(Lesson 5) HOW TO CATCH TRENDS WITH HEIKEN-ASHI CANDLESTICK ANALYSIS…????

Candlestick patterns offer reversal signals that are effective when you combine them with other analyses. However, there are dozens of candlestick patterns, including exotic patterns that rarely form. Is there an alternative way to catch trends with candlestick patterns? Yes. Let’s get to know the Heiken-Ashi candlestick chart.

A Heiken-Ashi (or Heikin-Ashi) candlestick chart is a tool that offers a unique perspective on price action

In this tutorial, you’ll learn:

• How to apply it in actual trading scenarios to profit from trends?

Before you proceed, make sure you have a solid understanding of standard candlestick charts

HOW TO INTERPRET HEIKEN-ASHI CANDLESTICK CHARTS?

On standard candlestick charts, we observe the candle body and shadows to find candlestick patterns.

This process involves looking out for various possibilities on the chart. Hence, it can feel overwhelming at times.

After a transformation to Heiken-Ashi candlesticks, you can adhere to a simplified analytical process.

BASIC HEIKEN-ASHI GUIDELINES

• Green candlesticks – bullish
• Green candlesticks without lower shadow – strongly bullish
• Red candlesticks – bearish
• Red candlesticks  without upper shadow – strongly bearish
• Dojis with substantial upper and lower shadows – neutral (congestion or reversal)

Except for Dojis, the Heiken-Ashi candlesticks lend themselves to straightforward interpretation. This takes an enormous burden off a candlestick trader.

Let’s go through these guidelines by example, with the chart below. (WMT – Walmart Daily)

1. When prices are trending up, you find consecutive bullish Heiken-Ashi candlesticks with no lower shadows.
2. When prices are trending down, you see consecutive bearish Heiken-Ashi candlesticks with no upper shadows.
3. Doji-like bars with both lower and upper shadows are possible turning points.
4. The Dojis also appear in price congestion or trend pullback areas.

As you can see, with Heiken-Ashi, it’s straightforward to describe the current price action.

• Is the market trending?
• Is the market trending strongly?
• Is it hesitating?

With this unique chart type, you can answer these questions quickly and with ease.

HOW TO APPLY HEIKEN-ASHI IN YOUR TRADING?

The previous section covered the market analysis. Here, we will focus on turning our analysis into trading decisions.

We will look at the following Heiken-Ashi applications:

• Finding turning points
• Letting profits run
• Timing long-term investments

FINDING MARKET TURNING POINTS

Finding turning points with Heiken-Ashi charts involves two steps.

First, find Dojis on a Heiken-Ashi chart. This step pinpoints a zone for us to focus on.

We have already done this by marking out the Dojis on the Walmart chart above (in Point #3 and #4).

The Dojis highlight zones of possible reversal or continuation where we can find trading opportunities.

Next, switch back to the standard candlestick chart and look for reversal candlestick patterns.

The chart below shows the same WMT daily chart. We have circled the candlestick patterns in the Heiken-Ashi Doji zones.

1. There was a Morning Star candlestick pattern here. It is a bullish three-bar reversal candlestick pattern.
2. After the bullish swing that filled the earlier price gap, Heiken-Ashi Dojis coincided with a Three Black Crows pattern. This bearish candlestick pattern led to the downswing, which ended with a double bottom.
3. This chart is twinkling with stars. In the other two trading zones, we found Morning Star patterns that pushed the bullish trend further.

This trading approach is not perfect.

Return your attention to the first Morning Star candlestick pattern at the chart’s bottom (Point #1). The two bars before it formed a Dark Cloud Cover pattern, which is bearish. Taking that signal to go short will result in a losing trade.

Nonetheless, Heiken-Ashi charts are nifty tools for quickly identifying areas of interest for further candlestick analysis.

LET YOUR PROFITS RUN WITH HEIKEN-ASHI ANALYSIS

• Do you have a problem letting your profits run?
• Do you watch over each trade with an eagle eye?
• Do you feel stressed by each price tick?

If you answered yes to any of the questions, you’d benefit from the Heiken-Ashi chart.

Let’s take a look at a simple method of taking profits with the Heiken-Ashi chart. When a Heiken-Ashi candlestick goes against our trade appears, we exit.

• If you are in a long trade, exit when you see a bearish Heiken-Ashi candlestick.
• If you’re in a short trade, exit when a bullish Heiken-Ashi candlestick forms.

The chart below marks the exit points for both long and short trades using this straightforward tactic. While these exit points are not perfect, they are adequate when coupled with a reasonable stop-loss.

If you’ve had applied the same exit method using a standard candlestick chart, you would have exited with smaller profits.

It’s common to feel anxious watching the market move against you. The anxiety might cause you to exit earlier than you should.

Try switching to a Heiken-Ashi chart to monitor your trade. This calm chart is what you’ll see.

Much easier to let your profits run. Right?

CONCLUSION: POWER OF HEIKEN-ASHI CHARTS

If we depend solely on the Heiken-Ashi chart, we might miss key price features like price gaps and candlestick patterns.

This is why I recommend using the Heiken-Ashi candlestick chart to identify note-worthy price action before switching to the standard candlestick chart for further analysis.

For instance, when the market is in a clear trend, there is no need to over-analyze. But when the market starts to stall, it’s time to dive in and assess if the market is merely taking a break or preparing for a reversal.

In a nutshell, Heiken-Ashi candlestick charts excel at telling us when to pay attention.

For candlestick traders, the Heiken-Ashi chart is a simple yet powerful addition to their trading arsenal.

Heiken-Ashi candlesticks are great because:

• They point out key trading zones for further candlestick analysis, saving you time and increasing your focus.
• They help to cut your anxiety as you let profits run.
• They do not need any user inputs—no need to tinker with different lookback periods to find the ideal moving average.

Finally, if you’re interested in a well-defined pullback strategy using the Heiken-Ashi candlestick chart.