The Heiken Ashi Smoothed indicator is a variation of the Heiken Ashi Candlesticks. However, although they carry the same name, they are very different from each other.
The Heiken Ashi Smoothed indicator is a trend following indicator which is based on the Exponential Moving Average (EMA). Like the EMA, the Heiken Ashi Smoothed indicator computes for the average of price. However, unlike regular moving averages, the Heiken Ashi Smoothed indicator computes four different moving averages. These moving averages are computed based on combinations of the mean of the candles, the average of the open, high, low and close, the highest high of a period, and the lowest low of a period. These computations are then plotted as candlesticks along with the price candles.
If you would observe a chart with a Heiken Ashi Smoothed indicator, you would notice the Heiken Ashi Smoothed candles being plotted close to price action, but not completely overlapping it, unlike the standard Heiken Ashi Candlesticks. These candles move smoothly on the price chart, changing colors only when the trend has changed. The body and the wicks grow larger as momentum increases, and contracts as momentum weakens. These characteristics make the Heiken Ashi Smoothed indicator very reliable.
The Heiken Ashi Smoothed indicator is a very reliable indicator when used on the right time frame. It usually reverses only when the market has already confirmed to have reversed and stays with the trend as long as possible.
Traders would also have an early indication of a probable reversal and could exit trades earlier once they see the Heiken Ashi Smoothed candles contract, which could also be confirmed by reversal or price rejection candlestick patterns.
Heiken Ashi Smoothed Strategy
This strategy is an example of how the Heiken Ashi Smoothed indicator could work well as the main entry and exit trigger indicator.
The Heiken Ashi Smoothed indicator works best on mid-term trends. As such, it is best to align the trade direction with the long-term trend. For this reason, we will be using the 200-period Simple Moving Average (SMA).
The trend would be based on how the 200 SMA line is sloping. If it is sloping up, then only buy trade signals will be considered. It if is sloping down, then only sell trade signals will be considered. This should also be confirmed by the location of price in relation to the 200 SMA line. Price action should also be trending based on a visual observation of how price is moving.
Trades are taken as soon as the Heiken Ashi Smoothed candles change color pointing the direction of the current trend. This usually occurs after a retracement or a contraction phase.
The candle coinciding with the changing of the Heiken Ashi Smoothed candle color should also close in the direction of the trend. This would help us avoid spinning tops and indecision candles which are common during market contraction phases.
Indicators:
- 200 SMA (Green)
- Heiken_Ashi_Smoothed (default setting)
Preferred Time Frames: 1-hour, 4-hour and daily charts
Currency Pairs: major and minor pairs
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price should be above the 200 SMA line.
- The 200 SMA line should be sloping up.
- The market should contract allowing the Heiken Ashi Smoothed candles to temporarily change to red.
- Enter a buy order as soon as a Heiken Ashi Smoothed candle changes to blue coinciding with a bullish candlestick.
Stop Loss
- Set the stop loss on the fractal below the entry candle.
Exit
- Close the trade as soon as the Heiken Ashi Smoothed candles changes to red.
Sell Trade Setup
Entry
- Price should be below the 200 SMA line.
- The 200 SMA line should be sloping down.
- The market should contract allowing the Heiken Ashi Smoothed candles to temporarily change to blue.
- Enter a sell order as soon as a Heiken Ashi Smoothed candle changes to red coinciding with a bearish candlestick.
Stop Loss
- Set the stop loss on the fractal above the entry candle.
Exit
- Close the trade as soon as the Heiken Ashi Smoothed candles changes to blue.
Conclusion
The Heiken Ashi Smoothed indicator is a reliable mid-term trend following indicator. In fact, it is probably one of the best mid-term trend following indicators.
The sample trading strategy above just shows how well the Heiken Ashi Smoothed indicator works. It is not perfect, but when used in the right market condition, it could do wonders. The sample strategy is a high yield type of strategy, which allows traders to profit because of the huge gains that traders could accumulate on the winning trades.
There are other ways to trade the Heiken Ashi Smoothed indicator. Traders could trade reversals from key support or resistance areas. They could also use it in tandem with another indicator to identify high probability trade entries.
The key to using the Heiken Ashi Smoothed indicator is by using it in the right market condition, which is in line with the long-term trend. It does not work well on choppy and ranging markets, however, it works wonders on a market that is trending or has a potential to reverse from a key area.
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