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 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.
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.
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:
- 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 TrendViper, 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.