Heikin-Ashi : How to Trade it ?

 

The previous post Heikin-Ashi gives the reader an overview of what the candle is and how better it is than a normal candlestick. This post explains about how to interpret the Heikin-Ashi candle and how to use the interpretation effectively in differentiating trending and trading regions.

Heikin-Ashi candle has the same properties as of the normal candlestick, i.e. a body, lower and higher shadows, OHLC etc., The fact that this candle is derived from previous candles and their OHLC values gives ample weightage to trust the behavior of this candle better than a regular candlestick.

There are five primary patterns to observe in the Heikin-Ashi Candlestick chart.

1. Green Candles with no lower “shadows” or a minimal shadow compared to the body of the candle indicate a stronger uptrend, which means that you can let your long positions ride on the profits.

2. The green candles with long higher shadows signify the strength of the market and remember the trader to add to long positions.

3. As in the case of normal candlesticks, Dojis are also formed in the Heikin-Ashi charts. A candle with a very small body and long upper and lower shadows indicate a trend change. (Fig 2). Those who like to take risk can always buy or sell at this point while Defensive traders do wait for confirmation.

 

4. The red long candles indicate a strong down trend, whereas green long candles indicate a stronger uptrend.

In Brief,

1) Bullish candle with an upper wick indicates a strong up trend
2) Bearish candle with a lower wick indicates a strong down trend
3) Bullish candle with a lower wick indicates a weak up trend
4) Bearish candle with an upper wick indicates a weak down trend.
5) A candle shorter than the previous candle indicates a slow down in the trend
6) A short candle with upper and lower wicks indicates a change in the trend.

The main advantage of Heikin-Ashi candlestick is that it doesn’t give you a false signal or avoids you from getting trapped in false breakouts. Moreover, the Candles also helps you to let your profits learn and doesn’t let you to exit early from your position. Heikin-Ashi candles, if used effectively, will help a trader to maximize his profits and also minimize his trades because the three phases of the market – Bull Phase, Bear Phase and Trend Changing phase are always marked and can be observed easily without the help of any other indicators.

Adding more positions is a fantastic way to take advantage of a long trend that develops and the Heiken Ashi candles can really help you do this. This is perhaps their greatest asset if used with proper money management. Obviously not every trend lasts a long time but if you can catch the long, several hundred pip moves (or most of them) and have multiple positions opened along the way you can really start to see you balance increasing.

That said, Advanced users of Heikin-Ashi correlate it with normal candlesticks and certain oscillators to know the exact nature of the market and take their trend in the right direction. Customization of Heikin-Ashi candles is possible in all ways and this will be discussed in the next weekly meeting.

All the possible interpretations of Heikin-Ashi Candles can be observed in the below chart

  Image courtesy: Chartschool.

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Heikin-Ashi : How better it is than a Normal Candlestick ?

      For a trader, most of the profits or losses are experienced only during the trending periods. As a matter of fact, certain traders lose more money in trading periods rather than trending periods. Because, A trending period lets you realize the direction of the trend and your stop loss may save you from incurring huge losses. But, during a trading period, it is never an easy task to setup the stop loss or escape from the nuances of periodic fluctuations all day, sometimes spanning over multiple days.



So, It is important for a trader to differentiate between Trending periods and Trading periods (consolidation periods).  Though there are many indicators which assist a trader in determining the nature of the market phase, none of them prove to be worthy enough to bring him out of the trading phase.

Under this condition, the Japanese developed an advanced version of candlestick charts, i.e. the Heikin-Ashi Candles. The Heikin-Ashi candles, if used effectively will help a trader determine the current phase of the market and help him in making most of the trending phases and preserving his capital in the trading phase. Heikin-Ashi candles are the better derivatives of normal candles and are mostly used in Stock and Commodity trading.

What is the difference between a normal candle and Heikin-Ashi candle?

Heikin-Ashi or Average bar is the technique developed in order to smooth out the trend and differentiate it from trading phase and assist the trader to set the target price more easily and accurately.

A normal candlestick chart is the combination of OHLC candles spread through the time frame. But, a Heikin-Ashi candle is an advanced version of the normal candle stick chart, using a smoothed out formula to calculate its parameters.

The Heikin-Ashi formula:

Current Candle Open = (Previous candle open + Previous Candle Close)/2   (Mid-point of previous candle)

Current Candle High = Max (High, Open, Close)         (All values of the present candle)
i.e the highest of the above three values.

Current Candle Low = Min (Low, Open, Close)           (All Values of the Present candle)
i.e. the lowest of the above three values.

Current candle Close = (Open + High + Low + Close)/4   (All values of the present candle).

The below images give you a clear picture of how Heikin-Ashi candlestick chart differs from a normal Candle stick chart.

Normal Candle Stick Chart

Heikin-Ashi Candle Stick Chart

How to trade a Heikin-Ashi Candle stick …… (to be continued)

Intelligent Investor : Investment Vs. Speculation

            An investment is far different from speculation. As said in Intelligent Investor speculator may go wrong about the market, which doesn’t harm them much. But, Investors are not supposed to be wrong during their investment because of the larger amount they put up and also the long term benefits of the investment. What is the basic difference between investment and speculation ?

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative".

The term investor doesn’t apply to everyone in the market who sells or buys shares. Rather, Investing is an art only a few excel in. The word “investor” is employed for everyone in the market because the market and the media are comfortable with the common term viz., Investor. There was always been a difference between investing and speculating in the market which is not observed by many in the present day’s business. The disappearance of this differentiation or ignoring the difference is an area where focus is to be laid.

Is Investment a pure science and no speculation is involved ?

     
        The answer is both “yes” and “no”. Yes because a thorough research is done, the stock is studied in scientifically proven methods and investments are made according to a plan and template. On the other hand, it’s a No because an investor must understand that there is always an amount of speculative factor in his common stock holdings. It is the job of the investor and his manager to keep this speculative factor to a bare minimum and to be prepared psychologically and financially to face the results that this speculative factor may generate.

So, Speculation is wrong. right ?

          No, speculation is not always wrong. Complete speculation is neither illegal, immoral nor beneficial to your account. At any point of time, some speculation is always necessary in the market and it cannot be avoided anyway. As there is something called intelligent investing, there is also intelligent speculation, and there is unintelligent speculation.

A speculation turns unintelligent when

            - Speculating while thinking that you are investing.

            - Considering speculation as a serious business rather than a pastime, without proper knowledge and skill for it.

            - Risking more money in speculating rather than investing.


Is Speculation beneficial ?

          Yes, but only some times it is. Speculation is fascinating and fun when your speculations are getting true and are reflected in the market. But, If you are looking at some serious speculation, put aside a portion of your capital for speculating and never ever add money into that account even though it is piling up with profits. Actually, speculation is beneficial at times.

         - Without speculation, new entrees into the market will never be able to raise the required capital. In case the new entrees are successful, heaps of money is made within a smaller time frame, which is the major benefit of speculation.

         - Risk is usually exchanged between persons (remember that risk is not completely eliminated). Every time a stock is bought or sold, the buyer carries with him a risk of stock going down and seller still retains a residual risk – the chance that the stock he just sold may go up.


Investors are of two types. Defensive, Aggressive…… (to be continued)

Intelligent Investor

Prologue

            Time and again, It is proved that no man is superior to market. Investing properly and intelligently is one of those rarest traits observed very rarely in the market. Investors are always a class apart from speculators. Speculators may often go wrong in their speculation and that doesn’t do a greater amount of harm to them. But, the case with Investors is different. Investors are not prone to go wrong and once they are, that pulls out a big chunk of their capital and also morale. 

            This series is aimed at differentiating speculators from investors, expose the traits of some of the famous investors and how a common man in the world market can cruise to that level, i.e. Being an Intelligent Investor. Usually, when we start to invest, much of our time and study will be allotted to studying the past patterns of the market, stocks and securities. That is the right way though. An investor should be forearmed with required knowledge about the stock or security he is going to invest and how the stock reacts to various scenarios observed in the market.

            As the great Santayana said “Those who do not remember the past are condemned to repeat it”. The market is the repetition of history. History repeats again and again. All these statements emphasize the importance of historical behaviors of the market and how important it is to understand the history of a particular security or stock prior to investing.


        
   So, who is an intelligent Investor ? He is not the one who has the highest degree possible or the highest IQ than that of Sir Isaac Newton. He is the one, who is patient, disciplined, eager to learn and one who is able to harness his emotions and think through the market. One may wonder what Sir Isaac Newton is doing here in this trading article. If history is to be learnt, it is more important to note that during the spring of 1720, Sir Isaac Newton owned shares in the South Sea company, one of the best stocks of that time in England. Looking at the market movements and the stocks reactions to the market, Sir Newton stated “I could calculate the motions of the heavenly bodies, but not the madness of people” who drive the market. The above observation by Sir Newton is enough to emphasize the importance of investing intelligently and that Investing is not a random process that everyone is capable of performing.

          The intention of writing this series of being an intelligent investor is to learn and in urn teach the readers about how to

             - Minimize the odds of suffering irreversible losses,
             - maximize the chances of achieving Sustainable Gains,
             - Control the self-defeating behavior that keeps most investors from reaching their full potential.

Attribution: Much of my writings and understandings in this series should be attributed to the knowledge I gained from the book “Intelligent Investor” by Benjamin Graham, to whom I am and will always be grateful.

Quadra Safe Strategy–Part 2-ii

Part 1 can be found at Let the Charts Speak....: Quadra Safe Strategy–Part 1

Part 2-I can be found at Let the Charts Speak....: Quadra Safe Strategy–Part 2-i

Well, till now we are clear about the swing high/swing low and how to enter into a position based on Quadra Safe Entry strategy, explained in Part – 2-i.

The stop loss is placed at the previous swing low (for a long position) and as the market moves up, the stop loss should be trialed.

The criteria for moving a stop loss from one point to another is that,

- If there is another candle forming a swing low(without a downward tilt in the WMA-50), then the stop loss is trialed to that point and the stop loss order will be changed to that point. That can be seen in the Chart below.

As evident from the chart above, The Initial stop loss is setup at the previous swing low before we take a long position.

As the market progresses, the stop loss should be moved to the next swing low.

The next swing low is observed at the arrow marked “Trialing Stop Loss – 1” , which is a swing low. The low of the red candle is lower than both the green candles on either side of it.

The market hasn’t touched that low again and then progressed further (observe that the WMA – 50, green line) is still upward and is indicating bullish.

The market again formed a swing low, (arrow marking “Trialing Stop Loss – 2”), where the low of the green candle over the arrow mark is lower than the lows of the candles on either side.

So, the Trialing stop loss is moved to that point. As such, the Trialing stop loss moves upward whenever a swing low is formed.

Exit:

The exit of a position can be made in 2 ways, depending on the comfort level of the trader in terms of time.

The first type of exit is where a stop loss is hit.

The second type of exit is where the WMA – 50 changes its direction and forms a tilt on the lower side. (Very rarest scenario to happen before the stop loss is hit).

Observation:

As said earlier, when the stop loss is hit, that is the exit point of the strategy.

On the other hand, an exit can be made when the first WMA, i.e. WMA – 5 cuts the second wma, i.e. WMA – 8 from the top side and proceeds to move lower. An avid trader who doesn’t want to risk his profit and get out of the position, can exit at this point, but re-entry into that position again should be made on a cautious note.

The exit point according to my observation is charted below.

The area circled with a smaller red circle on top of the chart is where the cross over happened. The black line is the close of the candle on which day the crossover is made. So, an exit will be made either at that price or lower, whichever is encountered earlier.
Customizing the system to Intraday actually requires a lot of work, on which I am occupied now. The next part with customization of averages and better exit points will be discussed later.

Quadra Safe Strategy–Part 2-i

Part 1 can be seen at Let the Charts Speak....: Quadra Safe Strategy–Part 1 
As we are now familiar with the requirements of QS Strategy, the main point to note is that
- The strategy doesn’t need the implementer to be familiar with Technical Analysis.
- Technically illiterate traders can count on this method for sizeable position trading.
Swing Candles do form a important role in deciding the entry, stoploss points.
Swing High:
Swing High is the high of that candle, whose ‘high’ is higher than the ‘high’s of the two candles on either side of it.
Swing Low:
Swing Low is the Low of that candle, whose ‘Low’ is Lower than the ‘Low’s of the two candles on either side of it.
Below is the Image showing Swing High & Swing Low.

Entry:

For entering a long position, the entry criterion is that all the three Wilder’s Moving Averages must be in the order of their number.
WMA (5) > WMA (8) > WMA (13)
i.e. the 5-WMA should be above 8-WMA, which should be in turn on top of 13-WMA.
Once the above three WMAs are in the required arrangement, it is now time to observe the 50-WMA.
50-WMA is the major trend decider.
The 50-WMA line (Green) should be moving with an upward tilt. i.e. The tip of the 50-WMA line should be moving and pointing upwards indicating a major uptrend.
A “Trigger Candle” is one during whose formation that the above setup will be formed.
The “BUY” order will be above the high of “Trigger Candle”. (GREEN Line)
The previous swing low will be the “Stop Loss” for our current position.  (RED Line)
The image below shows such an arrangement.

I try to limit one chart per post. So, the trialing stop-loss and exit points will be discussed later in part 2-ii.

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Quadra Safe Strategy–Part 1

This is one of the widely discussed strategy for positional trades. Mostly preferred by futures traders. This blog post is the summary or detailed procedure of implementing this strategy, consolidated from Savant Garde’s Thread in Traderji Forum, http://www.traderji.com/technical-analysis/68719-quadra-safe-trading-strategy-i.html
I would like to present this in parts, so that things can be kept simple and easy to understand. All efforts are made to include charts wherever necessary, but not everywhere.
Indicators Used:
1. Wilder’s Moving Average – 5

2. Wilder’s Moving Average – 8

3. Wilder’s Moving Average – 13

4. Wilder’s Moving Average – 50

WMA – 8 and WMA – 13 are used to assess the short term and medium terms, whereas WMA – 50 is used to assess the long term trend or Major trend. Nifty Futures Chart with all the above indicators and templates is shown below.

Chart Index :
Scrip – Nifty Futures
WMA – 5 – RED
WMA – 8 -  BLUE
WMA – 13 – Dark Grey
WMA – 50 – Green
Time Frame – Daily




The rules for Entry, Exit, Stop loss, Add will be discussed in the second part.
The third part explains Customizing averages and experimenting with various timeframes.
Fourth part emphasizes on trying to vary parameters in order to make it suitable for intraday.
Final and Fifth part will apply the strategy to current Nifty Futures Chart and market analysis will be done.

Pro’s:
1. Almost fool proof if rules are strictly followed.
2. Useful for long term positions (ranging from 4 to 12 weeks)
3. Preferable to utilize trading as a second source of income.
Con’s:
1. Patience needed.
2. Results may not be seen as soon as initiated.

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That “One” Missing Trade…

Psychology plays a very important role in one’s trading pursuit. No one can runaway from those decisions taken based on Greed, anxiety and fear of missing an important chance to make profits. Traders combat a variety of emotions on a daily basis. Most emotions when trading are unavoidable simply due to the fact that we are human! If we fail to deal with these emotions effectively, it can lead to catastrophic results in our trading.  The frustration of a missing trade is worth a discussion.

Every trader, young or old, would ‘ve experienced the frustration of missing that good trade more than once. The reason behind frustration is greed and anticipation about the points that “would ‘ve” been gained in case the trade is taken. That lets us forget the mere fact that we still have our money intact and the market is still available to trade.

Frustration lets you make drastic decisions viz., taking revenge on the market – the main devil that perishes all our money. The fight with the market will more or less lead to disastrous results as the trades taken emotionally are usually bad decisions or made in a hurry without sticking to the trading plan. Once the trade is made without a plan, we are literally stuck in the market as the exit plan is not considered.

This emphasizes the importance of planning before entering any trade. As Joker says in “The Dark Knight”,

“Nobody panics if everything goes according to the plan, Even if the plan is horrifying”

Simple precautions will help you not to miss on the trades you planned to take, for ex.,

- Price Alerts,

- Limit Orders,

- Market Watch criterion.  (will be elaborated later)

A successful trader never misses a planned trade. Even if he does, there is no way that emotions are going to takeover the control of his trading account, ‘coz he knows the fact that market is still available to trade tomorrow. Missing the repercussions of a “Missing Trade” is always healthier for a trader.

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Image Courtesy: Google.

So It began….!!

 

As the title says, this blog is totally aimed at providing insight into Indian stock market through technical analysis.

 

Lets begin the journey…