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Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

2013-06-04 03:00:00
Tyler Yell, CMT, Currency Strategist
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Article Summary: Staying in a good trade is one of the hardest aspects of trading well. Heikin-Ashi is a modified candlestick that rearranges how price is displayed so traders can see when it is prudent to stay in a well-entered trend. This article will teach you about Heikin-Ashi so you can decide if you’d like to add it to your Ichimoku repertoire.

In trading as in life, when you change the way you look at things, the things you look at change. Many traders utilize candlestick analysis to pinpoint reversals or continuation patterns in real-time. While this is helpful for deciding when to enter a trade once you’re in, a new candlestick view can be of major assistance to you.

The new candlestick (not really new in general but likely new to you), is called the Heikin-Ashi or “average pace of price” candles when translated from Japanese. Heikin-Ashi is simply an offshoot of what you’re likely accustomed to when reading candlesticks with their true display of the Open-High-Low-Close price. What’s altered is the open and close so you can get a better feel for the trend’s likeliness to continue.

Learn Forex: Regular Candlestick

Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

Learn Forex: Heikin-Ashi Candlestick Applied

Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

Heikin-Ashi’s Smoothing Ability & Calculation

As you can see from the second chart, directional moves are smoothed out in a way absent from the first chart. What makes Heikin-Ashi an effective tool is that it doesn’t adjust price but only the way price is displayed in terms of the open and the close. Specifically, the open of an Heikin-Ashi candle is the average price of the previous bar, and the close of the Heikin-Ashi candle is the average price of the current bar while the high and low are unchanged.

Here is the Heikin-Ashi Calculation

Open = (open of previous bar + close of previous bar) / 2

Close = (open+ high+ low+ close)/ 4

High = maximum of high, open, or close (whichever is highest)

Low = minimum of low, open, or close (whichever is lowest)

How Heikin-Ashi Helps Traders

The important point about this display of price action is that if the price of the current candle is above the average price of the previous candle (current candle’s open with Heikin-Ashi) then you’re in an uptrend. By representing the average pace of price, you can easily see with Heikin-Ashi when you should be in a trade that is trending and when it’s best to be on the side-lines. If Heikin-Ashi helps you stay in big moves longer that are in your favor, then this addition to your trading may be one worth using.

The main thing traders want to look for is a shaved or wickless candle opposite the trend. In other words, if the trend is up and price is above the Ichimoku cloud, then Heikin-Ashi candles with no lower wicks show you a very strong trend to the upside. When there is no counter-trend wick, then there is no reason to exit the trade at this time unless your profit target is hit and you’re happy to exit.

Learn Forex: Side by Side Comparison of Ichimoku with Heikin-Ashi Applied & Left Off of USDCHF

Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

Heikin-Ashi Combined With Ichimoku

Heikin-Ashi is best applied after a clear entry is identified with Ichimoku. Contrary to typical candlesticks, a large body with Heikin-Ashi and one wick displayed in the direction of the trend signifies the strength of trend. However, wicks on both sides of the candle show a choppy trend and gives off hints that the trend is weakening because price is breaking the average price of the prior candle.

In closing, it’s important to note that Ichimoku is also used to filter out the noise in that the cloud gives us our starting point for building a bias with the trend. Adding Heikin-Ashi filters the noise out even further from candle to candle so that you’re focusing on the average pace of price as opposed to potentially worrying about each candle. If you decide to use them together, Heikin-Ashi candles can help you stay in the trend longer after Ichimoku has helped you identify specific entry points.

Ichimoku Weekly Trade: Buy AUDCAD on A Clear Break of the Lagging Line through the Cloud

Joining Ichimoku with an Advanced Candlestick to Stay With the Trend

Ichimoku Trade: Buy AUDCAD If Lagging Line Breaks Through As Price Remains Above the Cloud

Stop: 0.9950 (Support at the Base Line)

Limit: 1.0200 (Near Weekly R2 on Classic Pivot)

If this is your first reading of the Ichimoku report, here is a recap of the rules for a buy trade:

-Price is above the Kumo Cloud

-The trigger line (black line on my chart) is above the base line (baby blue line) or has crossed above

-Lagging line is above price action from 26 periods ago (above the cloud is the additional filter)

-Kumo ahead of price is bullish and rising (displayed as a blue cloud). This is currently not fulfilled.

This trade was picked because of the recent breakthrough of the cloud by AUDCAD. Trading trends is like planting a tree in that the best time to plant a tree is yesterday and the best time to enter a trend trade is as soon as it’s identified. Please note however that this is a heavy news week for both pairs so keep an eye on the DailyFX economic calendar if you prefer to incorporate fundamentals with your trading.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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