ADVANCED TRADING GUIDE LEVEL 1

 ADVANCED TRADING GUIDE LEVEL 1

Heikin Ashi

“Heikin Ashi”, also known as “Heikin-Ashi” or “Heiken Ashi” is a charting technique used to display prices that, at a glance, looks similar to a traditional Japanese candlestick chart. The difference is the method used in how candlesticks are calculated and plotted on a chart. Traditional Japanese candlesticks are great at helping you find good entry points since they display potential reversals (like a shooting star) or breakout (like a bullish marubozu closing above a resistance level).

✅Applying the Heikin Ashi technique to a price chart can help you decide whether to stay in the trade or get out. Heikin Ashi charts make candlestick charts more readable for traders who want to know when to stay in a trade and ride a strong trend and when to get out when the trend weakens. Basically, Heikin Ashi is a modified candlestick charting technique that rearranges how the price is displayed so trend traders can have a higher confidence level when deciding whether to remain in a trade or exit. Some traders, usually longer-term traders, use Heikin Ashi charts as an alternative to traditional Japanese candlestick charts.

Traditional Japanese candlestick chart

Heikin Ashi chart

✅Candles on traditional Japanese candlestick charts frequently change from green to red (up or down) which can make them difficult to interpret. On the other hand, candles on the Heikin Ashi chart display more consecutive colored candles, helping traders to identify past price movements more easily. You’ll notice that Heikin Ashi charts have a tendency for its candles to stay 💹green💹 during an uptrend and stay 🛑red🛑 during a downtrend. This is in contrast to traditional Japanese candlesticks that alternate color even if the price is moving strongly in one direction.

✅With traditional Japanese candlestick charts, each candlestick represents the open, high, low, and close that the price makes within the current time period.
With Heikin Aishi candlestick charts, each candlestick doesn’t just include price movement within the current time period, it also includes price information from the past.

The idea behind using a Heikin Ashi chart is that it filters market noise.

And since noise is filtered, you basically see the naked trend.

A Heikin Ashi chart shows you the direction of a trend through its color-coded candles.
A green candle is telling you that trend is UP. A red candle is telling you that the trend is DOWN.
A Heikin Ashi chart shows you the strength of the trend by observing the shadows (or wicks).
for many of the green candles, there is no lower shadow or wick.
Vice versa for the red candles. Most do not have any upper shadows or wicks.
These candlesticks do not show a shadow in the OPPOSITE direction of the trend.
When there is no shadow, this means you’re in a strong trend.
So the main thing you want to look for on a Heikin Ashi chart to determine trend strength is shadowless or wickless candlesticks opposite the trend.

✅The main drawback is  - While the traditional Japanese candlesticks are derived from the actual prices, Heikin Ashi candlesticks are NOT.
Because the Heikin Ashi candlesticks are averaged, they do NOT show the exact open and close prices for a particular time period.The closing price is considered important for many traders, but the actual closing price is NOT displayed on a Heikin Ashi candlestick.

Calculate a Heikin Ashi Candlestick

Understanding Heikin Ashi Candlesticks

Elliott Wave.

According to Elliott Wave Theory
, the market traded in repetitive cycles, which he pointed out were the emotions of investors caused by outside influences (ahem, CNBC, Bloomberg, ESPN) or the predominant psychology of the masses at the time.Elliott shows that the upward and downward swings in price caused by the collective psychology always showed up in the same repetitive patterns. They are called upward and downward swings “waves”

Fractals

Basically, fractals are structures that can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property “self-similarity”. A sea shell is a fractal. A snow flake is a fractal. A cloud is a fractal. Heck, a lightning bolt is a fractal. So why are fractals important? One important quality of Elliott waves is that they are fractals. Much like sea shells and snow flakes, Elliott waves could be further subdivided into smaller Elliot waves.

Impulse Waves

A 5-3 wave pattern. The first 5-wave pattern is called impulse waves. The last 3-wave pattern is called corrective waves. In this pattern, Waves 1, 3, 5 are motive, meaning they go along with the overall trend, while Waves 2 and 4 are corrective.

✅Wave 1 The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons, real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.
Wave 2 At this point, enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.

✅Wave 3 This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.
Wave 4 Traders take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips.”
Wave 5 This is the point that most people get on the stock and is most driven by hysteria.

Extended Impulse Waves

One thing that you also need to know about the Elliott Wave Theory is that one of the three impulse waves (1, 3, or 5) will always be “extended.”
Simply put, there will always be one wave that is longer than the other two, regardless of degree.
According to Elliott, it is usually the fifth wave which is extended.

Corrective Waves

The 5-wave trends are then corrected and reversed by 3-wave countertrends. According to Elliott, there are 21 corrective ABC patterns ranging from simple to complex. But they are just made up of three very simple easy-to-understand formations.
Zig-zag formations
Flat formation
Triangle formations

Zig-zag formations are very steep moves in price that goes against the predominant trend. Wave B is typically shortest in length compared to Waves A and C. These zig-zag patterns can happen twice or even thrice in a correction (2 to 3 zig-zag patterns linked together). Like with all waves, each of the waves in zig-zag patterns could be broken up into 5-wave patterns.

Flat formations are simple sideways corrective waves. In flats, the lengths of the waves are GENERALLY equal in length, with wave B reversing wave A’s move and wave C undoing wave B’s move. We say generally because wave B can sometimes go beyond the beginning of wave A.

Triangle formations are corrective patterns that are bound by either converging or diverging trend lines. Triangles are made up of 5-waves that move against the trend in a sideways fashion. These triangles can be symmetrical, descending, ascending, or expanding.

Rules of the Elliott Wave Theory

Rule Number #1: Wave 3 can NEVER be the shortest impulse wave
Rule Number #2: Wave 2 can NEVER go beyond the start of Wave 1
Rule Number #3: Wave 4 can NEVER cross in the same price area as Wave 1

Using your knowledge of Elliott Wave, you label this move up as Wave 1 and the retracement as Wave 2.
In order to find a good entry point, you head back to the School of Pipsology to find out which of the three cardinal rules and guidelines you could apply. Here’s what you found out: Rule Number #2: Wave 2 can NEVER go beyond the start of Wave 1
Waves 2 and 4 frequently bounce off Fibonacci retracement levels

You begin counting the waves on a downtrend and you notice that the ABC corrective waves are moving sideways. Hmm, is this a flat formation in the works? This means that price may just begin a new impulse wave once Wave C ends. Trusting your Elliott Wave skills, you go ahead and sell at the market price in hopes of catching a new impulse wave. You place your stop just a couple of pips above the start of Wave 4 just in case your wave count is wrong.

Harmonic Price Patterns

The whole idea of these patterns is that they help people spot possible retracements of recent trends.
Combining these wonderful tools to spot these harmonic price patterns, we’ll be able to distinguish possible areas for a continuation of the overall trend. The main Harmonic Price Patterns are;
-ABCD Pattern
-Three-Drive Pattern
-Gartley Pattern
-Crab Pattern
-Bat Pattern
-Butterfly Pattern

The ABCD
To spot this chart pattern, all you need are ultra-sharp hawk eyes and the handy-dandy Fibonacci chart tool.

For both the bullish and bearish versions of the ABCD chart pattern, the lines AB and CD are known as the legs while BC is called the correction or retracement. If you use the Fibonacci retracement tool on leg AB, the retracement BC should reach until the 0.618 level. Next, the line CD should be the 1.272 Fibonacci extension of BC. Simple, right? All you have to do is wait for the entire pattern to complete (reach point D) before taking any short or long positions.

✅Oh, but if you want to be extra strict about it, here are a couple more rules for a valid ABCD pattern:
The length of line AB should be equal to the length of line CD.
The time it takes for the price to go from A to B should be equal to the time it takes for the price to move from C to D.

The three-drive pattern is a lot like the ABCD pattern except that it has three legs (now known as drives) and two corrections or retracements. 

Easy as pie! In fact, this three-drive pattern is the ancestor of the Elliott Wave pattern. As usual, you’ll need your hawk eyes, the Fibonacci tool, and a smidge of patience on this one. As you can see from the charts above, point A should be the 61.8% retracement of drive 1. Similarly, point B should be the 0.618 retracement of drive 2. Then, drive 2 should be the 1.272 extension of correction A and drive 3 should be the 1.272 extension of correction B. By the time the whole three-drive pattern is complete, that’s when you can pull the trigger on your long or short trade. Typically, when the price reaches point B, you can already set your short or long orders at the 1.272 extension so that you won’t miss out!

✅But first, it’d be better to check if these rules also hold true:

The time it takes the price to complete drive 2 should be equal to the time it takes to complete drive 3.
Also, the time to complete retracements A and B should be equal.

The Gartley Pattern

Gartleys are patterns that include the basic ABCD pattern we’ve already talked about, but are preceded by a significant high or low.

Now, these patterns normally form when a correction of the overall trend is taking place and look like ‘M’ (or ‘W’ for bearish patterns). These patterns are used to help traders find good entry points to jump in on the overall trend. A Gartley forms when the price action has been going on a recent uptrend (or downtrend) but has started to show signs of a correction.

✅What makes the Gartley such a nice setup when it forms is the reversal points are a Fibonacci retracement and Fibonacci extension level. This gives a stronger indication that the pair may actually reverse. This pattern can be hard to spot and once you do, it can get confusing when you pop up all those Fibonacci tools. The key to avoiding all the confusion is to take things one step at a time. In any case, the pattern contains a bullish or bearish ABCD pattern, but is preceded by a point (X) that is beyond point D.

✅The “perfect” Gartley pattern has the following characteristics:
1.Move AB should be the .618 retracement of move XA.
2.Move BC should be either .382 or .886 retracement of move AB.
3.If the retracement of move BC is .382 of move AB, then CD should be 1.272 of move BC. Consquently, if move BC is .886 of move AB, then CD should extend 1.618 of move BC.
4.Move CD should be .786 retracement of move XA

Scott Carney, a firm believer in harmonic price patterns, discovered the “Crab“.

According to him, this is the most accurate among all the harmonic patterns because of how extreme the Potential Reversal Zone (sometimes called “price better reverse or imma gonna lose my shirt” point) from move XA.
This pattern has a high reward-to-risk ratio because you can put a very tight stop loss. The “perfect” crab pattern must have the following aspects:

✅Move AB should be the .382 or .618 retracement of move XA.
Move BC can be either .382 or .886 retracement of move AB.
If the retracement of move BC is .382 of move AB, then CD should be 2.24 of move BC. Consquently, if move BC is .886 of move AB, then CD should be 3.618 extension of move BC.
CD should be 1.618 extension of move XA.

Scott Carney founded another Harmonic Price Pattern called the “Bat.”

The Bat is defined by the .886 retracement of move XA as Potential Reversal Zone. The Bat pattern has the following qualities:
Move AB should be the .382 or .500 retracement of move XA.
Move BC can be either .382 or .886 retracement of move AB.
If the retracement of move BC is .382 of move AB, then CD should be 1.618 extension of move BC. Consquently, if move BC is .886 of move AB, then CD should be 2.618 extension of move BC.
CD should be .886 retracement of move XA.

The Butterfly pattern.
Created by Bryce Gilmore, the perfect Butterfly pattern is defined by the .786 retracement of move AB with respect to move XA. 

The Butterfly contains these specific characteristics:
1.Move AB should be the .786 retracement of move XA.
2.Move BC can be either .382 or .886 retracement of move AB.
3.If the retracement of move BC is .382 of move AB, then CD should be 1.618 extension of move BC. Consquently, if move BC is .886 of move AB, then CD should extend 2.618 of move BC.
4. CD should be 1.27 or 1.618 extension of move XA.

Trading Harmonic Price Patterns
There are three basic steps in spotting Harmonic Price Patterns:

Step 1: Locate a potential Harmonic Price Pattern
Step 2: Measure the potential Harmonic Price Pattern
Step 3: Buy or sell on the completion of the Harmonic Price Pattern
By following these three basic steps, you can find high probability setups that will help you grab those oh-so-lovely pips.

Using the Fibonacci tool, a pen, and a piece of paper, let’s list down our observations.

1.Move BC is .618 retracement of move AB.
2.Move CD is 1.272 extension of move BC.
3.The length of AB is roughly equal to the length of CD.
This pattern qualifies for a bullish ABCD pattern, which is a strong buy signal.

✅Once the pattern is complete, all you have to do is respond appropriately with a buy or sell order. In this case, you should buy at point D, which is the 1.272 Fibonacci extension of move CB, and put your stop loss a couple of pips below your entry price. The problem with harmonic price patterns is that they are so perfect that they are so difficult to spot, kind of like a diamond in the rough.