMA are good potential averages
you could use.
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With the addition of the exponential moving
average, you basically analyze price crossovers.
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When you identify a wedge breakout, you want
to see price moving below the EMA, to confirm
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the momentum shift to the downside.
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The full strategy involves finding a rising
wedge pattern on a Heiken ashi chart, and
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trade after the price breaks the pattern,
below the exponential moving average.
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Here are the 10 main aspects of this strategy:
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1.
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Heikin-Ashi: Heikin-Ashi filters out market
noise and reduces small corrections making
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the signals more transparent.
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The smoothing effect makes it easier to find
our rising wedge pattern.
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2.
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Prior Trend: In order to qualify as a reversal
pattern, there must be a prior trend to reverse.
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Sometimes the current trend is contained within
the rising wedge; other times the pattern
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will form after an extended advance.
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3.
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Upper Resistance Line: It takes at least two
reaction highs to form the upper resistance
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line, ideally three.
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Each reaction high should be higher than the
previous high.
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4.
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Lower Support Line: At least two reaction
lows are required to form the lower support
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line.
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Each reaction low should be higher than the
previous low.
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5.
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Contraction: The upper resistance line and
lower support line converge as the pattern
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forms.
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The advances from the reaction lows (lower
support line) become shorter and shorter,
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which makes the rallies unconvincing.
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This creates an upper resistance line that
fails to keep pace with the slope of the lower
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support line.
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6.
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Support Break: Bearish confirmation of the
pattern does not come until the support line
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is broken in a convincing fashion.
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As I said earlier, the breakout is the signal
we will use as our entry signal.
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Once support is broken, there can sometimes
be a reaction rally to test the newfound resistance
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level.
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7.
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Volume: Ideally, volume will decline as prices
rise and the wedge evolves.
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An expansion of volume on the support line
breakout can be taken as bearish confirmation
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signal.
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8.
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EMA breakout: After the market breaks down
through the lower support line, it should
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also break below the EMA, and ideally should
remain below it.
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9.
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Profit Target: Usually, you should aim to
have a risk-reward ratio of 2 or more.
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Rising wedges are said to have a price target
that’s equal to the widest distance of the
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wedge.
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You measure the distance of the wedge and
you project the distance on the breakout point.
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10.
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Stop Loss: Generally, you should place the
stop loss to give the market some room to
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move.
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False breakouts are quite common, and by giving
the market some extra room to play with, we
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may avoid some of these!
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The high of the wedge is a good start for
an initial stop loss, which could be moved
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as the market makes lower lows.
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Here an example of a rising wedge we found
on this Heikin Ashi chart.
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- we have the prior uptrend
- the upper resistance line and lower support
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line converged as the wedge pattern formed.
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The slope of the lower support line is steeper
than that of the upper resistance line.
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Less slope in the upper resistance line indicates
that momentum is weakening as the price makes
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new highs.
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- the price tested the support line before
finally breaking with a sharp decline.
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The previous reaction low was broken after
this Heikin ashi candlestick
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- volume decreased before the support line
was broken.
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And there was an expansion of volume after
the breakout, which is a good sign that the
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market has shifted to the downside
- entry below the breakout point with a price
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target that’s equal to the widest distance
of the wedge
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- and stop loss above the high of
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the wedge.
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Another effective confirmation is a bearish
divergence on a momentum indicator.
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The rising wedge pattern in an uptrend signals
exhaustion of momentum.
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You can confirm this exhaustion in another
way, when a technical indicator will disagree
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or “fight” with the actual price action.
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A divergence appears when a technical indicator
(like RSI,MACD, Stochastic) begins to establish
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a trend that disagrees with the actual price
movement.
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The disagreement or divergence between bullish
price action (higher highs) and the trend
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of the oscillator (lower highs) is another
clue that the market could go down.
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If in
the
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previous examples, we traded the setup as
a bearish reversal pattern, we can also trade
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it as a bearish continuation pattern.
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In this case, the price came from a downtrend
before consolidating and forming higher highs
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and even higher lows.
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As a continuation pattern, the rising wedge
will still slope up, but the slope will be
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against the prevailing downtrend.
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During the formation of a rising wedge during
a downtrend, there are the same clues that
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can be used to determine whether the pattern
is worth trading:
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- the upper resistance line formed with minimum
2 successive higher peaks.
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- the lower support line formed with minimum
3 successive higher lows
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- price contraction with the slope of the
lower support line steeper than that of the
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upper resistance line
- the volume declining as price was rising.
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And an increase of volume after the support
line breakout
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- and additionally, you could look for a divergence
on a momentum oscillator
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There are many false patterns or patterns
in disguise that may come off as a rising
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wedge.
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That’s why we are using Heikin Ashi charts,
instead of traditional candlesticks, to eliminate
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noise on the chart and keep the dominant trend
in display.
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In addition, the other way to differentiate
a true rising wedge from a false one is by
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finding price/volume divergences.
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When the breakdown does happen, you have the
green light to go short.
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Here are several example of valid trades.
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As always, if you learned something new and
found value, leave us a like to show your
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Until next time.
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