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Smoothed EMA Heiken Ashi Strategies For Day Trading & Swing Trading (For Beginners) - YouTube
Channel: The Secret Mindset
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Heiken Ashi charts are becoming more and more
popular among traders and there are many trading
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strategies build around this type of charts.
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Heikin Ashi is a modified candlestick charting
technique that rearranges how the price is
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displayed.
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Basically, Heikin Ashi charts make candlestick
charts more readable for traders who want
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to know when to stay in a trade and ride a
strong trend, and when to get out when the
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trend weakens.
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Although Heikin ashi has many advantages,
a lot of traders prefer to analyze classic
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candlestick charts.
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But what if you could combine both charts,
in order to have the classic candles and still
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be able to plot Heikin-ashi candles?
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We can do that by using smoothed Heiken Ashi
candles.
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In todayâs video, weâll take a look at
the Heiken Ashi smoothed indicator and Iâll
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show you how you can apply this tool and configure
it to your preference.
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Before going further, letâs refresh our
memory with how the Heiken Ashi chart plots
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prices and how traders use this type of chart
when analyzing the price of an asset.
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Candles on traditional Japanese candlestick
charts frequently change their color, which
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can make them difficult to read.
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On the other hand, candles on the Heikin Ashi
chart display more consecutive colored candles,
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helping traders to identify past price movements
more easily.
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Youâll notice that Heikin Ashi charts have
a tendency for its candles to stay green during
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an uptrend and stay red during a downtrend.
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This is in contrast to traditional Japanese
candlesticks that alternate color even if
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the price is moving strongly in one direction.
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Heikin Ashi chart is much smoother looking
in terms of price action.
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This is why many traders prefer to use the
Heikin Ashi candles since it reduces the noise
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on the chart, and allows them to analyze trends
more clearly.
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What makes Heikin Ashi different from a traditional
Japanese candlestick chart is how the price
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is displayed in terms of the open and the
close.
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If you look closely at the Heikin Ashi chart,
youâll notice that each of the Heikin Ashi
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candlesticks start from the MIDDLE of the
candlestick before it, and not from the level
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where the previous candlestick had closed.
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While Japanese candlesticks require many definitions
and flexible rules for most patterns, a heikin-ashi
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chart works with only the five simple rules.
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1.
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A sequence of green bodies identifies an uptrend,
while a sequence of red bodies identifies
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a downtrend.
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2.
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The uptrend gets stronger with longer green
bodies and no lower shadows.
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The downtrend gets stronger with longer red
bodies and no upper shadows.
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3.
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The trend gets weaker with smaller bodies
and with the emergence of lower and upper
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shadows.
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4.
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A consolidation is revealed when you spot
a series of smaller bodies with both upper
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and lower shadows.
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5.
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A trend reversal could follow when you spot
multiple candles with small bodies and long
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upper and lower shadows (doji-like candle)
or a sudden color change.
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Just like any other tool used for technical
analysis, Heikin Ashi is useful but it does
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have some weaknesses or limitations.
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While the traditional Japanese candlesticks
are derived from the actual prices, Heikin
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Ashi candlesticks are NOT.
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Because the Heikin Ashi candlesticks are averaged,
they do NOT show the exact open and close
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prices for a particular time period.
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Heikin Ashi charts obscure actual price information.
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The closing price is considered important
for many traders, but the actual closing price
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is NOT displayed on a Heikin Ashi candlestick.
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But we can fix this problem by using the smoothed
Heiken Ashi.
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Smoothed Heiken Ashi is a modified version
of the regular Heiken Ashi candlestick charts.
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While you can typically use the regular Heiken
Ashi chart all by itself, the Heiken Ashi
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smoothed indicator is used as an overlay on
the regular candlestick chart.
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If you have a Tradingview account, this is
the exact version I use.
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As you can see, youâll get a better perspective
of the markets.
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You can see the regular candlestick chart
alongside the Heiken Ashi smoothed indicator.
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This is not possible if you use the regular
Heiken Ashi chart.
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The main difference between the regular Heiken
Ashi and the Heiken Ashi smoothed indicator
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is that the second one plots the Heiken Ashi
candlesticks as a moving average.
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The general rule of thumb is that the markets
are in an uptrend when the smoothed Heiken
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Ashi indicator is bullish or green, and the
markets are in a downtrend when the smoothed
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Heiken Ashi indicator is bearish or red.
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Smoothed Heiken Ashi is a trend following
indicator.
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In uptrends, price tends to stay above it.
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In downtrends, price typically stays below
the Smoothed Heiken Ashi.
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The first possibility of a change in trend
is when price crosses through the indicator.
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Downtrends start to reverse when prices cross
back up and through the smoothed HA, while
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uptrends show signs of reversal when price
falls through the smoothed HA, below it.
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The settings for the smoothed Heiken Ashi
indicator are very simple.
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You can set the values of the two moving averages
that are used.
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Depending on your trading style, scalping,
day trading or swing trading, you can change
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the value of the indicator to suit your trading
needs.
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Here are several settings you could try:
First one: 5 period Smoothed Heiken Ashi
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This is suited to scalping techiques, tracking
the strong momentum and the trend in the short
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term.
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The 5 period Smoothed Heiken Ashi acts as
support in the strongest trends.
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This line is best used in low volatility trends
with strong momentum.
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You can also use it as a trailing stop.
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10 period Smoothed Heiken Ashi, which is the
default value, is a great method to keep you
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on the right side of the major market trend.
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It is usually the first line to be lost before
any real trouble begins, meaning any reversals
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in current trend.
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From my backtesting, it can be used as a standalone
signal in some stocks and markets that tend
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to trend strongly in one direction for long
periods.
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20 period Smoothed Heiken Ashi acts like an
intermediate term moving average.
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It is generally the last line of support in
a volatile uptrend.
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To me, it is the reversion to the mean in
a market when it finally pulls back after
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an extended trend.
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50 period Smoothed Heiken Ashi is the line
that strong leading stocks typically pull
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back to.
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This is usually the main support level for
strong uptrends.
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Most bull markets and uptrends will usually
pull back to this level.
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From my backtesting, the 50 period Smoothed
Heiken Ashi is generally a great âBuy the
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dipâ level.
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If you enjoy swing trading or position trading,
you could use the 100 period Smoothed Heiken
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Ashi, which indicate long term direction.
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This is the deeper pullback level in bull
markets and uptrends.
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It usually presents a great risk/reward ratio
in bull markets.
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Now, how to Use Smoothed Heiken Ashi
There are 3 main ways in which you can use
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the Smoothed Heiken Ashi:
⢠To determine the direction of the trend
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⢠To determine support and resistance levels
⢠Using multiple Smoothed Heiken Ashi for
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long- and short-term market trends
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1.
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First approach is to determine the direction
of the trend
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When prices are trending higher, the Smoothed
Heiken Ashi will adjust by also moving higher
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to reflect the increasing prices.
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This could be explained as a bullish signal,
where traders may prefer buying opportunities.
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The opposite would be true if the price was
consistently trading below the Smoothed Heiken
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Ashi indicator, where traders would then prefer
selling opportunities due to the market signaling
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a downward trend.
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2.
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Second approach is using Smoothed Heiken Ashi
for support and resistance levels
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If you see the Smoothed Heiken Ashi trending
higher, you could enter the market on a retest
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of the Smoothed Heiken Ashi.
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Likewise, when you are long in an uptrend
market, then the Smoothed Heiken Ashi can
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be used as a stop loss level.
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The opposite is true for down trends.
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In this chart you can see several examples
of how the Smoothed Heiken Ashi can be used
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as powerful level of support or resistance.
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3.
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Third approach is making use of multiple Smoothed
Heiken Ashi
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This allows traders to simultaneously assess
the short and long-term trends in the market.
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As price crosses above or below these plotted
levels on the graph it can be explained as
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either strength or weakness for the asset
you are trading.
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This method of using more than one Smoothed
Heiken Ashi can be extremely useful in trending
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markets.
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Now, very important: when making use of multiple
Smoothed Heiken Ashi, you might have the idea
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to trade when the lines will cross.
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A bullish cross is identified when the short-term
Smoothed Heiken Ashi crosses above the long-term
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Smoothed Heiken Ashi, while a bearish cross
represents the short-term Smoothed Heiken
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Ashi crossing below the long-term Smoothed
Heiken Ashi.
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Donât use this strategy.
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Heiken Ashi is considered a lagging indicator
that not only dismisses useless signals to
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open the trade but also provide you with a
late signal for closing the trade.
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Attempting to build a crossover strategy with
2 Smoothed Heikin Ashi lines is very bad idea.
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If you donât want to see the market slowly
destroying your profit as the trend you are
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trying to trade has already changed, I advise
you to use multiple Smoothed Heikin Ashi lines
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only for dynamic support and resistance levels,
and not for crossover signals.
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Every Heikin Ashi trading system should include
price action rules:
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⢠So look for Support and Resistance levels
⢠look for chart patterns for potential
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breakouts.
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⢠And try to enter into emerging trends
and exit on slowing trends.
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Also, as you are able to see the classic candlesticks
you can combine classic price action with
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Smoothed Heikin Ashi.
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You will able to identify a pin bar, an engulfing
candle or a reversal pattern and at the same
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time, knowing what Heikin Ashi are indicating.
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With classic candlesticks, an engulfing candlestick
pattern at a support level can be a nice starting
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signal, a decent entry into a beginning upward
movement.
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Nevertheless, there is room for misinterpretation.
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With additional smoothed Heikin Ashi candles
on the same chart, you can mitigate this danger
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of misinterpretation and can help you to judge
a trend more clearly in combination with classic
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candlesticks.
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Thatâs why itâs better to use both candle
types on the same chart.
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Despite the simplicity of the Heikin Ashi
approach, you must be aware that Heikin Ashi
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candles, unlike classic candlesticks, are
in fact indicators.
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This is due to the construction of Heikin
Ashi candles, in which the current and previous
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periods are always considered.
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So the Heikin Ashi Candles are not the ultimate
trading instrument.
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Thatâs why the combination between classic
candlesticks and Heikin Ashi represents a
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better and safer approach to trade.
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You analyze the markets on the classic candlestick
chart, and you apply the Smoothed Heikin Ashi
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to filter against false signals and background
noises.
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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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support, subscribe to our channel and hit
the bell icon to stay notified when we upload
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new videos.
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Until next time.
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