A Simple, Profitable Heikin-Ashi Trading System

Dow Jones with Heiken Ashi Bars

Heikin-Ashi candlesticks are a slightly different way of viewing the markets. In this article, I will show how they are used as part of a profitable trading strategy.

Heikin-Ashi Candlesticks


The image below shows the DJIA with standard Japanese candlesticks.

DJ30 Industrial Avg Index

This next image below shows the DJIA over the same period using Heikin-Ashi candlesticks.

DJ30 Industrial Avg Index Heikin-Ashi Trading System

The two images are quite similar but note how the trends are clearer on the Heikin-Ashi chart. This is because we calculate Heikin-Ashi candles based partly on the average price and partly on the price of the preceding candle. The effect of this is to smooth the candles and gloss over minor moves in the opposite direction to the primary trend.

The advantage of Heikin-Ashi candlesticks is that they make the trend clearer and help nervous traders (which is all of us sometimes!) remain with the dominant trend. However, it is important to remember that when the market does change direction Heikin-Ashi candles react more slowly.

Heikin-Ashi Trading Strategy

In this strategy, I used historical data from the EUR/USD pair on the 4-hour timeframe. The historical data was from 2000 – 2014.

The strategy I backtested is:

  • Trade Long when Heikin-Ashi turns positive and MACD is below 0
  • Trade Short when Heikin-Ashi turns negative and MACD is above 0
  • Close Long when Heikin-Ashi turns negative
  • Close Short when Heikin-Ashi turns positive

I used a stop-loss and profit target of the ATR * 10.

I did a second backtest which included a trailing stop of the ATR * 1.

Additionally, I only took trades that occurred during the European trading session. The European session includes the very end of the Asian session and also the US morning session.

Finally, I wanted to take account of the summer slowdown in the financial markets an so excluded the months of July and August from my analysis.

Backtest Results

Tradinformed Backtest Models

If you want to take your trading to the next level, the most important step is being able to test your strategies. Once you can do this, you will be able to discard the useless advice and focus all your attention on what really works.

I backtested the trading strategy using a Tradinformed Backtest Model. This is a spreadsheet that can be used to test all sorts of trading and investment strategies. Excel is a great tool to use for backtesting because it is very accessible and allows testing of quite complex strategies.

You can find more about how to use a Tradinformed model here: How to Use a Tradinformed Backtest Model. And see the latest models in the Tradinformed Shop.

Results

The results of the first backtest were:

Gross Winning Trades $206,109
Gross Losing Trades $-177,809
Net Profit $28,300
Profit Factor 1.16
Winning Trade 165
Losing Trades 263
Win Percentage 38.6%
Largest Winning Trade $6,947
Largest Losing Trade $-3,696
Max Drawdown 16%

The results of the 2nd backtest, including the trailing stop were:

Gross Winning Trades $173,415
Gross Losing Trades $-139,753
Net Profit $33,661
Profit Factor 1.24
Winning Trade 185
Losing Trades 246
Win Percentage 42.9%
Largest Winning Trade $5,249
Largest Losing Trade $-3,548
Max Drawdown 10%

The above results are pretty encouraging to me. They show that the Heikin-Ashi candles can be profitable over a long period. They produce a decent win percentage for a trend following strategy and in particular show a low drawdown. For many traders, this is a key aspect. It is hard to follow any strategy that has big swings in profitability.

This strategy is designed to highlight how Heikin-Ashi candlesticks are helpful for traders looking for trend following opportunities. They are easy to read and understand. They can be combined with other indicators to make them more effective.

Resources

My fallback information source for anything related to Japanese Candlesticks are the books by Steve Nison. I have his classic Beyond Candlesticks: New Japanese Charting Techniques Revealed and I refer to it often. If you are interested in learning more about candlesticks, this is an excellent place to start. The book covers patterns as well as other fascinating Japanese trading systems like 3 LIne Break, Renko and Kagi Charts.

YouTube Video

I have recorded a YouTube video giving more information about the candlesticks and the backtest spreadsheet.

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