Diamond in the Rough – The Heiken Ashi Smoothed

Originally written: 7th January 2020

I mentioned in a previous post I hadn’t covered what goes on in my algorithm, so it was going to be hard for you to all follow what kind of trading decisions I’ve made and why I’ve made them. I certainly apologise too that it’s taken this long to find the right space and time on the blog to discuss it.

Of course, I also have to apologise for the lack of information I’m about to give you too. If I was to give away my methodology, strategy and system as a whole, it wouldn’t be very effective for very long. The Big Banks and their analysts are sharp. When they see growing pools of money in one area, they’ll manipulate price the other way and snatch the lot for themselves. That’s kinda just Finance 101 really.

Maybe when I’ve made my millions and can retire I’ll give the idea away for free, because I’m a kind giving soul really, but I can’t change the world the way I want to without the big sack of cash necessary to do it first.

Let me tell you what I can reveal instead. I’m going to give away the identity of the most crucial confirmation indicator I have in my lineup. Not my entry, but the indicator that holds the balance for my trades being on the right side or not.

That is the Heiken Ashi Smoothed.

Bit crap on its own to be honest. This isn’t a great screenshot.

I call my current algorithm PinPoint. The reasoning for that is how I see each confirmation indicator preparing the ground for my entry. If the Main Entry Indicator signal is my alarm to take a shot, then I need to know my confirmation indicators have lined up to make that shot accurate.

The indicators I use all come from different families as well. My main entry is a nice, simple, repainting trend indicator that works strongly in the moment but really cannot be used for any kind of backtesting. Confirming if that’s valid are:

  • A Price Action indicator: The Heiken Ashi Smoothed
  • A Cycle indicator
  • A Momentum indicator

They’re all important, but that Price Action indicator also acts as my key for trade management and exits too. Just so we’re clear too, the Heiken Ashi Smoothed I use doesn’t rely on default settings. Sorry to any contrarians who think they’re going to pick up my money reversing my strategy.

I’m going to assume everyone reading knows what Heiken Ashi is. If not, go and do some research here and then come back. Heiken Ashi Smoothed simply takes the logic behind Heiken Ashi candles and adds a set of moving average calculations. It provides a ranged area where a pair is either in pullback/ranging, or freely trending in the implied direction.

Heiken Ashi Smoothed is not best used on its own. After all, it’s literally only a method of smoothing real Heiken candles, and those don’t work as a single indicator system either. However it is exceptional as confirmation, and even better as a trade management system.

You’ve been hit, you’ve been struck by, a smooth Heiken Ashi.

When I have a signal, I set a firm emergency stop loss 3* higher than my preferred risk. The rationale for that comes from the philosophy that the Big Banks can see where the price points where most of the current trading volume was taken. Whilst my real world stop is probably somewhere around there, I don’t want to be caught in a stop hunt. Equally in case of a flash crash or unexpected gains, I don’t want to be caught up in a margin call that completely destroys my account.

This presents me with emotional management challenge #1 – when price closes above my actual risk, manually close the trade without question.

The real stop is set on the back end of the smoothed candle. Ultimately if price is travelling back into or across that range I know the trend is either dying or in pullback. If it’s in pullback, I want to give it just enough room to get back on track. Additionally, the HAS is so smooth that it will carry on gradually travelling every candle until it’s caught up with price. If it’s sitting in that range, I too can gently pull my stops closer and closer – invaluable if it turns out that price has turned into consolidation.

Ultimately, unless things have gone really wrong outside of anyone’s real control, by following HAS in this way I’ll be well clear of closing for loss as big as my risk or emergency stop.

Likewise, I can use HAS movements to stagger my profits too. When my trade goes into profit, I create zones between certain percentages of profit. As a HAS candle stick starts to enter that zone, I move my SL into profitable territory at the start of the zone. The trade has room to breathe and move on, but no longer needs active management either, unless I want to move it throughout zones (which I do, but at least I don’t have to worry about losing money and can step away from the screen for a second).

This is merely how I use Heiken Ashi Smoothed. It’s my diamond in the rough and probably the most important indicator I have. It’s not the strongest confirmation I have, but mixed with its trade management properties and you have something that gets you into profit without cutting too much of it off, and keeps your lossy runs short.

Trade management is the most important part of this game. I’d rather win 10% of my trades and have 90% break evens than an algorithm that gives me a 1% winning edge but all the losses are equal the other way. How stressful! You may as well just flip a coin for what good that is.

Use the indicators in your strategy to ensure you’re taking a winner whenever possible.

So, I know that was all kinda light on real information. Again I apologise, I had intended this to be a clearer breakdown until I realised just how much I would be giving away and potentially ruining my own money making abilities. However, there is a point there of varying your confirmation indicators too, and finding the one – whether it’s HAS, ATR or something else – that’s going to be that friend who says “Come on mate, you’ve had enough, let’s go home.”

Because you know what? That friend saved you money AND you from a 3 day hangover. Good friend to have, no?