Wednesday, June 27, 2012

Swing Trading with Heiken Ashi and Stochastic System

This forex strategy deceptively simple but profitable basic on trend following system. It uses a few of indicators work good on 4 hour charts but other people are using other timeframes successfully.

Indicators you need;
  • Heiken Ashi candles 
  • SMA 100 Close 
  • Stochastic 8,3,3 low/high

Heiken Ashi candles are "average price" candles. They are calculated using a moving average and change colour according to that average. The open, high, low and close of these candles represent slightly different things to normal candles and the best way to get a feel for them is to put them on your chart and see how they look. If you have metatrader you can go to a line chart and then set line chart to "none" in the chart properties and that gets rid of the line leaving you a nice blank screen to put your HA candles on. Notice how the candles can sometimes stay one colour for a long period of time, hundreds of pips on a 4 hour chart. Catching and holding on to these long trends can be very profitable but of course it is not always as easy as all that!

The 100 sma is there to help visualise the trend. As a basic rule of thumb if the price is above the ma the trend is up and we only want to buy and below is down and we only want to sell.

The stochastics give us information about the strength of the pullback in the trend. I find stochastics to be the best momentum based oscillator to help visualise turns in the trend and they work very well with HA candles.

Basic Method 

In an uptrend you want to see a move up followed by a smooth decline in prices signified by green HA candles followed by red. When the HA candle turns back to green and the stochastics make a nice smooth cross towards the bottom of the stochs window then wait for the 4 hour candle to close and open your long trade. In a downtrend you want to see the opposite.

Money Management, Stops and Targets

There is some combination for the best stop loss and target combination to use to capture the most profit from these signals. There are 3 basic methods that I believe are worth testing.

  1. Enter the trade with a 50 pip stop loss. Hold the trade open until the HA candles turn back against the trend moving the stop loss behind the trade as it moves. 
  2. Enter the trade with a 50 pip stop loss and a 50 pip take profit moving the stop loss to +1 pip after +25 pips is reached. 
  3. Enter the trade with a 50 pip stop loss and take half profit at +25 pips moving the remainder to break even at that point and trailing the stop loss as the trade progresses. 

That's all, need more information of this forex strategy please visit FF forum