Heikin Ashi Strategy for Binary Options

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Heiken Ashi Binary Options Strategy

The Heiken Ashi binary options strategy involves the use of the Heiken Ashi candlestick indicator, as well as, the MACD indicator.

In this case, we shall be deploying a custom-made MACD indicator, which has been color-coded to recognize trend changes much earlier than the conventional MACD indicator which comes with the forex charts.

Indicators required for this strategy

The indicators to be used for this strategy are:

  • The Heiken Ashi indicator: This is a custom-made indicator which plots Heiken-Ashi candlesticks on the asset charts.
  • The MACD color-coded histogram: This is another custom-made indicator which paints the MACD histogram component of this indicator blue or red according to trend bias.
  • 21-day EMA: Acting as support or resistance for the price action depending on where price action is going.
  • 7-day EMA: While this indicator is not a very integral part of this strategy, the 7-day EMA can be used as an additional indicator to the chart to detect trend when this is not ascertainable on the charts at first glance. (Learn more about Moving Averages and how to use them)

The Heiken Ashi indicator will plot candlesticks using the following data:

  • open and closing price data from the previous time period
  • open price, high price, low price and closing price data from the current time period

The Heiken Ashi candlesticks are therefore different from the conventional candlesticks and on a chart, these will be seen plotted as additional candles on top of the Japanese candles. For this demonstration, we have adjusted the colours of the Heiken Ashi candles to blue and red respectively; blue candles representing up candles and red candles representing down candles.

The strategy

The Heiken Ashi candlesticks indicate when the trader should trade Call or Put based on color changes. So when the Heiken Ashi candles turn red in colour, it is a signal to prepare for a PUT entry, and when they turn blue, it is a signal to prepare for a CALL entry. These colors can be customized by the trader for visual clarity.

The 21-day exponential moving average (EMA) is the resistance-support line for this trade, while the MACD histogram also determines the trade direction by means of a color change. Red is a signal to PUT, and blue is the signal to CALL. A typical trade performed with this strategy must therefore take all these parameters into consideration and put them together so that signals are clean, clear and unambiguous.

CALL TRADE

The Call trade setup occurs when the following conditions occur at the same time:

  • The Heiken Ashi indicator candles are blue.
  • The price bounces off the 21 EMA
  • The MACD histogram bars are blue in colour.

These conditions are displayed in the chart that we have shown below:

This is a one hour chart that displays the fact that there are several opportunities to trade this setup over a one-week period. We can see that on this chart, 4 areas to set a Call trade (marked 1, 2, 3 and 4) were seen over a 9-day period. When the market is trending, the opportunity to profit from this trade is enhanced.

As in similar trade setups we have described, it is necessary to determine the correct exit point for the trade so that the expiry time will leave the trade in the money. While left to the trader’s discretion, it is suggested that the trader can leave an expiry time of about 4 hours, or 4 candles in length for a trade taken from a one-hour chart.

PUT TRADE

The trader should short the currency pair when the three indicators show the following characteristics. Again, these should all be seen at the same time:

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  • The Heiken Ashi indicator candle bars assumes a red colour.
  • The price action has come from above and broken the 21 EMA to the downside, or is coming from below in a pullback fashion and is rejected at the 21 EMA.
  • The MACD histogram bars are already red in colour.

The chart below shows the possible entry points for a long trade based on the conditions that we have stipulated above on a daily chart.

The snapshot displays the setup that occurs that makes a PUT trade possible. The lines indicate where price action marked by red Heiken Ashi lines bounce off the 21EMA line and provide the trade signals. Once again, it is pertinent to set the expiry time using the timeframe chart as the guide. This chart was pulled from a one hour chart, and therefore it would be ok to use at least 4 candles as the length of time which should be allowed to pass before the trade expires.

Tips for better trades

A closer examination of the charts will show that there are times when the Kumo will be horizontal in orientation, showing that the price action is going to be in consolidation or will be in a range-bound mode. This strategy works best when the Kumo is in a trend, showing that the asset will be in a trending mode. A trending market will not be in the best interest of the trader as the asst has to make a move in some direction to actually give the chosen trade a chance at success. So how can the trader confirm that the market will trend?

One way of performing a confirmation to see if the price action is actually going to trend is to introduce another indicator. One such indicator which is used to detect a trend is the 5-day exponential moving average (5 EMA). When the 5 EMA crosses over the 21 EMA in one direction, it is most likely that this will be the direction of the trend. Where the 5 EMA fails to produce a definitive cross with the 21 EMA, the market will in all probability end up being range-bound and the strategy will not deliver. So perhaps the trader will need to add the 5EMA to the chart to check for the trend before executing any kind of strategy.

One of the best indicators based on MAs is trend indicator for MetaTrader 4 that not only produces non-repainting crossover trading signals, but also filters them through ADX, which measures the strength of a trend.

Please remember to test all your strategies on a demo account first.

Heikin-Ashi Binary Options Strategy

Like candlesticks, Heikin-Ashi was also created by Japanese commodity traders. Heikin-Ashi is basically a modified candlestick chart that uses the average price of a period to plot the chart. You can read more about how Heikin-Ashi bars are calculated and displayed on Investopedia.

Today, we are going to discuss a very simple Heikin-Ashi binary options trading strategy that combines the Moving Average Convergence Divergence (MACD) indicator to generate CALL and PUT signals.

Preparing the Chart for Trading Heikin-Ashi Binary Options Strategy

Many popular technical analysis and charting software offers the Heikin-Ashi bars as an indicator that you can add to any chart. For example, the MetaTrader 4 trading platform has a built in Heikin-Ashi indicator.

To prepare the chart for trading this Heikin-Ashi binary options strategy, all you need to do is: add two built in indicators on the MT4 platform, MACD and of course, the Heikin-Ashi.

Once you have added these two indicators, your chart should look similar to the following example chart:

Trading with Heikin-Ashi Binary Options Strategy

As you can probably guess from seeing the chart, the white color bars represent a bullish trend and the red color bars represent a bearish trend.

If you consider yourself the John Wayne of binary options, you can simply place a CALL order when the Heikin-Ashi bars turn WHITE or place a PUT order when it turns RED.

However, at No.1 Binary Options, we would ask you to be a bit more prudent and apply few filters to increase the odds of winning. After all, we are traders, not actors – pretending to be cowboys!

The way you can be prudent about this is to wait for the MACD to change trend as well.

In the first example CALL trade in the chart above, we have waited the MACD to turn bullish, and then waited for the price to close above the Heikin-Ashi bar that changed the MACD trend. Only then, we placed the CALL order with our binary options broker.

Similarly, in the second PUT order example, we waited for the MACD to turn bearish and the price to close below the Heikin-Ashi bar that changed the MACD trend.

Conclusion

By being a bit more conservative, we prevailed as the winner on both occasions. However, like all other trading strategies, the Heikin-Ashi binary options strategy does not guarantee a 100% win rate. Our back test suggests that the win rate of this strategy around 70% to 75% depending on the currency pair.

It works best with EUR/USD, GBP/USD, USD/JPY, and other currency crosses that involve the US Dollar. Also, keep in mind that the Heikin-Ashi Binary options strategy works best during market hours, so it is better that you do not try to trade with this strategy during early Asian session and stick to trading smaller time frames like 1-minute and 5-minute charts when markets are open in London and New York.

Indicator Heiken Ashi for trading binary options

Despite the advantages and technically adapted algorithm for the operation of binary options that traders receive for trading in this instrument, the main problem remains – to obtain a stable result, every potential investor must learn to correctly identify the most profitable market points for contracting. For these purposes, a potential investor will need a fairly broad technical toolkit. And this is logical, because the market, despite the cyclical nature of the charting of quotes, can not build clearly repeated patterns and models. For this reason, the more arsenal of analysis tools a trader has, the higher the probability of correct market forecasting. Another point connected directly with options trading is that the principle of the rate for market movements is embedded in the algorithm of the work of the instrument, that is, the clear definition of the direction of the trend of quotations is the main issue here. Therefore, the most efficient services when generating forecasts for binary trading are trend instruments. Given such requirements for work in the binary market, we offer you as a service for effective market analysis a description of the work of a professional and highly productive indicator Heikin Ashi. This market analysis tool today refers to the classic forecasting services and allows you to achieve the highest possible trading results in the binary market.

What is the indicator?

So, Heikin Ashi was introduced to traders in 2004 in one of the most popular financial publications. The tool was created as a means of determining the trend based on smoothing the indicators of candlesticks.

The problem of analyzing trading quotes is that at the outbreak of market volatility, many instrumental strategies fail – simply indicators can not respond quickly and accurately to impulse declines or the growth of quotations. In addition, most traders consider such market situations difficult for analysis, and even more so for registration of trade rates. Therefore, the specialists decided to create a service, in the algorithm of which a delayed reaction to instantaneous outbursts of volatility will be laid. This smoothes out the technical indicators of the instrument and allows you to more accurately determine the trends in the movement of quotations.

Heiken Ashi is nothing more than a filter for low-frequency market fluctuations. This principle of construction reduces the level of influence of market noise in any time horizon of quotes assessment.

The indicator for building its indicators uses the candles already formed on the chart, so users get a clear picture of possible market fluctuations in the value of the asset. It is the belated reaction of the instrument to the bursts of market impulses that makes the indicator an indispensable service in binary trading.

In addition to the general advantages of Heikin, Ashi provides an excellent opportunity for traders who prefer to use cross-rates of high-volatility currencies in trading. His technical algorithm of work allows you to determine the most profitable trading levels for contracts when working on such assets as precisely as possible.

What does the indicator look like?

At first glance, the service almost does not differ from the classical Japanese candles. But here an innovative method of calculating the schedule is used, which more accurately determines the current trend of the market. For clarity, we describe the formulas:

• The level of candle opening in this case is calculated as the arithmetic mean between the opening and closing of previous Japanese candles chart
• The level of candlestick closing indicator is calculated as the arithmetic mean between the closing / opening price and the level of extremes of the previous Japanese candle
• The level of the candle’s maximum is defined as the arithmetic mean between the minimum asset value and the opening / closing level of the previous candles
• The minimum level of a candlestick indicator is defined as the arithmetic mean between the maximum asset value and the level of opening / closing of previous candles

As a result, on the trading schedule of the underlying asset, a specific liquidity management regime is formed, which allows, based on the candlestick indicators, to generate forecasts for trading:

Pay attention to how well the liquidity chart, constructed by the indicator of Heikin Ashi, looks harmoniously. Here it is possible to trace all the cyclical patterns of the trend turns, which greatly simplifies the work of the trader in the issue of generation of forecasts.

Access to Analysis Service

Heikin Ashi is considered a classic professional indicator for market valuation. However, in binary trading we use specialized terminals for trading, which often have relatively limited equipment in terms of access to analysis tools. Therefore, it is rarely possible to find a trading service, where the basic set of analysis services will include this tool. But the problem is solved very simply. First, today in the market of brokerage services there are companies that provide the Meta Trader platform as a trading service, for example, the operator Alpari. Heiken Ashi is a standard analysis service on this platform. Secondly, – on some trading platforms, brokers offer specialized functionality for installing third-party indicators, which allows adding a technical analysis tool to the list of necessary tools for forecasting. Heikin Ashi can be downloaded online for free. And, thirdly, if your trading platform does not provide the opportunities described above, you can use any third-party technical resource where you offer live asset schedules and a wide range of indicator means. As an example of such a professional resource, you can offer a site tradingview.com.

An important point is that the candles of the indicator on the asset chart are installed over the Japanese candles, so when installing the technical tool, pay attention to setting the color gamut of the service. This is necessary for the comfort of using analysis tools.

Indicator signals

So, we came to the main indicator of the indicator’s performance – signals. In this respect, the analysis service has a very wide range of indicators that allow a clear definition of the market trend of quotes movement, and opens the possibility for the execution of a performance contract with a binary option. When the indicator is operating, it is customary to distinguish such formats of technical signals for trading:

• On the chart, the green indicator candles without shadows are formed. This indicates a clear trend trend up, where there is a strong market momentum. In this situation, you can draw up a series of trading rates on the growth of quotations of the asset.
• The color of the candle is green, but a slight shadow is formed – this indicates a certain reduction in the market momentum when building an uptrend, but these indicators allow you to continue trading in the general direction of the market.
• The indicator candles have a red color and form a large body without shadows. This is an indicator of a clear downward trend in which you can use the DOWN rate packages.
• The color of the candle is red, but a slight shadow appears – this indicates a certain decrease in the market momentum in the construction of a downtrend, but these indicators allow you to continue trading in the general direction of the market.
Candles of the indicator, regardless of color, form small bodies and long shadows (as an example of this mode of constructing the indicators of the instrument, use the classic Japanese candles Dodzi). Such candles Heiken Ashi signal about the maximum decrease in the market momentum on the threshold of the trend reversal. A model of this format can be used as a signal for the emergence of a new market trend.

Considering the practical application of the indicator in binary trading, it is worthwhile to say that auxiliary tools can be used to increase the effectiveness and accuracy of service signals. In this case, oscillators are extremely effective. You can recommend standard services: MACD, RSI, AO, Stochastics. Using auxiliary resources, you will be able to more accurately monitor the market’s reversal impulses and achieve the most effective use of the indicator Heiken Ashi. In addition, the oscillators will filter out the false signals of the main resource at times of short-term increase in market volatility that occur when fundamental market drivers appear.

Disadvantages of the indicator

Of course, like any other technical service for forecasting and market valuation, the Heikin Ashi indicator has a number of drawbacks. Yes, it is a pity that the Grail has not yet been developed, which is capable of accurately determining the most favorable conditions for trading operations by binary options. Although, frankly speaking, the appearance of such a tool will make trading an ordinary and uninteresting occupation, and the financial market will simply collapse! So, let’s return to the shortcomings of the indicator:

• The main negative aspect of the service is its delay in building. Yes, its main advantage under certain conditions is a disadvantage. The problem is that the algorithm for calculating the technical service candles is based on the evaluation of the already generated candles of the chart, so in the medium term the instrument signals have an extremely low value. But given the fact that binary traders rarely use long-term valuation periods and contracts with prolonged expiration, this shortcoming is not capable of having a critical effect on the overall trading result. In terms of recommendations – use timeframes below H1 to evaluate – thus the indicator signals will not lose their relevance and bring profit.
• The Heikin Ashi indicator has low efficiency as a mono indicator strategy. Despite the accuracy of service indicators and the ability to work on its signals with packages of contracts, the service generates low-frequency signals, which do not allow obtaining high dynamics of trade operations. Therefore, the optimal application of the indicator is a combination with other technical forecasting tools
• The latter lack of service is more likely due to the low level of experience of traders. The fact is that it is quite difficult for newcomers to understand the candle models that form the service as signals. Therefore, for novice investors, first of all, it is necessary to study the classic patterns of the chart in the format of Japanese candles – this will allow to identify the indicator signals at an effective level.
• In general, despite the shortcomings and certain technical problems of the indicator, it is an amazingly effective resource for binary trading.

In conclusion, I would like to note that we provided you with an additional resource for trading, which allows us to evaluate trading quotations very efficiently and professionally, and build based on this, efficient projections for options. But before using the tool, test its work in real market conditions. Based on this, you can more clearly understand the principle of its operation, study the technical signals of the service, and also determine the optimal conditions for its application. Thus, you can maximize your financial indicators of trading and count on success.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

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