Trendlines with Heiken Ashi and Stochs System

***** UPDATE 20th Jan 2012 *****

I've noticed there are a few new readers coming in since the thread started up again. The first 9 pages give some good information but the latest reincarnation of this system starts with this post.

http://www.forexfactory.com/showthre...92#post5288392

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I posted a thread a little while ago to try to help newer traders who were maybe struggling a little bit. Unfortunately it got moved to the commercial section due to my excessive enthusiasm for a thread by a commercial member. (I understand the forums moderators reasons for doing this and have no complaints at all).

***UPDATE: I have removed the content of the original thread that got it put into the commercial section. Although the system described there is slightly different than the one I present here there is a lot of good information and lots of charts that you may find interesting and I don't want to have to go over again here so here is the link and you may like to take a look. http://www.forexfactory.com/showthread.php?t=304375 ***

At the start of the thread I gave a little of my history and a small breakdown of what it took for me to start to make money from trading. In this thread I am not going to repeat all of that information but rather I am just going to present a system. I'm sure if you wanted to read that thread you could probably work out how to find it and you may find some of the information useful.

The system I offer here is slightly different from my system on the other thread. I have included a few indicators in this system because although I can trade perfectly well without them I believe that from a beginning traders point of view it may be useful to have these indicators present to aid in spotting good trades and to aid in entry and exit rules for good trades.

The system uses trendlines drawn on the monthly, weekly and daily charts, a 100 ema of the close, heiken ashi candles and stochastics.

Drawing trendlines is sometimes a sticky issue but to simplify things we will just say that to draw a trendline you merely connect the lows in an uptrend and the highs in a downtrend. Lots and lots of chart examples will follow.

A note on trendlines while we are here. I draw trendlines on monthly charts first. These monthly trendlines are the most reliable s/r levels on a chart. They do tend to cause a reaction in price if not a complete trend reversal. Also, as stated in my other thread, I do draw 2 touch trendlines by which I mean the first touch is the start of the trendline and the 2nd touch is the first connecting point. A lot of people will tell you that a trendline isn't a trendline until the 3rd touch to which I say true but a 4 or 5 touch trendline starts out life as a 2 touch trendline.

I use trendlines because they are a good, reliable (on the higher time frames) place to look for reversals in the direction of a trend.

I use a 100 ema of the close to help define the longer term trend. Generally I only take trades in the same direction that the ema is sloping unless there is a strong pattern forming such as a flag or triangle.

I use Heiken Ashi candles which are average price candles because they filter out a lot of the noise of regular price action. A change in colour at a trendline backed up by stochs in the direction of the main trend gives a good signal. Also they can help you stay in the trade longer as you are less prone to worrying about the day to day noise.

I use stochastics (8,3,3,low/high,simple) to confirm the price reversal. Of all the oscillators I find stochastics the most useful to represent what is happening in the momentum of price. I posted a couple of posts on my other thread with an explanation of why I don't like the terms overbought and oversold. Nothing has changed, I still don't like them but I do find that stochs can be useful when looking for good reversals providing you are trading with the trend. Also I believe it is easier to define a good entry point for a newer trader if you use these visual aids.

I will post more with chart examples and give detailed entry and exit rules soon. Incidentally this is a system for trading daily charts so if you like to take lots of trades then this is not for you. If you like to make money and don't want to pay your broker a fortune in spreads then you may want to read more.

To set up the charts I find it easier to use normal candlesticks to start with. I move to a monthly chart and zoom it out so far but so I can still see the individual candles.

I then draw any trendlines I can see in purple to denote monthly/weekly lines. I then move to the weekly chart and add any new lines I see, sometimes there are none. After that I go to the daily chart and add any lines I see in red to denote shorter term lines. I also "refine" the longer term trendlines on the daily chart as with Metatrader it doesn't put the lines at exact price points. I believe this happens because it puts the lines at the start of the month rather than the specific price. It only takes a minute to turn off the auto scroll and go back and correct them anyway.

Once I have the trendlines drawn I can add the rest of the indicators. First I apply the HA candles. These are in Metatrader under custom indicators. Then I add the 100 ema. Since I am using HA candles I also add a 1 period sma of the close to show me the same as a line chart. I don't use the line chart as you can't alter the thickness. Also I switch the chart to a line chart and set the line chart colour as none in the properties box so I just see the HA candles. Then I add the stochastics with the settings 8,3,3,low/high,simple.

The first chart is below is usdchf monthly. The second chart is the completed daily chart.

Put quite simply an entry signal for the above usdchf chart would be a heiken ashi colour change back to red at one of the trendlines it is moving towards and the stochastics green crossing back below the red, preferably above the 50 level. Note that you would only take shorts at the moment because the blue 100 ema is moving down and the pair is in an obvious downtrend.

Here is an example of eurgbp. I actually took this trade whilst illustrating a trade using my other system but it so happens that I spotted a good trade according to this system too (so much for the indicators but I'm hoping that you will realise that over time anyway).

This is a buy entry. The blue 100 ema was breached slighly but nothing to be concerned about as the stochastics and the HA colour change combined with the 3rd touch of the trendline all signals a good buying opportunity. Time will tell if this is going to be a good entry for either system or not.

To manage the trade I will move to break even after a move of around 60 to 80 pips on this pair as it tends not to move much more than that. Once it is at break even I will trail the stop behind any minor pullbacks and I will trail more aggressively should the HA change colour against the trend. I will let the stop loss take me out of the trade. Should the trade reach the next trendline I will consider taking profit manually.

I have to go to bed for work in the morning now but I will post more about the system and more chart and trade examples as I go along.

It always pays to zoom out your chart a little. Upper channel lines are sometimes very informative too. This is the eurgbp trade, about 30 pips up at the moment. Zoom the chart out a little and you can see an obvious channel forming. The touches are marked in magenta. Is the best place to look for a reversal/take profits in the area marked in light blue?

This type of trendline analysis won't work out all the time but it's good to look at possibilities because it may keep you in a good trade for longer.

having identified the trend based on monthly and daily can you explain your entry like you use lower time frame charts for the purpose of entry

Hi Hugh

I am very interested in your system as I have done the usual and concentrated on lower time frames looking for more "action" whilst losing my money!!!

I think the penny has finally dropped (along with a large percentage of my account!) that the longer term charts are a far better place for a fairly inexperienced trader like myself.

So I have been searching these forums looking for a simple system that would suit me best. I have found several Trendline based system which really appeal to me and make perfect sense but mostly on much shorter time frames.

However your system seems to match my requirements entirely being trendline based on the longer term charts, however I am fairly new to trading so may ask some pretty dumb questions especially around longer term philosophies as I have, up to now been concentrating on shorter timeframes.

So heres my first tranche of dumb questions:

 

1. What time do you carry out your analysis and how often?
2. How many pairs do you monitor and which are they?
3. Which timeframe do you use for entry?
4. Could I use this system on lower timeframes? By that I mean start the process on daily and maybe enter on hourly? (sorry still suffering from an itchy trigger finger)

Thanks for sharing your method and explaining it so clearly. I look forward to many successful trades with you.

All the best Clive.

Take a look at the chart of eurgbp above. The price approached a 2 touch trendline. The heiken ashi changed colour to green at the trendline and the stochastics crossed at the bottom and started moving up. When these things occur together then you wait until the close of the daily candle and then open your trade.

What you are actually trading is the bounce from trendlines with confirmation from the stochastics.

Hello Clive, good to have you along for the ride.

Never worry about asking dumb questions because I can guarantee you that even the most experienced traders had to ask the same questions themselves once.

Your questions...

1) I love to look at charts on a weekend, the market is closed and I can just spend hours zooming charts out on monthly, weekly and daily. Part of my love of trading these days is just looking at charts! As you are drawing much longer term trendlines you won't need to change them that often. On the daily chart trendlines break more regularly so I will have to move or adjust these on a daily basis. I'd say I look at charts mostly on the weekends but when I check the daily candle each day I will remove or adjust any that are no longer valid as I go along.

2) I monitor all pairs with a spread of 10 or less, depends what broker you are using. As you are only checking the charts once a day this can take as little as 5 mins to check them all.

3) I draw trendlines on monthly and weekly charts and then use the daily for the entries. The exception to this would be if price is approaching a very strong monthly trendline and the daily chart is giving me too much noise in which case I will wait until the weekly chart gives me a better picture.

4) I would really urge you to scratch your finger some other way! The higher the time frame the more reliable the support/resistance that the lines offer. You could trade bounces from daily trendlines using smaller time frame charts which would give you a slightly better entry if it goes right but you have more chance of being shaken out of the trade. It is much less stressful to just watch a daily chart and take your trades on the close of the daily candle. It is possible to use trendlines on the lower time frames like daily, 4 hour and then take trades on 1 hour or 30 min but the lines are more likely to break and less likely to give you good signals.

I hope that covers it all? If you need anything else just ask.

Looks like a good system Hugh!

I was wondering where your initial stop loss order will be placed? Is it one tick/pip below/above the HA candle before the color change? At the trendline?

I agree that it can be less stressfull to trade the day chart, but the longer time frames also have longer drawdowns that can cause a few grey hairs to grow if your money is managed incorrectly.

Are the EMA and STOC configs the same for all timeframes?

Thanks!

Some possible set ups to watch.

This is gbpusd, first chart is weekly, approaching the trendline again. Will it bounce there?

Second chart is daily, stochs are high, 100 ema is sideways. Will it bounce at the trendline and the stochs go lower?

This next one is eurchf daily. It's in a strong downtrend but currently retracing, maybe a bounce from the trendline and a trend resumption could occur around that location?

The good thing about this system is you know what to look for and when and usually a good way in advance.

Chfjpy daily. The daily trendline that it is about to test doesn't look so strong to me as it's only a 2 touch trendline. The monthly trendline in purple just below it looks a much better place to watch for a reversal. It corresponds with the 100 ema and by then the stochs will be quite a bit lower.

Notice that in a strong trend the stochs won't always reach the "overbought" or "oversold" areas. If your trading with the trend then a cross of the stochs (with other confirmation such as a trendline and ema) is enough.

The other thing to mention on this chart is the apparent breach of the trendline which I have marked in white. This occured around the time of the earthquake and tsunami in Japan which caused a temporary fluctuation in the price. For this reason I do not count those few bars in my trendlines. This is across all yen pairs because in all pairs the price moved swiftly back above the trendline and seems to have resumed the same trend, sometimes to the pip.

Ok, here's audchf, cadchf, cadjpy and usdbgn (yes that is the usd against the Bulgarian Lev, my broker is Bulgarian and it only has a 5 pip spread so why not? Trades pretty smoothly too).

I haven't marked the previous touches or the possible touches but if you have read the thread from the start it should be obvious what we are looking at. (if you're really not getting it ask questions, I will answer no problems).

One point I want to mention now is not to trade the same pair too many times. Let's say audchf and cadchf both set up in the next few days it is fine to take both trades but be aware that if the chf tanks for any reason then both your trades will go against you at the same time. Don't overexpose yourself to the same currency. When it goes right you will feel like a hero because all 3 or 4 of your chf trades went your way and you made a bundle. When it goes wrong you will feel like a bum for being so stupid. I like to not take more than 2 trades featuring the same currency pair.

Last chart for tonight is gold with fibonacci drawn. Price reached the upper channel line (I posted charts in my other thread, see the first post of this thread for the link), stochs are down. I'm watching the next trendline which corresponds with the 100 ema for a good clear reversal signal in order to buy back into the trend. This will probably correspond with either the 50 or 61.8% retracement level.

This is obviously complete speculation, noone can know what will happen next but you can know what you want to see happen in order for you to place a trade and if it happens act on it. If it doesn't happen as you want it to happen then simply readjust your trendlines and wait for the next potential setup to watch. Wait for the trades to come to you and they should be obvious.

Great thread....please don't stop! Blessings!! Tony Costa

Thanks for the feedback, glad you're enjoying it.

Hi RS, sorry I didn't notice this before but obviously your post didn't appear straight away as it needed modding as it's your first post.

To answer your questions... one pip one way or the other is a bit close. Usually the stop loss goes the other side of the whole reversal up to 200 pips away but sometimes less. Take the eurgbp trade discussed above, from the entry point to 10 or 12 pips below the last low it is around 100 pips so to keep things round I have just entered a 100 pip stop loss. Eurgbp is not a very volatile pair. Should the HA to change colour and/or the stochs cross against the trade then I would move the stop loss in tight or just close the trade so I wouldn't necessarily always take a full loss. A close the wrong side of the trendline is always a good sign of your trade not going your way.

In terms of money management you are rignt that it can seem as though you are losing a lot of pips for every loss. If you are only risking 1 or 2% of your account on each trade then you should still be able to turn the pc off and sleep at night. A 2% loss is unfortunate and feels bad, when it's your turn to catch a good trade that you can add on to as well then you could be banking 10 to 20% of your account on one trade. (or series of trades added on to an original winning trade)

I believe these configurations would work for all timeframes. One way to use stochs is to look at the direction of a higher timeframe and only take trades on the lower timeframe in the direction of the higher timeframes stochs. There are a number of ways to look at things and use different indicators but the main indicator and the most reliable at predicting the next price direction (given the right signals) is trendlines and they will be the same on all timeframes.

Thanks for your questions and I hope this answers everything?

Great explanation and very clear what you are looking for. It helps to keep that itchy trigger finger under control when I can see possible setups approaching.

Thanks again for sharing.

A pretty quiet week then. The eurgbp trade has been open a week and is a grand 21.5 pips up! It does still look good though. A few trades could be setting up for next week so maybe more action then?

Have a good weekend and I'll see you next week.

Eurgbp is grinding it's way slowly in the right direction, still no reason to close the trade.

On the face of it nzdchf looks like a good trade, a stoch cross at a decent level and a bounce from not 1 but 2 trendlines. What you have to ask yourself though is how far could this trade go? It looks to me as though there is much too much sideways movement to be able to trade this and there is possible support not far away at the next rising trendline so it's a pass.

The second chart is a trade on gbpchf. What worries me slightly about this is that gbpchf needs to continually break historic lows to go further down. I would think this is possible and it's a strong trendline, the trend is obviously down, stochs have crossed at the same level they have been crossing in the past. On the whole it looks like a good trade so I took it.

I took the trade a bit earlier than the close of the daily candle but I'm up at 3.30am, such is life. Not too much tends to happen between now and 10 anyway, not usually so much that would change my mind about the trade.