Trading signal: detecting reversals using Heikin Ashi

Description

This signal takes positions in the early stages of a potential trend reversal. It is based on the Heikin Ashi trend indicator. The visual representation of the Heikin Ashi indicator resembles a classic candlestick chart. As a consequence many trading platforms classify this indicator not in the list of indicators but in the list of available chart types.

Category	: Trend reversal
Components	: Trend indicator Heikin Ashi : Chart patterns
Time frame(s)	: All
Usable for buy signals	: Yes
Usable for short sell signals	: Yes
	: Video

The trend indicator Heikin Ashi visually resembles a candlestick chart. Each Heikin Ashi candle, however, is calculated on the basis of the previous Heikin Ashi candle and the current classic candle.

The Heikin Ashi chart offers three interesting advantages: (1) as long as a trend is maintained the Heikin Ashi candles do not change color, (2) the Heikin Ashi candles only change color if a trend reversal appears significant, and (3) the Heikin Ashi indicator can be used in all time frames and for all financial instruments.

Traders implementing this trading signal can experiment with two different parameters:

(1) The combination of the number and type (bullish or bearish) of Heikin Ashi candles to generate a signal. The default setting is 3 and 2 i.e. 3 bearish Heikin Ashi candles followed by 2 bullish Heikin Ashi candles, for a buy signal or 3 bullish Heikin Ashi candles followed by 2 bearish Heikin Ashi candles, for a short sell signal.

(2) The aggregated time frame of the Heikin Ashi chart. Usually the higher the time frame, the less signals but the higher quality of the signals. The default setting is 5x the time frame of the main chart. If the time frame of the main chart is 10’, the related Heikin Ashi chart will be automatically set to 50’ (= 5 x 10’).

When to open a position?

A buy signal appears when the Heikin Ashi chart displays 3 bearish candles followed by 2 bullish candles. A short sell signal appears when the Heikin Ashi chart displays 3 bullish candles followed by 2 bearish candles. These patterns are the default setting. Users can change the default settings in the designer dialog window in order to create their own patterns.