Forex Trading Tools and Methods (+)

Heikin-Ashi Forex Trading Strategy (Based on Joseph Nameth)

The following trading strategy aims to follow strong trends in the Foreign Exchange market. It is based on the daily Heikin-Ashi chart for identifying and confirming the trend, while the trigger is based on a Range/Renko chart. This strategy was originally presented by Joseph Nameth as a multi-timeframe trading strategy, however, for educational purposes, we are only using the Daily chart to make things easier.

Implementing the Trading Strategy in 3 Steps

Highlights

1. Determining a strong trend on a daily (D1) Heikin-Ashi chart (alternatively a 4-hour chart)
2. Confirming the trend with the EMA(20)
3. Using a trigger based on a Renko/Range chart

 

Step-1: Identifying and Following the Prime Direction of the Market

The first step involves the recognition of a strong bullish/bearish trend on a daily Heikin-Ashi chart. Heikin-Ashi uses averages to smooth out trends, and it is considered an effective trend indicator.

A few words about the Heikin-Ashi

• Heikin-Ashi is a candlestick pattern technique
• A strong trend is identified when long-filled/hollow candles are printed on the chart
• The disadvantage of this technique is that some price data is lost and that highly affects entry/exit orders
• Bollinger bands and EMAs are examples of indicators that can be combined with Heikin-Ashi to improve its efficiency

 

Example on EURUSD

On the following EURUSD Heikin-Ashi chart, we can see periods of continuous greens and red candles.

• A series of green (hollow) candles identifies a strong bullish trend
• A series of red (filled) candles identifies a strong bearish trend

This is a basic requirement for this strategy. A series of red/green candles is needed before entering any trade.

Chart: Daily Heikin-Ashi Chart on EURUSD

 

Additionally, the last bar in the Heikin-Ashi chart should follow the same direction (color).

• The last bar should be Green for entering a Long Trade
• The last bar should be Red for entering a Short Trade

 

 

Step-2: Confirming the Trend

The second step involves the confirmation of the trend. For that job, the EMA(20) is applied on the same daily Heikin-Ashi chart. Note that EMA means Exponential Moving Average and is a simple TA indicator found in all modern trading platforms.

 

On the Previous Example

On the above EURUSD chart, there are periods of positive EMA(20) slope and periods of negative slope.

• Periods of positive EMA(20) slope → green arrows
• Periods of negative EMA(20) slope → red arrows

Condition

The slope of the EMA(20) must match the primary direction of the price trend in the Heikin-Ashi.

So after the prime trend is identified, there should be no divergence between the price slope and the EMA(20) slope. If these two slopes move in the same direction, we have confirmation.

 

Confirming also with the MACD/RSI Slope (Our addition)

For extra confirmation, we can use MACD or RSI:

• If the slope of MACD/RSI moves in the same direction as the price chart, we have extra confirmation
• Note that MACD and RSI divergences are taken very seriously by many pro traders

Chart: Daily Heikin-Ashi Chart plus MACD and RSI Precision

 

Step-3: Triggering Trades

For triggering trades, Joseph Nameth proposes the use of a 10-pip Range or a 5-pip Renko chart. The idea is that these two types of charts can easily visualize a significant price movement.

 

10-Tick Range Chart

This chart type prints a bar only if the market moves at least 10 pips up or down. For a trade to be triggered, we need a bar in the same direction as our primary trend.

• For a Long Trade → waiting for a green bar
• For a Short Trade → waiting for a red bar

 

5-Tick Renko Chart

The trigger can also be based on the 5-tick Renko chart. Again. for a trade to be triggered, we need a bar in the same direction as our primary trend.

• For a Long Trade → waiting for a green bar
• For a Short Trade → waiting for a red bar

 

MACD or CCI as an alternative trigger

Alternatively, Nemeth recommends the use of MACD or CCI as a trigger for those traders who do not have access to Range or Renko bars:

• Apply MACD or CCI on a 5 min or 15 min time frame
• For example, a Green/Red bar on the MACD histogram triggers a Long/Short trade

 

Money Management

 

Take Profit on a Winning Position

One of the advantages of this strategy is the simplicity of taking profits. The idea is that traders run their profits until the Range/Renko chart changes color.

• Exiting Long Trades → When the Range/Renko chart prints a red bar
• Exiting Short Trades → When the Range/Renko chart prints a green bar

Re-Entering

In case the entry conditions remain the same, you can re-enter the trade later.

 

Stop-Loss on a Losing Position

If the position is losing money, there are two cases:

(a) If the position is losing money but the same entry conditions are still present, Joseph Nameth proposes a DCA approach. This means improving your Dollar Cost Averaging by adding to the position (up to four times maximum)

(b) If the position is losing money and the entry conditions are not valid anymore, then hedging or exiting the position when the Heikin-Ashi chart changes color

 

Trading with only one-fifth of your capital allocation

Joseph Nemeth proposes an alternative money management approach:

• Divide your trade value by five (5) and start trading with only 1/5
• The other 4/5 will be used for hedging or re-entering the position if things don’t go well

 

 

Final Thoughts

Overall, the Heikin-Ashi Forex trading strategy is interesting. If the strategy is used on a wide range of Forex assets, there should be several weekly signals for entering trades.

As mentioned above, the trading strategy is mainly based on the D1 Heikin-Ashi chart for identifying and confirming the trend. However, originally, Nemeth came up with a multi-timeframe strategy that was applied in more timeframes:

• Adding H4, H1, M30, M15 and M5 charts

Taking profits is simple and allows traders to ride strong trends until they are canceled. Concerning money management and placing stops, it is better to be careful by trading tight and keeping your orders simple. Ride the trend if the market direction moves favorably, and cut losses, if the market is not responding as it should. In any case, it is always better to apply any trading strategy on a demo account and test it yourself.

 

Please note that:

• The above trading strategy differs from the original Joseph Nemeth's trading strategy and it is exclusively presented for educational purposes
• Many traders argue that the Nemeth's Hekin-Ashi trading strategy doesn't work, so it is better to test it yourself on a demo account
• Backtesting can prove an effective tool to test the profitability of any trading strategy, however, don't forget that past performance cannot guarantee future returns

 

■ Heikin-Ashi Trading Strategy (Based on Joseph Nameth)

G.P. for CarryTrader.com

May 2024 (c)