Heiken Ashi Double Bottom Momentum Pattern
Let us now move to Double Bottom Momentum Pattern which is very different from the standard Double bottom pattern seen in Technical Analysis. A standard Double bottom is where Price revisits a previous bottom and takes support in that region and then heads higher. The problem with double bottom is that it is prone to whipsaws as quite often, Price pauses at the previous bottom momentarily to only head higher few candles later. This is one of the main reasons why Standard Double bottom is not used that often as a Trading Strategy.
A much better way to trade Double Bottom is by adding element of Momentum within it. By doing the same, you will add an extra dimension to standard double bottom pattern. Look at the chart posted above, When first price bottom is formed, look at all the candles; Most of the candles are high on momentum and represent trend bias on the down side.
Now, look at the second price bottom, as price approaches the previous bottom, look at all these candles during Second price bottom. Other than one candle, all candles are low on momentum and are narrow range candles. What this signifies is that when compared with first price bottom, during second attempt, price has lost substantial momentum and is much more likely to take support in this region. Therefore, we are using combination of Rising Momentum in first price bottom along with combination of Falling Momentum in second price bottom to identify high probability trades. I have explained more of this in the Heiken Ashi Trading Strategy Video (links posted below).
Heiken Ashi Strategy On 5 Minute Chart
Let us now come to using Double Bottom Momentum Pattern as Heiken Ashi Trading Strategy on Shorter time frame charts. In order to Trade this Double Bottom Momentum Pattern, there are Three rules you have to follow on shorter time frame charts.
Rule Number 1: The first Bottom Formed has to be on back of high momentum. Clear Wide Range Candles should be visible.
Rule Number 2: The Second Price Bottom should be formed on back of low momentum. Most candles should be narrow range candles.
Rule Number 3: You enter the Trade when you spot a long tail Heiken Ashi Candle by keeping low of previous bottom as Stop loss.
Heiken Ashi Strategy On Daily Time Frame Chart
In order to Trade this Double Bottom Momentum Pattern on a daily time frame chart, there are Three rules you have to follow.
Rule Number 1: The first Bottom Formed has to be on back of high momentum. Clear Wide Range Candles should be visible.
Rule Number 2: The Second Price Bottom should be formed on back of low momentum. Most candles should be narrow range candles.
Rule Number 3: You enter the Trade when you spot Two Initiation Candle and One Confirmation Candle. Stop loss for the Trade would be below the low point of first price bottom.
Unlike 5 Minute Time frame chart, on daily chart, you are waiting for Initiation Candles & Confirmation Candles to enter the Trade.
Heiken Ashi Long Term Charts
Heiken Ashi is also very useful on Higher time frames. While Heiken Ashi is primarily used for Short term Trading, its effectiveness improves a great deal when it is used on a higher time frame chart. Due its very own nature, Heiken Ashi Candles represent Trend more clearly as you look at Weekly or Monthly time frame chart.
Whether it is long term Investment or a Positional Trade you hold, do check Heiken Ashi charts on a weekly or monthly time frame to assess strength of Trend. In the chart below, I have marked out trending phases for S&P 500 on a higher time frame chart over the last 10 Years.
Heiken Ashi Strategy – Most Common Mistake
Most Common mistake when using Heiken Ashi Candles is to Enter or Exit Trades based on the color of Candle. Most beginners commit this mistake and this should be avoided at all times. Whether it is Heiken Ashi Candles or any other charting method, you need to understand the overall Market Trend and Context. Without this, you will find it difficult to Trade successfully over a longer period of time.
One of the main things you have to do is to analyze which candles contribute to Trend and which do not. This effective way of filtering out relevant candles from non relevant one’s is what will help you succeed with Heiken Ashi Candles.
Always divide your Candles into two types; that is Candles that have impact on Trend and Candles that have no impact. This way, you will know which one’s to focus upon.
Heiken Ashi Strategy – Heiken Ashi Advantages.
Main advantage of Heiken Ashi is that It filters out the noise from the trend and helps trader identify Trending moves better. Heiken Ashi technique takes average of 2 periods and this technique of combining the previous day and the current day results into a candle which substantially reduces the volatility in the price movement. While Heiken Ashi has tremendous advantages in form of representing Trend more clearly, it has some disadvantages as well.
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