Price Action Trading Setup With Heikin-Ashi

Introduction

Traders have an array of indicators to look to when it comes to identifying setups, patterns, trends and reversals. These are all viewed on a price chart, which is arguably the most important piece of information a trader can have. Heikin-Ashi is a charting technique that is often overlooked but offers valuable insights for those who know how to put this derivative of Japanese candlesticks charts to good use. They run smoother, easier to understand, keeps you in the trade longer generally and creates less stress.


I want to show you a reliable price action pattern using Heikin-Ashi candles, Pullback Candle Reversal Pattern is a formation that makes a candle in the direction of the trend, followed by a longer candle that, in this case, set a lower low or higher high and then pulled back leaving a long wick, followed by a third candle that may or may not change color but sets a higher low or lower high and is usually an inside bar, followed by an entry candle that breaks above or below the previous inside bar candle. That is the entry point.


Currencies

• This pattern works on all currencies.

Time Frames

• Best time frames for trading this formation are 1 Hour and 4 Hours.

Pullback Candle Reversal Pattern forms with 3 or 4 candles that meet certain criteria

• The pattern consists of the pullback candle, the candle previous to the pullback candle and the candle or two following the pullback candle.
• The wick on a pullback candle must be at least ½ of the total size of that candle and only have a wick on one end. An even longer wick is preferred.
• The low of the 3rd candle (the candle following the pullback candle) should create a Higher Low & Higher High (bullish reversal), The high of the 3rd candle should create a lower high & lower low (bearish reversal) compared to the pullback candle on that or the following candle showing that a reversal is occurring.
• The candle following the pullback candle or the next candle should change color to complete the pattern.

Entry

• An aggressive entry may be made once the following candle clears the pullback candle.
• A conservative entry would be on the open of the second candle following a change in candle color.

Take Profit and Stop Loss

• You can set Take Profit and Stop Loss if you are more comfortable with that. I use support and resistance levels for both.

Bullish Reversal Setup

Figure 1. EUR/USD Hourly Heikin-Ashi chart bullish reversal example

1. Bearish Candle (downtrend).
2. Followed by a lower candle that sets a lower low and then pulls back leaving a long wick.
3. Followed by a 3rd candle that may or may not change color but sets a higher low and is usually an inside bar.
4. Followed by an entry candle that breaks above the previous inside bar candle and breaks above 10 EMA.

Bearish Reversal Setup

Figure 2. EUR/USD Hourly Heikin-Ashi chart bearish reversal example

1. Bullish Candle (uptrend).
2. Followed by a higher candle that sets a higher high and then pulls back leaving a long wick.
3. Followed by a 3rd candle that may or may not change color but sets a lower high and is usually an inside bar.
4. Followed by an entry candle that breaks below the previous inside bar candle and breaks below 10 EMA.

Figure 3. EUR/USD Hourly Heikin-Ashi chart analysis for week

Chart analysis for an entire week showing only possible entries on the EUR/USD H1, based on Pullback Candle Reversal. Green lines are the entry point on a break of the 3rd leg of the pullback candle and Brown lines are the stop loss point. There were 7 possible trades all of them being valid setups and winners (ellipses) as well there were 5 invalid setups (rectangles) because they didn't break through 10 EMA (no trade). If you only captured one-half of the possible pips, you would have averaged over 50 pips per day based only on just this candle formation.


Conclusion

• This setup will almost always guarantee a good trade.
• Do some back testing or forward testing on your own and see how often price reverses following one of these setups. more so on the H1 and H4 than the smaller time frames.