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Using Heiken Ashi Indicator for Trading and Finding Market Bottom

Using Heiken Ashi Indicator for Trading 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

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Using Heiken Ashi Indicator for Trading and Finding Market Bottom

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  1. 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 Version 1.4 (incorporating corrections after the SIG presentation on April 11th, 2009 ) April 12th, 2009 Ravi Jagannath RaviJag@yahoo.com Disclaimer Any 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.

  2. Contents • Heiken Ashi basics • Trade execution • The market bottom signal • 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. Hollow = closed up (bullish) Filled = closed down (bearish) A normal candle has OHLC and direction High High Close Open Open Close Low Low

  5. HA calculates its own OHLC haClose = (O+H+L+C)/4 ‘Average price’ of the current bar • haOpen = • [haOpen(prev. bar) + haClose(prev.bar) ]/2 • Middle of previous bar O, H C haHigh = Max(H, haOpen, HaClose) L haLow = Min(Low, haOpen, haClose)

  6. Depending on previous bar, the new OHLC are usually different haClose = (O+H+L+C)/4 ‘Average price’ of the current bar • haOpen = • [haOpen(prev. bar) + haClose(prev.bar) ]/2 • Middle of previous bar O, H haHigh C haOpen haClose haHigh = Max(H, haOpen, haClose) L haLow haLow = Min(Low, haOpen, haClose)

  7. Thus the candle is ‘transformed’ haClose = (O+H+L+C)/4 ‘Average price’ of the current bar • haOpen = • [haOpen(prev. bar) + haClose(prev.bar) ]/2 • Middle of previous bar O, H haHigh C haOpen haClose haHigh = Max(H, haOpen, haClose) L haLow haLow = Min(Low, haOpen, haClose)

  8. Combine HA with normal candle to get candlesticks with trend Use the HA candle’s direction; discard its shape Keep the shape and ‘fill’ of the original candle 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 • Heiken Ashi basics • Trade execution • The market bottom signal • 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)

  12. Heiken Ashi as a part of a setup – Trend line break • Trend line break

  13. Heiken Ashi as a part of a setup – Entry#1 • First Entry Option: • HA color change • Break below 21 EMA 1

  14. Heiken Ashi as a part of a setup – Entry#2 • Second Entry Option: • Double top 2

  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 Exit: • Two-bar color change Exit Heiken Ashi as a part of a setup – Final Exit EURUSD 120 min Jan 24– Feb 03 2009

  17. Thus there are a number of applications • Heiken Ashi color change can be used: • To confirm entries • To find entries at retracements • To add to position at retracements • Exit trade • …making it easier to ride a trend. • Additional uses: • Visual assessment of trend strength • Visual confirmation across multiple timeframes 1 2 3 Exit

  18. HA rules to consider • Heiken Ashi rules: • Entry confirmation with one or two bar color change • One bar color change not adequate to exit trade • Color change in the direction of trend on retracement confirms another entry • Two bar color change usually is a good exit in itself at the end of a strong trend 1 2 3 Exit

  19. ISSUE MANAGING THE ISSUE Some issues to be aware of 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. 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. Real-time monitoring of the trade with and confirming exit signal may alleviate the problem.

  20. Contents • Heiken Ashi basics • Trade execution • The market bottom signal • www.MarketBottom.com and associated sites

  21. The search for a simple market bottom confirming indicator • Simple • Visual • Objective • Statistical

  22. S&P500 daily bar chart Jul 2008 – Mar 2009 S&P Daily Jul 08 – Mar 09

  23. S&P 500 weekly bar chart Oct 2006 – Mar 2009 S&P Weekly Oct 06 – Mar 09

  24. Understanding these simple price structures is critical to using this approach S&P 500 monthly bar chart 1995 – 2009 S&P Monthly 1994 - 2009 • Types of corrections in a bull market / Rally: • Minor correction • Major correction • Extreme correction • Non-trending Dow (high rate of signal failure) A real possibility!

  25. Correction price structure #1: Minor correction S&P Monthly 1996 - 2009

  26. Correction price structure #2: Major corrections S&P Monthly 1996 - 2009

  27. Correction price structure #3: Extreme corrections S&P Monthly 2000 - 2005 NASDAQ Monthly 2000 - 2005

  28. Extreme correction during the 70’s S&P Monthly 1973 - 1976 NASDAQ Monthly 1973 - 1976

  29. False signal = signal failure Reading the signal Good signal Moderate signal Bad signal

  30. Not the best signal Extreme correction of the Dow: 1933 bottom Dow Monthly 1929 - 1936

  31. Correction price structure #4: Non-trending market,primarily a Dow phenomena Dow Monthly 2000 - 2003 Non-trending, 12 months of choppy action. Dow Monthly 1979 - 1983 There have been six instances of the Dow acting choppy under extreme conditions with each instance ranging from two to four years. Is this because Dow is a price only weighted average?

  32. S&P and NASDAQ Signal statistics from the last five decades

  33. 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.

  34. Example: Signals from the 1970’s • 8 Corrections • 5 Good signals • 2 Moderate signal • 1 Bad signals • Including one Extreme correction with good signal • Bad signal => Extreme correction S&P NASDAQ Dow Transport

  35. Where are we today? S&P Monthly 2005 - 2009

  36. Contents • Heiken Ashi basics • Trade execution • The market bottom signal • www.MarketBottom.com and associated sites

  37. Web based services • 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: • Back tested setups for active traders • Evolving trade setups • Some inter-market analysis • Stocks, Forex, Futures • Alternate vehicles: • Forex with ETF • Futures with ETF • Forex with Options

  38. Thank you. RaviJag@yahoo.com

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