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 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.

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

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

A normal candle has OHLC and direction High High Open Close Filled = closed down (bearish) Hollow = closed up (bullish) Close Open Low Low

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)

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)

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)

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.

Thus Trend Candle = Normal Candle + HA Color Candles with HA Trend: Use ‘hollow’ / ‘full’ representation of candlesticks in combination with HA color

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

Heiken Ashi as a part of a setup - Indicators 8 EMA 21 EMA Slow Stochastic Bollinger Bands Heiken Ashi (HA)

Heiken Ashi as a part of a setup – Trend line break

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

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

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

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

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

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

Some issues to be aware of MANAGING THE ISSUE 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.

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

The search for a simple market bottom confirming indicator Visual Objective Statistical

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

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

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

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

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

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

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

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

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

Correction price structure #4: Non-trending market, primarily a Dow phenomena Non-trending, 12 months of choppy action. Dow Monthly 2000 - 2003 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?

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

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.

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

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

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

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

Thank you. RaviJag@yahoo.com