Using Heiken Ashi Indicator for Trading and Finding Market Bottom There were 34 stock market...
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Transcript of Using Heiken Ashi Indicator for Trading and Finding Market Bottom There were 34 stock market...
Using Heiken Ashi Indicator forTrading and Finding Market Bottom
• There were 34 stock market corrections in five decades• A simple system correctly signaled 31 market bottoms• Not intermediate bottoms, but The bottom• This system will be the focus of our discussion• No curve fitting, not subjective, nothing complex
DisclaimerAny investing/trading idea or recommendation or opinion contained in this document/presentation/mail is for education and/or entertainment only. We are not and do not represent agents, brokers, stockbrokers, broker dealers or registered financial advisers. We do not accept any responsibility for loss due to any person acting or refraining from acting as a result of material contained in this document/presentation/mail. Past performance is no indication or guarantee of future results. This mail may contain information and opinions believed to be reliable, but the accuracy cannot be guaranteed, we are not responsible for any errors or omissions.
Version 1.4(incorporating corrections after the SIG
presentation on April 11th, 2009 )April 12th, 2009Ravi Jagannath
2
Contents
1. Heiken Ashi basics
2. Trade execution
3. The market bottom signal
4. www.MarketBottom.com and associated sites
3
A better use of candle is with HA trend color
Candles with HA Trend:Use ‘hollow’ / ‘full’ representation of
candlesticks in combination with HA color
4
A normal candle has OHLC and direction
Low
Open
Close
High
Low
Close
Open
High
Filled =
close
d down
(bearis
h) Hollow = closed up
(bullish)
5
HA calculates its own OHLC
haClose = (O+H+L+C)/4‘Average price’ of the current barhaClose = (O+H+L+C)/4‘Average price’ of the current bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haHigh = Max(H, haOpen, HaClose)haHigh = Max(H, haOpen, HaClose)
haLow = Min(Low, haOpen, haClose)haLow = Min(Low, haOpen, haClose)
L
O, H
C
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Depending on previous bar, the new OHLC are usually different
haClose = (O+H+L+C)/4‘Average price’ of the current barhaClose = (O+H+L+C)/4‘Average price’ of the current bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haHigh = Max(H, haOpen, haClose)haHigh = Max(H, haOpen, haClose)
haLow = Min(Low, haOpen, haClose)haLow = Min(Low, haOpen, haClose)
haHigh
haClose
haLowL
O, H
C
haOpen
7
Thus the candle is ‘transformed’
haClose = (O+H+L+C)/4‘Average price’ of the current barhaClose = (O+H+L+C)/4‘Average price’ of the current bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haOpen = [haOpen(prev. bar) + haClose(prev.bar) ]/2
Middle of previous bar
haHigh = Max(H, haOpen, haClose)haHigh = Max(H, haOpen, haClose)
haLow = Min(Low, haOpen, haClose)haLow = Min(Low, haOpen, haClose)
haHigh
haClose
haLowL
O, H
C
haOpen
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Combine HA with normal candle to get candlesticks with trend
Keep the shape and ‘fill’
of the original candle Use the HA candle’s
direction;
discard its shape
Trend Candle
Blue= part of an uptrend
Red = part of a downtrend
From now on all reference to HA candles will mean Trend candle.
9
Thus Trend Candle = Normal Candle + HA Color
Candles with HA Trend:Use ‘hollow’ / ‘full’ representation of
candlesticks in combination with HA color
10
Contents
1. Heiken Ashi basics
2. Trade execution
3. The market bottom signal
4. www.MarketBottom.com and associated sites
11
Heiken Ashi as a part of a setup - Indicators
Indicators:•8 EMA•21 EMA•Slow Stochastic•Bollinger Bands•Heiken Ashi (HA)
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Heiken Ashi as a part of a setup – Entry#1
First Entry Option:•HA color change•Break below 21 EMA
1
15
Heiken Ashi as a part of a setup – Entry#3
Third Entry Option:•Retracement to 21 EMA•Retracement to neckline•Close below 21 EMA
HA color rotation confirms the trend
3
16
Heiken Ashi as a part of a setup – Final Exit
Exit
Heiken Ashi Exit:•Two-bar color change
EURUSD 120 minJan 24– Feb 03 2009EURUSD 120 minJan 24– Feb 03 2009
17
Thus there are a number of applicationsHeiken Ashi color change can
be used:a. To confirm entriesb. To find entries at
retracementsc. To add to position at
retracementsd. Exit trade…making it easier to ride a
trend.
Additional uses:e. Visual assessment of trend
strengthf. Visual confirmation across
multiple timeframes
Heiken Ashi color change can be used:
a. To confirm entriesb. To find entries at
retracementsc. To add to position at
retracementsd. Exit trade…making it easier to ride a
trend.
Additional uses:e. Visual assessment of trend
strengthf. Visual confirmation across
multiple timeframes
Exit
1
3
2
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HA rules to consider
Heiken Ashi rules:1. Entry confirmation with one
or two bar color change2. One bar color change not
adequate to exit trade3. Color change in the direction
of trend on retracement confirms another entry
4. Two bar color change usually is a good exit in itself at the end of a strong trend
Heiken Ashi rules:1. Entry confirmation with one
or two bar color change2. One bar color change not
adequate to exit trade3. Color change in the direction
of trend on retracement confirms another entry
4. Two bar color change usually is a good exit in itself at the end of a strong trend
Exit
1
3
2
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Some issues to be aware of
ISSUE MANAGING THE ISSUE
The ‘exit on two bar color change’ rule can result in pre-mature exits during a not-so-strong trend.
Long candles at entry/exits can eat into the meat of the trend that a normal trend trader targets.
Limit the use of this rule to the anchor-chart (the largest timeframe chart). It may help to confirm the exit with another indicator during a not-so-strong trend.
Real-time monitoring of the trade with and confirming exit signal may alleviate the problem.
20
Contents
1. Heiken Ashi basics
2. Trade execution
3. The market bottom signal
4. www.MarketBottom.com and associated sites
21
The search for a simple market bottom confirming indicator
1. Simple
2. Visual
3. Objective
4. Statistical
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S&P 500 monthly bar chart 1995 – 2009
A real possibility!
Types of corrections in a bull market / Rally:
1) Minor correction2) Major correction3) Extreme correction4) Non-trending Dow (high
rate of signal failure)
Types of corrections in a bull market / Rally:
1) Minor correction2) Major correction3) Extreme correction4) Non-trending Dow (high
rate of signal failure)
S&P Monthly 1994 - 2009
Understanding these
simple price structures
is critical to
using this
approach
27
Correction price structure #3: Extreme corrections
S&P Monthly 2000 - 2005
NASDAQ Monthly 2000 - 2005
29
Reading the signalGood signal
Moderate signal
Bad signal
Good signal
Moderate signal
Bad signal
False signal
= signal
failure
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Correction price structure #4: Non-trending market,primarily a Dow phenomena
Non-trending, 12 monthsof choppy action.Non-trending, 12 monthsof choppy action.
Is this because Dow is a price only weighted average?Is this because Dow is a price only weighted average?
There have been six instances of the Dow acting choppy under extreme conditions with each instance ranging from two to four years.
There have been six instances of the Dow acting choppy under extreme conditions with each instance ranging from two to four years.
Dow Monthly 1979 - 1983
Dow Monthly 2000 - 2003
32
S&P and NASDAQ Signal statistics from the last five decades
Decade
Total
Signals
Good and
Moderate
Signals Bad Signals
1960's 6 5 11970's 8 7 11980's 7 7 01990's 9 8 12000's 4 4 0TOTAL 34 31 3
There were a total of three moderate signals
Decade
Total
Signals
Good and
Moderate
Signals Bad Signals
1960's 6 5 11970's 8 7 11980's 7 7 01990's 9 8 12000's 4 4 0TOTAL 34 31 3
There were a total of three moderate signals
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Anticipating and Confirming the HA signal
• At times one of the two indexes (S&P or NASDAQ) will signal confirmation ahead of the other.
• This is usually a sufficient condition for aggressive investors to consider some exposure to the market.
• Conservative investors may want to wait for confirmation signaled by both these indexes.
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Example: Signals from the 1970’s
S&P
NASDAQ
Dow Transport
8 Corrections• 5 Good signals• 2 Moderate signal• 1 Bad signals• Including one Extreme correction
with good signal
• Bad signal => Extreme correction
8 Corrections• 5 Good signals• 2 Moderate signal• 1 Bad signals• Including one Extreme correction
with good signal
• Bad signal => Extreme correction
36
Contents
1. Heiken Ashi basics
2. Trade execution
3. The market bottom signal
4. www.MarketBottom.com and associated sites
37
Web based servicesWe are building a few
websites focusing on market timing:
MarketBottom.com• Stock market bottom
signals• Signal calculator• Weekly newsletter• Signal’s interpretation
(online handbook)• Up-to-date statistics• Simple investment
strategies
An active investors website:1) Back tested setups for
active traders2) Evolving trade setups3) Some inter-market
analysis4) Stocks, Forex, Futures5) Alternate vehicles:
•Forex with ETF•Futures with ETF•Forex with Options
We are building a few websites focusing on market timing:
MarketBottom.com• Stock market bottom
signals• Signal calculator• Weekly newsletter• Signal’s interpretation
(online handbook)• Up-to-date statistics• Simple investment
strategies
An active investors website:1) Back tested setups for
active traders2) Evolving trade setups3) Some inter-market
analysis4) Stocks, Forex, Futures5) Alternate vehicles:
•Forex with ETF•Futures with ETF•Forex with Options