1. 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
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
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
High
High
Open
Close
Filled = closed down
(bearish)
Hollow = closed up
(bullish)
Close
Open
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
and associated sites

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

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

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. 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.

20. Contents
Heiken Ashi basics
Trade execution
The market bottom signal
and associated sites

21. The search for a simple market bottom confirming indicator
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. 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
Understanding these simple price structures is critical to using this approach
A real possibility!

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

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

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

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

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

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

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

36. Contents
Heiken Ashi basics
Trade execution
The market bottom signal
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.