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Tuesday, November 22, 2011
Exclusive Trading Report
TRADING THE HEIKIN ASHI WAY
The Heikin Ashi technique for construction of a price chart was first introduced in 2004 by Dan Valcu in his Journal “Technical Analysis of Stocks & Commodities”. The literal translation of the Japanese word “heikin” means “balance” or “middle” and “ashi” literally means “band” or “sometimes”. The candles which are produced by using this technique are pretty different from your usual forex candlesticks.
Objective – the objective of the Heikin Ashi technique is to simplify the way that the graphics are perceived and to smooth out any irregularities which may appear as gaps, strong bullish or bearish candles for example. (Fig. 1)
It is possible to obtain the pure form of Heikin Ashi candles only if you have a clear line display price chart. If, on the other hand, the candles are displayed alongside Japanese candlesticks it will make the chart very difficult to read. (Fig. 2)
The Heikin Ashi Formula used in constructing an indicator
When constructing an indicator it is important to use the modified opening price, the high, the low of the bar as well as the closing price, we shall call this Open, High, Low, Close – you calculate the modified prices as follows:
HaClose = (O + H + L + C) / 4
HaOpen = (haOpen [previous bar] + haClose [previous bar]) / 2
HaHigh = the maximum value (H, haOpen, haClose)
HaLow = the maximum value (L, haOpen, haClose)
O H L C indicates the current bar price respectively – open, high, low, close.
The Heikin Ashi indicator features
If there is a strong upward trend there will be no lower shadows in the candles. If you go back to the formula you’ll realize the reasons for this – using the Heikin Ashi technique (HA) the opening price of the current bar becomes the minimum at the bar and is always found in the middle of the previous bar body HA, although the actual real minimum for this trading period is always found above haOpen. This works to the contrary when there is a strong down trend.
Another feature which you will notice about Heikin Ashi charts is that there are no gaps. This is again because of haOpen – the price is the center point of the former candle body, once again
built on HA technology.
When there is a trend shown in the HA candles it will very often appear to be smoother and flatter than candlestick charts you may be used to. Notice the following trend reversal situation – the body of the candles decrease as their shadows begin to grow. You can interpret this signal similarly to how you would interpret reversal signals in a Candlestick Chart - the long shadows and the narrow body (candles hammer, star or doji in different types) shows an uncertain market with doubts: for example, Bulls indicate that the market is unable to raise the prices any higher. The best way believed to deal with such charts is to attempt to determine what the end correction will
be.
A few of the HA candlestick patterns do not even fit into this standard model, many of them are simply very much more.
Heikin Ashi Technique Signals
The following signals can be interpreted in the following say:
- Bullish candles which have large bodies and very short shadows (or sometimes no shad ow) means a strong bullish trend which has a very high chance of continuing.
- Candles similar to the classic “doji” – with small bodies and very large shadows indicate that the trend may be slowing down or in fact reversing.
- Bullish candles which have small shadows indicate that there is likelihood that the bullish trend will continue
- All of these points are true also of the bearish trend.
However, when using the HA technique of trading, you are strongly recommended not to simply take the signals in their pure form, the technique is most effective when used in combination wit
h oscillators which also determine the end of the correction, as well as other trend indicators which can help to determine the strength of the trend.
You will find Template in the folder with this manual “HeikenAshi.tpl” put it in your trading platform in template folder: Example: C:\Program Files\FXDD Malta - MetaTrader 4\templates
What Are Market
Indicators?
Market indicators are simply analysis tools which help to provide a much more complete overall picture of the how price movements in the current market Forex will continue. By interpreting
these indicator signals correctly, traders can successfully follow trends and gain the maximum profits, but although this describes the technical capabilities of each indicator, there is also adjustment needed to coincide with your chosen trading strategy.
You can really divide indicators into two major groups:
- Trend indicators which confirm a trend
- Oscillators which predict that a trend will reverse
Loads of technical analysis tools have been developed, so let’s just take a look at some of the more popular ones.
Stochastic Oscillator – this is a great way to accurately determine trend reversal points, indicating the point at which the currency price has been either over-bought or over-sold, bringing it close to the corridor of trade.
The Stochastic indicatorformula is as follows:
Two parameters are used to define stochastic oscillators – the fast curve which we shall label %K and the slow curve which we shall label %D.
Calculations for parameter %K:
%K = (close – min [low {%K}]) / (max [high {%K}] – min [low {%K}])*100
when:
close – the closing price today
min (low {%K}) – the lowest minimum for the number of periods of %K
max (high {%K}) – the highest maximum for the number of periods of %K
Parameter %D is really a sliding average of the %K which is calculated by this formula:
%D = SMA (%K,N)
when:
N – the smoothing period
SMA – the Simple Moving Average
SMA = SUM (Close(i),N) / N
SUM – sum
CLOSE (i) – the closing price of this current period
N – the number of calculation periods
So, depending on which type of graphics you use, the oscillator analyzes where the closing prices of current bars or candles are over any pre-selected time period – N.
The Stochastic Oscillator Range on a chart showing from 0% - 100%, assuming that the
boundary value of 0% indicates the lowest price over any time period N, and the value of 100% indicate the highest closing price. This indicates that the levels of 20% and 80% are over-bought and over-sold.
How to Interpret the Signals
These Stochastic values indicate when a price change is happening faster than expected and future correction can be expected. When the %K line goes across the above %D, this signal clearly indicates that you should sell your base currency. If, however, the %K lines goes across the %D from below, this is a signal of an opening long position for the currency pair. Pay
particular attention to the fact that the buy signals are at their most reliable in the 0% - 20% zone, while the sell signals are most reliable in the 80% - 100% zone.
Reliable strong signals are divergence – simply the difference shown between the chart and any oscillator. If a new high price is on a chart, then there will not be an oscillator maximum. This type of situations is known as a negative divergence and predicts a reversal of a trend down. If the
price falls and hits a new low with no changes on the stochastic oscillator graph, this is known as positive divergence and resulted in trend reversal being possible.
Using Divergence in Trading
Strategy
Trading Strategies differ for each individual, they are the specific set of rules which each trader uses in order to make transaction decisions. Thousands of transactions are made on the forex market every single day, some make a profit, others do not. The only way that a trader can make a profit is by having and following a trading strategy, without such consistent profitability is impossible.
The mistake that many early traders make is that they trade at
random. Now then, this might very well be profitable over a short period of time, but if you don’t have a strategy then your trading will be very unpredictable, and so will your results!
You need to have a basic understanding of trading, be familiar with the terminology, the principles, and existing indicators even when you first begin trading. There are certain questions which need to be answered – “What is traded?” “When should we open or close a deal?” “Which indicators should be used?” Once you start thinking about these questions you will soon come to the conclusion that you either need to copy somebody else’s trading strategy or to develop a strategy of your own. Let’s look at how to go about it.
Trading with the Divergence
The trading systems which we are considering in this report are based generally on using Bollinger Bands with Stochastic divergence. We have already discovered that divergence is the difference between the price and the technical indicator and often indicates an imminent rever
sal in trend. In order to reduce the number of false signals, we can use the classical divergence (correct) when the price makes a higher low (a high) and the indicator indicates a lower low (high) at the same time.
It is, however, difficult to determine when the exact moment of a trend reversal will be when using only divergence. Often it can simply be that the trend is doing “retracement” and will continue to move in the same direction later.
When there is a growing trend evident, the price can make new, higher highs and the indicator will form new, lower peaks. This increases the divergence, but the price is only moving in one direction. This is where Bollinger Bands come in, as they can help us in determining the entry points in the market. This indicator, when used with divergence can show us a much greater probability that a trend reversal is imminent.
Right then, what we need to do is to analyze a 20-period Bollin
ger band which has deviations 2SD and the stochastic oscillator. It doesn’t have to be the stochastic oscillator, you can use a different type of oscillator indicator if you prefer, as long as it shows divergence. You are recommended to work on hourly charts using this technique, in fact, as higher time frames are better.
Your Trading Strategy.
- Before opening a buy trade, the trader must wait for a combination of the following two signals: a.) the price making another deep minimum with the stochastic also forming the bottom, although it will be higher than previous ones.) the previous candle has closed outside of the lower Bollinger Band, but the current candle is above the lower band.
- You must place your stop loss between 5 and 10 pips below the last local minimum (and lower than the divergence candles)
- Enter the market with a buy pending orders, which the trader needs to place just above the maximum of the divergence candle. In some situations the next peak of the oscillator may not be formed and it is impossible to judge the formation of a divergence. If this is so, wait for confirmation of the formation of the peak and open your trade at the market price.
- You need to fix your profits in parts – the trader should enter the market with both positions being of equal size. The profit target should be the upper Bollinger band on the first transaction, or at least when the price is pretty close to the top of this band, but stochastic divergence should appear for a sell trade. Trailing stops should be used for the second transaction, with the amount being determined by individual preferences.
- Sell mechanisms are simply the reverse.
There is one more very important detail which you should be aware of. Before you make any transaction it is vitally important that you take into account the “bigger picture” or higher timeframe of the currency pair which you are looking at to trade. Do not trade against any strong momentum in the price movement. To do so you will be at a high risk of trading at a loss.
There is one more very important detail which you should be aware of. Before you make any transaction it is vitally important that you take into account the “bigger picture” or higher timeframe of the currency pair which you are looking at to trade. Do not trade against any strong momentum in the price movement. To do so you will be at a high risk of trading at a loss.
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