Trend following strategies are usually great. It allows traders to maximize profits on winning trades because it allows traders to ride trends from start to finish. This results in a very high yielding trade in relation to the risk placed on the trade.
However, there are many instances when trend following entries would fail. This is because trend strength is not taken into consideration. Trends usually last longer when there is momentum behind it. Without it though, trends tend to be short lived. After a few small expansion phases, trends without momentum could reverse.
The Heiken Ashi Directional Cross Forex Trading Strategy however is a strategy which identifies trend strength or momentum. On top of it, it also looks at high probability trend reversals based on a custom indicator which smoothly indicates the trend.
Average Directional Movement Index
The ADX or Average Directional Movement Index is an indicator which determines both trend direction and trend strength. It does this using two Directional Movement Indicators (DMI). One is positive, and the other is negative. Whenever these two moving averages would crossover, it is indicative of a possible trend reversal.
For this setup, the positive DMI is colored green while the negative DMI is colored orange red. Whenever the positive DMI crosses above the negative DMI, it is considered an indication of a bullish crossover. On the other hand, if the negative DMI crosses above the positive DMI, then it could be considered as a possible bearish crossover.
Heiken Ashi Smoothed Indicator
The Heiken Ashi Smoothed indicator is a trend following indicator derived from the standard Heiken Ashi Candles and moving averages. While the standard Heiken Ashi Candles are basically candles which show the high and low of price but changes colors only when the trend changes, the Heiken Ashi Smoothed indicator is quite different. In fact, it more of a variation of a moving average rather than a candlestick.
The Heiken Ashi Smoothed indicator is a smoothened version of the Heiken Ashi. However, this version doesn’t reflect price at all. What it does however is that it averages out price much like a moving average. It is usually based on an Exponential Moving Average (EMA).
The Heiken Ashi Smoothed indicator is, as the name indicates, characteristically smooth. It usually does not have sudden changes in direction. Instead, it tends to change directions only when the trend seems to have clearly changed. If you would observe it closely on price chart, the Heiken Ashi Smoothed indicator does really well in identifying the mid-term trend direction.
Trading Strategy
The Heiken Ashi Directional Cross Forex Trading Strategy is based on the confluence of the Average Directional Movement Index (ADX) and the Heiken Ashi Smoothed indicator.
The ADX is intended to aid us chose entries with momentum behind the crossovers. By taking trades that have momentum behind the trend change, we tend to have a higher win ratio.
Then, by adding the Heiken Ashi Smoothed indicator, which is inherently a high probability trend indicator, we get to have an even better win probability.
The key to this strategy is to take trend reversals which have both indicators reversing quite at the same time. The distance between the signals of both indicators should be close enough for us to consider taking the trade.
Indicators:
- Heiken_Ashi_Smoothed
- MaPeriod: 15
- Average Directional Movement Index (ADX)
- Period: 50
Timeframe: 1-hour, 4-hour and daily charts
Currency Pair: major and minor pairs
Trading Session: Tokyo, London and New York
Buy (Long) Trade Setup
Entry
- The green +DMI line of the ADX should cross above the orange red -DMI line indicating a possible bullish trend reversal
- The Heiken Ashi Smoothed indicator should change to blue indicating a possible bullish trend reversal
- These two trend reversal signals should be somewhat aligned
- Enter a buy order at the confluence of the above conditions
Stop Loss
- Set the stop loss below the Heiken Ashi Smoothed indicator
Exit
- Close the trade as soon as the Heiken Ashi Smoothed indicator changes to red indicating a possible bearish reversal
- Close the trade as soon as the green +DMI line of the ADX indicator crosses below the orange red -DMI line indicating the possible end of the bullish trend
Sell (Short) Trade Setup
Entry
- The orange red -DMI line of the ADX should cross above the green +DMI line indicating a possible bearish trend reversal
- The Heiken Ashi Smoothed indicator should change to red indicating a possible bearish trend reversal
- These two trend reversal signals should be somewhat aligned
- Enter a sell order at the confluence of the above conditions
Stop Loss
- Set the stop loss above the Heiken Ashi Smoothed indicator
Exit
- Close the trade as soon as the Heiken Ashi Smoothed indicator changes to blue indicating a possible bullish reversal
- Close the trade as soon as the orange red -DMI line of the ADX indicator crosses below the green +DMI line indicating the possible end of the bearish trend
Conclusion
This strategy, which is based on a high probability trend following indicator, which is the Heiken Ashi Smoothed indicator, is inherently a high probability trading strategy. By adding the ADX indicator, which takes into consideration momentum, this strategy works even better.
This strategy would also work best when traded on support and resistance reversals. Some knowledge of price action, support and resistances would certainly help improve trading performance using this strategy.
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