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

RaviJag@yahoo.com

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)

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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

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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.

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Thus Trend Candle = Normal Candle + HA Color

Candles with HA Trend:Use ‘hollow’ / ‘full’ representation of

candlesticks in combination with HA color

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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 – Trend line break

•Trend line break

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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

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Heiken Ashi as a part of a setup – Entry#2

Second Entry Option:•Double top

2

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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

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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

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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.

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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&P500 daily bar chart Jul 2008 – Mar 2009

S&P Daily Jul 08 – Mar 09

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S&P 500 weekly bar chart Oct 2006 – Mar 2009

S&P Weekly Oct 06 – Mar 09

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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

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Correction price structure #1: Minor correction

S&P Monthly 1996 - 2009

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Correction price structure #2: Major corrections

S&P Monthly 1996 - 2009

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Correction price structure #3: Extreme corrections

S&P Monthly 2000 - 2005

NASDAQ Monthly 2000 - 2005

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Extreme correction during the 70’s

S&P Monthly 1973 - 1976

NASDAQ Monthly 1973 - 1976

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Reading the signalGood signal

Moderate signal

Bad signal

Good signal

Moderate signal

Bad signal

False signal

= signal

failure

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Extreme correction of the Dow: 1933 bottom

Dow Monthly 1929 - 1936

Not the best signal

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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

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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

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Where are we today?

S&P Monthly 2005 - 2009

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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

Thank you.

RaviJag@yahoo.com