How to Trade Heikin Ashi Candles
Don’t get shaken out, ride the trend
Recap
If you’re new to trading Heikin Ashi candles I would suggest you first take some time to read Introduction to Heikin Ashi Candles, which can be found pinned to the #Heikin-Ashi channel in The Exclusive Nest Club Discord. To refresh your mind, these are the main takeaways from the first article.
- Heikin Ashi cuts out noise from the chart
- Heikin Ashi gives you a quick bias of the market, either bullish, bearish or indecision.
- Heikin Ashi lets you trade with the trend
- Heikin Ashi makes sure you don’t enter the market too early
- Heikin Ashi makes sure you don’t exit the market too late
We have also talked briefly about how to put Heikin Ashi candles on your charts in TradingView. Now if you’re following the #Heikin-Ashi channel in our The Exclusive Nest Club Discord, you might have already figured out some ways to trade with this trading system. If not, grab a coffee and fire up TradingView because I’m going to put you to work.
First things first
When trading the trend, it is extremely important to understand when a new up- or downtrend is beginning. You want to catch most of the trend, but I can assure you that you won’t buy the exact bottom or sell the exact top. This is important to always keep in mind.
Before I write about how to enter or exit a trade, I will show you how to spot a trend reversal. It is quite easy. Heikin Ashi should be easy. If you have turned on your HA (Heikin Ashi) candles on, the chart gives you the opportunity to quickly decide if a certain asset is trending or not.
There are three main possibilities:
- Trending up
- Trending down
- Possible reversal
Below I’ll show you all three possibilities within one chart. The example is Stratis / BTC on a daily timeframe.
If you look at the period around 6 to 15 December, you’ll see that price stayed in a range. The bodies of the candles were very small, with wicks to both the upside and downside. We call those candles ‘indecision candles’. Price is not going up and price is not going down. After the market makes up its mind, price will go up or down.
For Stratis price went up. A look at the chart will show you that it started with a green ‘doji-like’ indecision candle, followed by two small green candles with small wicks mainly to the upside. From then on the candles get bigger with long wicks above the body. This is where the trend really has momentum. This is what you are looking for! From then on the trend continues, but the candles and wicks are get smaller.
Around the 26th of December you’ll notice the first red candle. It’s a bearish candle and clearly shows us that the uptrend has come to an end.
A new downtrend then starts with two indecision candles with both wicks to the downside and upside. From then on, the bearish trend continues with red candles that tend to be bigger and bigger. Remember, the bigger the candle, the stronger the momentum.
Now within this downtrend momentum gets weaker two times. The first time around January 1st, where you will see another red doji candle. The second time, the downtrend is interrupted with small green candles before it resumes.
Around the 14th of January you’ll spot another doji followed by 1 small and 1 large green candle, pushing the price of Stratis back up.
Now you have seen one chart, with both an uptrending and a downtrending price, with some reversal patterns in between.
If you like, you could open your TradingView right now and look up any trades you are currently in or would like to enter. Switch to Heikin Ashi candles and set the chart to the daily timeframe to spot if your trade is currently trending up, trending down, or if it’s showing some reversal candles. Note that Heikin Ashi candles can be used in every timeframe, but let’s start for now with the daily.
If you don’t know which asset to choose, try practicing with these assets that have had some nice recent trends: ADA/BTC, XLM/BTC and KMD/BTC.
As an example, I will put the ADA/BTC chart here, first with normal Japanese candles, then with Heikin Ashi candles.
To catch a new trend, you’ll have to train your eyes to spot those smaller candles with shadows to the upside and downside. Sometimes you will find a set of those candles behind each other. Other times it’s just one single candle.
Entering a trade
Now that you know how to put Heikin Ashi candles on your chart as well as how to spot trends and reversal candles, let’s talk about where and how we enter a trade.
When we enter a trade, the first thing that is important is that we spot one or a series of reversal candlesticks. Remember the small doji-like candles.
Now assume that we are only trading only long on Binance or Bittrex, and we would like to catch a nice uptrend. We want some kind of confirmation that the token we’re trading is starting a new uptrend. Therefore we are going to put stop-buy orders just above the wick of the closed daily candle from the day before.
Here is one example for KMD/BTC. Take a look at the chart and try to imagine where you would place your stop buys.
When looking at the Komodo chart, you will see that it is in a downtrend after it had a pretty epic uptrend where price reached a level of almost 2500. Now if you want to catch another uptrend, we have to know where a possible trend reversal could be. If you have placed an imaginary stop buy line in the chart, it should be around the level as pointed out in the chart below.
I have put my entry level just a few satoshis above the upper wick of that candle. When an actual trend reversal is happening, price will have to break the high of that Heikin Ashi candle and therefore turn green.
Now it could be that we will continue the downtrend and price will not reach my entry level. Maybe some would have placed a different entry line on the chart. If you’ve done that, great job. I had placed an entry for Komodo based on the reversal candle of January 5th, but price didn’t reach it and continued going down. Take a look at the same chart below, but then with my earlier stop entry level.
Now one thing that is very important in Heikin Ashi trading, but could feel a bit weird, is not taking profits after every steep price rise, or a sell after every price decline. To trade the trend, it is important that you let the trend develop itself. So when entering a trade just like we did with Komodo above, you should not move your stop loss up too quickly.
When trading with Heikin Ashi candles, there are several ways to exit a trade. Here are three possible options:
- trail your stop with a stop loss at the previous candle
- a manual close if the last candle closes below the one before it
- use Williams Fractals
In this article I will talk more about the trailing stop, because I prefer to do this in a bear market. If we look at the Komodo chart at the start of the uptrend around which started around December 18th and ended December 31st, there was a lot of room to make profit. It would have been bad if you had entered a trade but got stopped out too early, or if you didn’t let the trend play out before exiting. So let me show you in a few images how you could have played this by trailing your stop loss.
How to trail your stop loss
In the image below, I show you where I would have entered the trade, and where I would have placed my stop loss after entering.
We would have entered the trade on December 19th and placed our stop loss below the wick of the red indecision candle. Komodo painted the first green candle with a small body but a long wick. Remember, candles with long wicks show that there is a lot of buying going on and that momentum is starting.
In the next images, we are going to trail the stop loss. Imagine waking up and checking the daily chart of Komodo. It is December 20th and you would like to see how the candle close was for December 19th. Just below this candle, you are going to move your stop loss up. You would continue to do this every day.
When your trailing stop is above your entry level, you are in a comfortable position. We like to call this a ‘free trade’ because even if price hits your stop level, you are already in profit. The images above show you how I would have moved the stop loss up each day.
Now in the next image, the stop has taken us out of this trade. This is because the wick of the first red indecision candle wicked below the wick of the green indecision candle. We would have made a profit of 6.4% by using this trailing stop strategy.
Some would say, only 6.4%! I could have gone out on the first big move up with 10% and buy in lower. Yes you could have, but you would have to be more focused on the chart during the day and understand price action to actually do this. Heikin Ashi gives you a very clear and simple technique to easily enter and exit a trade even if you don’t have the time or ability to constantly monitor the chart.
Don’t underestimate the power of a trend
It is important to say that you should always stick to the timeframe where you started your trade. I will show you why in this paragraph.
I have been trading Holochain, also known as HOT, a low satoshi coin on Binance. I bought this at 11, 12 and 13 satoshis. Now lately Holochain was on fire and it went up a lot. Because I like to buy and sell low satoshi coins in Ethereum, I will chart the HOT/ETH pairing here.
Now it is very clear that from the 6th of January until the 29th of January, there wasn’t a single bearish candle. If you had bought after the last red candle and were able to ride it all the way towards January 30th, you understand perfectly how to trade Heikin Ashi candles. My mistake with trading HOT is that I switched to a lower time frame, where I saw some bearish momentum occurring. See the 4-hour chart below where there were a lot of bearish moments that would have made you sell your precious Holochain tokens. So stick to your chosen timeframe and trade the trend.
To sum up
In this article we have looked at how to spot reversals and how to enter a trade using Heikin Ashi candles.
For me this is one of the most important things. Don’t enter too early. Instead, enter only after confirmation, which would usually be a break of the upper wick of the prior candle. When your entry is good, you won’t immediately have to worry about selling at a loss and it’s easier to get out with profit.
In a bear market any profit you can make is awesome, so don’t get too greedy. Trail your candles with a stop below, and adjust this once a day when you’re playing the daily chart. This way there’s no stress and you can ride the trend. If you get stopped out early, then the trend probably was not your friend or it wasn’t a strong trend. Don’t worry about it and simply move on to the next trade.
