Forex & Stocks Zig-Zag Heiken Ashi Trading Strategy

The Heiken-Ashi technique is a Japanese candlestick-based technical trading tool that utilizes candlestick charts to represent and visualize market price data.

It is employed to identify market trend signals and forecast price movements. The Heiken-Ashi method utilizes average price data to filter out market noise.

The primary contrast between the traditional candlestick chart and the Heiken-Ashi chart lies in the methodology of data representation. While the former relies on open, high, low, and close prices, the latter employs a modified formula based on two-period moving averages.

This modification results in a smoother chart in Heiken-Ashi, facilitating easier identification of trends and potential reversals. Additionally, Heikin-Ashi charts tend to obscure gaps and certain price data, contributing to their smoother appearance.

In the comparison provided, the left chart showcases traditional candlestick bars, whereas the right chart displays Heiken Ashi bars. The visual disparity is evident, with the Heiken Ashi bars appearing noticeably smoother. This enhanced smoothness is a characteristic feature of Heiken-Ashi charts, attributed to their unique computation method utilizing moving averages.

By elucidating these differences, traders gain a deeper understanding of the distinct advantages offered by Heiken-Ashi charts, particularly in terms of trend identification and chart clarity.

When using candlestick bars, traders encounter numerous types of Price Action patterns, such as Doji, Gravestone Doji, Dragonfly Doji, Pin Bars, Engulfing Candlesticks, and many more. The variety of patterns offers insights into market sentiment and potential price movements.

However, when utilizing Heiken Ashi bars, these patterns are condensed into three main types of Price Action patterns:

• 1) Bullish Heiken Ashi Bars

With the Bullish Heiken Ashi Bars, you will notice that there’s only a wick at the top of the bar but there’s no wick at the bottom. As long as this is an up bar with no wick at the bottom, we consider this a bullish signal.

• 2) Bearish Heiken Ashi Bars

The Bearish Heiken Ashi Bars are simply the opposite of Bullish Heiken Ashi Bars. They have a wick at the bottom but not wick at the top. As long as this is a down bar with no wick at the top, we will consider this a bearish signal.

• 3) Indecision Heiken Ashi Bars

To simplify the Heiken Ashi bars, I’ve categorized all bars that have wicks at the top and bottom of the bars as an Indecision Heiken Ashi bar. So regardless of whether the bar color is bullish or bearish, as long as there are wicks on both sides, we will consider this an Indecision Heiken Ashi Bar.

By simplifying the patterns into these categories, traders can swiftly analyze market conditions and make informed trading decisions.

While it may seem appealing to enter a Long position whenever you spot a Bullish Heiken Ashi Bar or to go Short when encountering a Bearish Heiken Ashi Bar, it’s important to resist the urge to do so.

Despite some teachings advocating for such straightforward approaches, it’s essential to exercise caution and refrain from impulsive trading decisions.

To gain an edge in trading the markets, it’s crucial to establish specific criteria that must be met before entering a trade. This ensures a more strategic and informed approach, enhancing the probability of successful trades while minimizing risks. By adhering to a well-defined trading strategy, traders can better navigate market fluctuations and capitalize on favorable opportunities.

• Download “TraderVersity-ZigZagHeikenAshiSystem” (Zip/RAR File).
• Copy mq4 and ex4 files to your Metatrader Directory …/experts/indicators/
• Copy the “TraderVersity-ZigZagHeikenAshiSystem.tpl” file (template) to your Metatrader Directory …/templates /
• Start or restart your Metatrader Client.
• Select Chart and Timeframe where you want to test your forex system.
• Right-click on your trading chart and hover on “Template”.
• Move right to select “TraderVersity-ZigZagHeikenAshiSystem” trading  system and strategy
• You will see “TraderVersity-ZigZagHeikenAshiSystem” is available on your Chart

• Criteria number 1: The higher time frame must be in an uptrend.This criterion entails that the higher time frame, such as the 4-hour chart when trading on the 1-hour chart, should exhibit a pattern of higher highs and higher lows. This ensures that the broader market trend aligns with the intended trade direction, providing additional confirmation for a Long trade setup.

In contrast, trading higher timeframes mitigates the impact of spreads and commissions, increasing the likelihood of favorable trade outcomes.

By minimizing costs and maximizing potential profits, traders can tilt the odds in their favor and improve their overall trading performance.

• Criteria number 2: The last Heiken Ashi Bar on a higher time frame is a Bullish Heiken Ashi Bar. The next confirmation is when the 14-period RSI line is above the level of 50.
• Criteria number 3: The time frame you’re trading on (in this case, it’s the 4-hour or 1-hour time frame chart) must fulfill both criteria 1 and 2.For a valid Long trade setup, both criteria 1 and 2 must be met on the time frame being traded. This ensures alignment with the broader market trend and confirms bullish momentum, enhancing the probability of a successful trade outcome.

Once these three criteria are satisfied, the ideal entry point for a Long trade is signaled when the first Bullish Heiken Ashi candle forms on the next day of the lower time frame chart. The next confirmation is when the 14-period RSI line is above the level of 50. Stop Loss placement is then determined below the low of the current swing low, with a minimum target of twice the established trading risk.

 

• Criterion 1: Confirmed Downtrend on Higher TimeframeThe fundamental principle is to sell high and buy low. Therefore, you must first confirm a downtrend on a higher timeframe (for example, daily chart) compared to your intended trading time frame (for example, 4-hour, or 1-hour chart).

Look for lower highs and lower lows in price action on the higher time frame chart. Imagine this as identifying the overarching bearish trend you’re aiming to ride within your shorter time frame trades.

• Criteria number 2: The last Heiken Ashi Bar on a higher time frame is a Bearish Heiken Ashi Bar. The next confirmation is when the 14-period RSI line is below the level of 50.
• Criteria number 3: The timeframe you’re trading on, (in this case, it’s the 4-hour or 1-hour time frame chart), must fulfill both criteria 1 and 2.

For a valid Long trade setup, both criteria 1 and 2 must be met on the timeframe being traded. This ensures alignment with the broader market trend and confirms bearish momentum, enhancing the probability of a successful trade outcome.

Once these three criteria are satisfied, the ideal entry point for a short trade is signaled when the first Bearish Heiken Ashi candle forms on the next day of the lower time frame chart. The next confirmation is when the 14-period RSI line is below the level of 50. Stop Loss placement is then determined above the high of the current swing high, with a minimum target of twice the established trading risk.

By eliminating market noise, this technique provides a clearer depiction of market trends and direction, facilitating the identification of potential price movements. Traders can then make informed decisions about whether to hold, pause, or anticipate a reversal in a trade. This flexibility allows traders to adjust their positions to avoid losses or secure profits.

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