Heikin-Ashi Trend-Following Trading Strategy with Trailing Stops

This article describes a trend-following trading strategy implemented in Backtrader that uses Heikin-Ashi candles to identify strong trends. The strategy enters trades after a sequence of trend-confirming candles and employs trailing stops to manage risk and capture profits.

Strategy Overview

The Heikin-Ashi Trend-Following Trading Strategy integrates the following components:

• Custom Heikin-Ashi Indicator: Smooths price action by calculating modified open, high, low, and close prices to emphasize trend direction and reduce noise.
• Trend Confirmation: Requires a sequence of three consecutive strong Heikin-Ashi candles (green with no lower wick for buys, red with no upper wick for sells) to confirm a trend.
• Trailing Stops: Applies a 2% trailing stop-loss upon entry to protect against adverse price movements while allowing profits to run.
• Position Management: Ensures no new trades are placed when an order is pending or a position is active, maintaining disciplined execution.

Code Implementation

Below is the complete Backtrader code for the strategy, including the custom Heikin-Ashi indicator:

import backtrader as bt

# Custom Heikin-Ashi Indicator
class HeikinAshi(bt.Indicator):
    lines = ('ha_open', 'ha_high', 'ha_low', 'ha_close',)
    plotinfo = dict(subplot=False) # Plot on the main chart

    def __init__(self):
        # Heikin-Ashi Close
        self.lines.ha_close = (self.data.open + self.data.high + self.data.low + self.data.close) / 4.0

    def next(self):
        # Heikin-Ashi Open
        # On the first bar, the HA open is the average of the regular open and close
        self.lines.ha_open[0] = (self.lines.ha_open[-1] + self.lines.ha_close[-1]) / 2.0 if len(self) > 1 else (self.data.open[0] + self.data.close[0]) / 2.0
        
        # Heikin-Ashi High and Low
        self.lines.ha_high[0] = max(self.data.high[0], self.lines.ha_open[0], self.lines.ha_close[0])
        self.lines.ha_low[0] = min(self.data.low[0], self.lines.ha_open[0], self.lines.ha_close[0])

class HeikinAshiTrendStrategy(bt.Strategy):
    """
    A trend-following strategy that uses the pattern of Heikin-Ashi candles
    to identify and trade strong trends.
    1. Uses a custom Heikin-Ashi indicator to smooth price.
    2. Enters on a sequence of strong trend-confirming candles.
    3. Exit is managed with a trailing stop-loss.
    """
    params = (
        ('consecutive_candles', 3), # Number of strong HA candles needed for entry
        ('trail_percent', 0.02),   # Trailing stop
    )

    def __init__(self):
        self.order = None
        # Instantiate our custom Heikin-Ashi indicator
        self.ha = HeikinAshi(self.datas[0])

    def notify_order(self, order):
        if order.status in [order.Submitted, order.Accepted]:
            return

        if order.status in [order.Completed]:
            if order.isbuy():
                self.sell(exectype=bt.Order.StopTrail, trailpercent=self.p.trail_percent)
            elif order.issell():
                self.buy(exectype=bt.Order.StopTrail, trailpercent=self.p.trail_percent)

        self.order = None

    def next(self):
        # Make sure we have enough bars to check the sequence
        if len(self) < self.p.consecutive_candles:
            return

        if self.order:
            return

        # --- Entry Logic ---
        if not self.position:
            # --- Check for a BUY Signal ---
            is_buy_signal = True
            # Loop backwards from the current candle (i=0) to check the sequence
            for i in range(self.p.consecutive_candles):
                # Perform the check on the historical data inside the loop
                is_green_past = self.ha.ha_close[-i] > self.ha.ha_open[-i]
                has_no_lower_wick_past = self.ha.ha_open[-i] == self.ha.ha_low[-i]
                
                if not (is_green_past and has_no_lower_wick_past):
                    is_buy_signal = False
                    break  # If one candle fails, the sequence is broken

            if is_buy_signal:
                self.order = self.buy()
                return  # Exit to avoid checking for a sell signal on the same bar

            # --- Check for a SELL Signal ---
            is_sell_signal = True
            # Loop backwards to check the sequence
            for i in range(self.p.consecutive_candles):
                # Perform the check on the historical data inside the loop
                is_red_past = self.ha.ha_close[-i] < self.ha.ha_open[-i]
                has_no_upper_wick_past = self.ha.ha_open[-i] == self.ha.ha_high[-i]
                
                if not (is_red_past and has_no_upper_wick_past):
                    is_sell_signal = False
                    break  # If one candle fails, the sequence is broken
            
            if is_sell_signal:
                self.order = self.sell()

Strategy Explanation

1. HeikinAshi Indicator

The custom Heikin-Ashi indicator smooths price action to highlight trends:

• Heikin-Ashi Close: Calculated as the average of the regular open, high, low, and close prices for the current bar.
• Heikin-Ashi Open: For the first bar, it’s the average of the regular open and close. For subsequent bars, it’s the average of the previous Heikin-Ashi open and close.
• Heikin-Ashi High and Low: The high is the maximum of the regular high, Heikin-Ashi open, and Heikin-Ashi close. The low is the minimum of the regular low, Heikin-Ashi open, and Heikin-Ashi close.
• Plotting: Displayed on the main price chart for easy visualization.

2. HeikinAshiTrendStrategy

The strategy uses Heikin-Ashi candles to identify strong trends and manage trades:

• Trading Logic (next):

  • Data Check: Requires at least 3 bars (based on consecutive_candles) to evaluate the candle sequence.
  • Pending Order Check: Skips trading if an order is pending to avoid overlapping trades.
  • Entry Conditions:
    • Bullish Entry: Enters a buy order if the last three Heikin-Ashi candles are green (close above open) and have no lower wick (open equals low), indicating strong bullish momentum.
    • Bearish Entry: Enters a sell order if the last three Heikin-Ashi candles are red (close below open) and have no upper wick (open equals high), indicating strong bearish momentum.
    • Checks historical candles using a loop to confirm the sequence, breaking if any candle fails the criteria.
  • Position Check: Only enters trades if no position is currently held, ensuring one trade at a time.
  • Single Signal Priority: Exits after a buy signal to avoid checking for a sell signal on the same bar.

• Order Management (notify_order):

  • Order Status: Ignores submitted or accepted orders, resetting the order tracker when completed.
  • Trailing Stops:
    • For long positions: Places a trailing stop sell order with a 2% trail below the current price.
    • For short positions: Places a trailing stop buy order with a 2% trail above the current price.
  • Ensures trailing stops are set immediately after a trade is executed.

Key Features

• Heikin-Ashi Smoothing: Uses Heikin-Ashi candles to filter out market noise and highlight sustained trends.
• Strong Trend Confirmation: Requires three consecutive strong candles (no opposing wicks) to ensure robust trend signals.
• Trailing Stop Risk Management: Employs a 2% trailing stop to lock in profits while allowing the trade to follow the trend.
• Disciplined Execution: Prevents multiple simultaneous positions or overlapping orders, maintaining clear trade logic.
• Custom Indicator: Implements a tailored Heikin-Ashi indicator for precise trend detection.

Potential Improvements

• Parameter Tuning: Adjust consecutive_candles or trail_percent to optimize for specific assets or market conditions.
• Additional Filters: Incorporate volume, ADX, or other momentum indicators to confirm trend strength and reduce false signals.
• Fixed Stop-Loss: Add a fixed stop-loss alongside trailing stops for additional risk control.
• Performance Metrics: Include analyzers for returns, Sharpe ratio, drawdown, and trade statistics to evaluate strategy effectiveness.
• Multi-Asset Testing: Apply the strategy to multiple assets to assess performance across different markets.

This strategy is designed for trending markets where Heikin-Ashi candles can effectively identify sustained directional moves, suitable for assets like forex, stocks, or cryptocurrencies, and can be backtested to evaluate its effectiveness across various timeframes and assets.