Day Trading with Heikin Ashi Charts by Tim Haddock and Ravi Kapoor Copyright © 2013 Tim Haddock and Ravi Kapoor All rights reserved firstname.lastname@example.org All rights reserved. No part of this book may be reproduced or transmitted in any form or any means, electronic, mechanical, photocopying, scanning or other means without prior permission by the authors except for brief quotations in reviews. Disclaimer Trading and especially day trading oﬀers great proﬁt poten al but can involve a high degree of risk. If you engage in trade stocks or other ﬁnancial instruments you have to be aware of the inherent risks. Do not trade with capital you cannot aﬀord to lose. The strategies outlined in this book are for educa onal purposes only and do not cons tute a recommenda on to buy or sell any ﬁnancial instrument. Past performances are no indica on to future results. Acknowledgement We have created all charts using the Think or Swim pla orm as provided by TD Ameritrade - 2013© TD Ameritrade IP Company, Inc. Other screenshots of the trading pla orm are of the same source. Table of Contents Why we wrote this book Trading vs. inves ng Trend following vs. contrarian approach Day trading Making a watch list The Elements for the Heikin Ashi Trend Trading Strategy Bollinger Bands Keltner Channels Squeeze Moving averages Candle S ck Charts Heikin Ashi General Market Indicators Time frame The Heikin Ashi Trend trading strategy Se ng up the Charts The long entry rules The short entry rules Stops and exit Note Real life examples Friday, August 9, 2013 Monday, August 12, 2013 Tuesday, August 13, 2013 Wednesday, August 14, 2013 Thursday, August 15, 2013 Friday, August 16, 2013 Final Remarks Why we wrote this book Like many of you who started trading as a way to make some money on the side or to pursue the goal of ﬁnancial independence we have been collec ng and reading a ton of books on trading. From the classics like Edwin Lefevre, Reminiscences of a stock operator or Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds to the modern books heavy on mathema cs. One of the more recent books which we found to be an excellent guide to trading strategies is John F. Carter, Mastering the Trade. Yes, we have learned a lot from those books, though we did not ﬁnd the holy grail of trading. We have seen the development of diﬀerent types of charts and the crea on of a myriad of technical indicators, facilitated by the advent of the PC making all these tools accessible to every trader. Some technical indicators did indeed work – at least for a while. Then a er a period of uselessness they worked again – for a while. Back tes ng helped to ﬁnd what worked in the past, naturally without any guarantee for future results. Depending on the look back period you got totally diﬀerent results. With a skillful selec on of the look back period you could promote any indicator or system as the ul mate system and make tons of money selling it. Some systems were selling for several thousands of dollars making the creators rich without the need of doing a single trade. This, of course, was a constant source of frustra on for the hopeful souls purchasing those systems and seeing their capital erode using them. One thing remained the same over the years, trivial as it is. Stocks or any other ﬁnancial trading instrument moved either up, down or sideways. And when they moved, they moved in trends, some of them in a more orderly fashion, others with wild swings scaring the daylights out of a novice trader. Retracements are part of the game, since nothing moves straight up or down. The big ques on always was, is that just a retracement, giving you the opportunity to buy the dips or is it the beginning of a reversal? If you have the correct answer you are on the way to riches. Whether you consider a move a trend or a just a retracement depends on the me frame you are watching. What looks like a nice tradable trend on a daily chart, may just be a retracement on the weekly chart. The quest we are pursuing with this book is to help you to iden fy an emerging trend in its infancy and ride it as far as you could within the meframe of your choice. We will show you a solid strategy which you can pursue with readily available tools within your char ng package or trading pla orm. All this without the need of manipula ng spread sheets which would be unprac cal in a day trading situa on. This strategy focuses on riding the trend for as long as possible while ghtly limi ng the risk. We will demonstrate our strategy on the very elaborate and versa le Think or Swim pla orm (ToS) which is supported by the online brokers TD Ameritrade and thinkorswim.com. This is simply because it’s the pla orm we are familiar with and we cannot cover other pla orms in this limited space. But you may certainly use any other broker or pla orm you like. You should be able to duplicate virtually all the se ngs we are using for the Heikin Ashi Trend Trading Strategy. In case you could not see the charts provided properly on your device, don’t hesitate to shoot us an email (email@example.com) and we will make sure you can get access to them. Trading vs. investing An investor typically con nues to hold on to his investments for a long me, some mes for years or even decades. As long as he is convinced about the fundamental soundness and future prospects of the company he is inves ng in he will hold his shares through periods of declining stock prices. He might even buy more shares on dips. And along the way he will cash in dividend payments and beneﬁt from stock splits. In the long run he will average returns at or somewhat above the returns of the S&P 500, let’s say anywhere between 10 and 20% annually on average. There is always the danger that he falls in love with a stock and will never consider to sell it just for profane money reasons. A trader on the other side aims to take advantage of the ups and downs of the market. This requires regular monitoring of the markets and the ability of the trader to actually call the shots when to buy or sell. To arrive at these decisions and to be successful in the long run he needs to have some ra onale or a trading plan with rules when to enter or exit. Trading decisions from the gut might work as well some mes but are far from being reliable and are therefore not recommended. It is essen al to keep the feelings of fear and greed in check. Failing to take proﬁts when they are available is the biggest danger to your capital. Swing traders look for holding periods of between several days to several months. A good swing trader with a solid system can substan ally exceed the returns achieved by the investor. At the short end we have the day trader who wants to take advantage of intraday movements and exits all his posi ons before the close of the trading day. Buying and selling or short selling and covering within the same day will create a daily cash ﬂow. At the end of the trading day the trader will know his result as a Dollar amount. The Dollar amount is the only reasonable yards ck for measuring your success. Percentage numbers don’t make much sense in this context. He needs to constantly monitor the market, essen ally spend his day in front of the screen. This is like a job or a business and the day trader is well advised to treat his trading accordingly. Trend following vs. contrarian approach To be a contrarian means not to follow the crowds. Crowds and herds have a pre y lousy image on the intellectual front. We immediately think of the stupid behavior sheep or of the fran c bull run of Pamplona. Being a contrarian certainly has its merits in inves ng. Like discovering out of favor stocks when they are cheap and riding them up over months or years. In short term trading a contrarian would be someone who can call the bo oms and tops of swings before anyone else. If you can achieve that on a consistent basis, you are a hero. It is also intellectually rewarding, but is it realis c? We don’t think so. And our aim is to make money consistently, becoming a hero is not one of our goals. And the intellectual sa sfac on does not necessarily line our pockets. That’s why we are taking the trend following approach. A er all, just think of Pamplona and the raw energy associated with a bull run. We strive to get into a trend as early as possible and to ride it for as long as possible. Not standing in the way of the charging bulls is the recipe for our ﬁnancial health. Day trading If you s ll have a day job forget about day trading, there is no way you can combine the two. At least one of the two ac vi es will suﬀer from underperformance, if not both. Whether you can join the ranks of day traders depends ﬁrst of all on your account size. According to the FINRA (NASD) regula ons you need to maintain a minimum of $25,000 of equity in your account. When you do your ﬁrst day trade you will get a warning message from your broker explaining about the implica ons and once you have done your fourth day trade within any 5 successive business days you will be labeled a pa ern day trader. This means that from now on you will have to maintain a minimum balance of $25,000 at all mes. As a day trader you have to be aware that this ac vity was an exclusive domain of ﬁnancial ins tu ons un l just a few years ago, like Goldman Sachs, Morgan Stanley, Knight Capital and many more. The drama c development of the internet and the advent of online discount brokers with ever improving trading pla orms has democra zed and interna onalized the scene. Day traders can be found among students, housewives and pensioners around the world. There seem to be very ac ve day trading groups with smart individuals in India and China trading the US stock markets. All you need to join the game is a funded account, a lap top and an internet connec on. Well, and a solid strategy, of course. Don’t underes mate either the new or the old compe on. The old compe on, the big ﬁrms employing the smartest traders money can buy, supported by hordes of highly paid analysts and equipped with the best in hardware and sophis cated so ware is s ll well and alive. And not to forget, they have a backing of capital you could only dream of. Don’t even think of trying to outsmart them. It’s a losing proposi on. Now, with that formidable compe on out there, does it mean you are crazy to take up the ﬁght and try to make a living oﬀ the markets? Not at all. You need not be afraid. All these formidable market par cipants are trading for themselves and none of them can predict the future just like everyone else. They do not operate with the same systems or don’t come to the same conclusions about whether or not a stock price is too high or too low. That’s why we see transac ons happening all the me. And not only you, but also the big boys incur a loss once in a while, that’s part of the business. You may have experienced that one of your stops has been hit and the price rebounds right away. Nobody has singled you out speciﬁcally to get your money by running your stops. Your stops were probably just at an obvious point used by many traders. No sinister complot by the big boys. Your losses are usually your own making, be honest to yourself and don’t try to explain your mistakes away. Do you really have a realis c chance to survive in this environment? Absolutely. But you have to arm yourself with a solid strategy including money management, discipline and a proper mind set. And most important: Treat the market with respect Making a watch list You simply cannot monitor the whole market with thousands of traded stocks. You have to reduce that universe to a more manageable size. Make a list of stocks you plan to watch on a regular basis. It should be as short or long as you can handle. For us this list of trading candidates contains between 50 and 100 names and we will update this list on a regular basis. You can create this list manually with the stocks you like or you can do it systema cally by scanning the whole market against your criteria. Most trading pla orms allow you to do that very painlessly. You can use a preset scan or do your own. Our criteria are trading volume, vola lity, minimum stock price and whether weekly op ons are available. Stocks with too low trading volume tend to have wide bid/oﬀer spreads making them diﬃcult to trade proﬁtably. The risk of erra c movements increases as well. Don’t waste your me or capital on these. We chose 1 million shares as the minimum trading volume. We set a minimum vola lity of 25%. If a stock just sits around all day at one level, we don’t want to waste our trading capital on it. For the stock price we set a minimum of $30. That is just an arbitrary number, but we feel that generally you get be er movement from that price level upwards than with low priced stocks. You can use whatever you are comfortable with. Figure 1: Se ng up a scan On TOS you choose the Scan tab and then under the drop down menu load scan query choose Create new scan. The drop down op ons show up when you click on the li le triangle in the lower right corner of that box (1). In the upper right of this page you can tell the program where to scan and with which list to intersect the result. We have chosen All Stocks to be intersected with Weekly Op ons. This is a bit tricky to ﬁnd. In the intersect box go to Public and Weekly op ons will be at the very bo om of the drop down list. Why do we choose weekly op ons as a criterion? Even if you are not even considering trading them right now, their presence is an indica on that there is a good following in the stock on a con nued basis. Sort the resul ng list alphabe cally by clicking on the Symbol header and go through this list manually. You might add stocks you like for whatever reason. You may add your favorite ETFs, index products, currencies or some futures, like gold, bonds, crude or natural gas. Anything you trade or you think is worth watching to give you a sense of the overall market sen ment and direc on. You can also delete the symbols of stocks you dislike. At this stage and only here you may allow yourself a few emo ons. Finally save the scan result as a watch list and give it a meaningful name. Figure 2: Se ng up a watch list The watch list in TOS is very useful. Right clicking on any cker symbol oﬀers you many choices, from accessing a Quick chart, to note taking and even to order entry. Just go through this list of op ons and explore them on your own. You can also customize the watch list in many ways. To do that right click on the li le dot just le of the Symbol header (1) and chose Customize. On the le appears a list of available items which include all technical indicators. You can add your choice to the current set to be displayed. You can also remove items you do not need to be displayed and you can change the order of the columns. We will come back to this with se ng up a customized scan in a later chapter. The Elements for the Heikin Ashi Trend Trading Strategy In the old days, i.e. before the arrival of the PC, traders drew their charts by hand and even the simplest technical analysis tools like moving averages were a pain to calculate. The PC has changed all that and democra zed market analysis. With a click of the mouse you can display your charts as line charts, bar charts, candle s cks and Heikin Ashi. Among the newer addi ons are monkey bars. Even mathema cally challenging indicators are updated almost instantaneously and real me char ng is no longer a luxury. You can have it even on your tablet or smart phone. On the TOS pla orm there are more than 200 indicators you can choose from and more indicators are regularly developed. Do you need all of them? Certainly not. The problem with indicators is that they do work very well at mes and then they don’t work at all for a while. That’s why many traders add more and more indicators in the hope that they conﬁrm each other and if not they speak of divergence which itself is interpreted as a signal. That’s where the objec ve turns into subjec ve. Or do we decide democra cally based on what the majority of indicators tell us? Pick the indicators you use very carefully and sparingly since you do not want to run into the problem of paralysis by analysis when you get contradic ng signals. The indicators are calculated with past data in the hope to predict the future. This is a lo y goal. S ll there is merit to some of the indicators since they can tell us something about the current state and health of the market, which can expected to persist for a while. For our Heikin Ashi Trend Trading Strategy we will mainly focus on two aspects for iden fying trade setups, vola lity and momentum. We will use a combina on of Bollinger Bands and Keltner Channels and for momentum either MACD or the TTM_Squeeze indicator. Bollinger Bands, Keltner Channels and MACD are built into almost any pla orm oﬀered by online brokers. The TTM_Squeeze indicator is part of the ToS pla orm free of charge, for other pla orms it can be purchased. We will show you a workaround which is not as comfortable, but at least it’s free. Bollinger Bands Bollinger Bands have been developed by John Bollinger in the 1980s and are widely used and well documented. We think there is no need to go into details which you either do know already or which you can easily look up in many books on technical analysis or on the internet. Let us just summarize that Bollinger Bands consist of a simple moving average with a default length of 20 periods and a upper band and a lower band which are 2 standard devia ons above resp. below this moving average. When vola lity decreases the bands will narrow towards the moving average. Bollinger Bands are supported by prac cally all char ng packages and trading pla orms. You can s ck with the default se ngs. Keltner Channels Keltner Channels are quite similar to Bollinger Bands, but use instead of standard devia on the Average True Range = ATR which is ﬂuctua ng not as wildly as the standard devia on resul ng in a much smoother appearance and more constant width. Keltner Channels are pre y much standard and you should ﬁnd them on most char ng packages and trading pla orms. S ck with the default se ngs as well which uses a length of 20 periods and factor 1.5 for the ATR. Squeeze Whenever the Bollinger Bands contract to within the Keltner Channel we observe a serious decline of vola lity. John F. Carter in his highly recommended book “Mastering the Trade” calls this a squeeze. It might be short lived but it could also go on for a while. But eventually we will see the Bollinger Bands breaking out of the Keltner Channel accompanied by a signiﬁcant price move to the upside or downside. In the following graph you can see the squeeze by watching the actual movement of the Bollinger Band (red lines) and the Keltner Channel, deﬁned by the blue lines. On the sub graph you can see John Carter’s TTM_Squeeze indicator on the horizontal line with the dots changing from blue to red when the squeeze is entered. The histogram is a momentum indicator. As you can see, both indicators give the same results and you can use either of them. If you have no access to the TTM_Squeeze you may want to add a momentum histogram, like MACD. I personally prefer the TTM_Squeeze indicator for its clarity and simplicity. It does not clu er up the main graph leaving room for se ng up anything you fancy from moving averages to support and resistance lines. As we men oned this indicator is currently available free of charge only on the Think or Swim (ToS) pla orm. This pla orm is supported by the online brokers Thinkorswim.com and TDAmeritrade.com. It has been programmed also for numerous other pla orms and is available at their website tradethemarkets.com, unfortunately not free of charge. Let’s just state for the records that we are in no way associated with this group. On ToS you can ﬁnd this neat indicator under Studies -> Add Study -> John Carter’s studies -> TTM_Squeeze. Figure 3: The Squeeze It is very important that you use market hour data only for stocks for the squeeze to work properly. A er hours trading in stocks can be very thin with erra c price movements. We will show you how to turn this oﬀ under Se ng up your charts. In the case of futures which are traded around the globe like gold or crude you may use 24 hour data. Figure 4: Chart se ngs Click the li le wrench le of the me aggrega on selector. On the next screen select equi es and then uncheck Show Extended Session. Figure 5: Chart se ngs 2 Moving averages We think there’s no real need to explain what a moving average is. In case you do need an explana on, just google it. We will use exponen al moving averages. We will set the length to 13, 21 and 55. These numbers happen to be Fibonacci numbers. It’s not that we believe they will work any magic in this context, but this choice does not hurt either. Just use what you are comfortable with. Candle Stick Charts You will be familiar with candle s ck charts since they are supported by all packages and pla orms. They have been invented in Japan more than 200 years ago and have been popularized in the western world by Steve Nison in his1991 book Japanese Candles ck Char ng Techniques. They became so standard that these days you can create them even in Microso Excel. They give a very good visual representa on on what’s happening in the par cular market you are trading. How to interpret them and how to make sense of the various forma ons like hanging man, doji, dark cloud cover and any other with a funny name has been the subject of numerous excellent books. We will not go into details here. Heikin Ashi Also invented in Japan they are a varia on of candles ck charts with some unique proper es. While regular candle s cks display data as they are, Heikin Ashi bars are the result of a calcula on as follows: Open = (open of previous bar + close of previous bar) / 2 Close = (open + high + low + close) / 4 High = maximum of high, open or close (whichever is highest) Low = minimum of low, open or close (whichever is lowest) The following ﬁgure shows Heikin Ashi and candle s cks side by side for the same stock and the same period. You will immediately no ce that Heikin Ashi charts show much smoother trends. At the same me you will no ce that due to the par cular calcula on the closing prices of the bars are not reﬂec ng the actual data. That’s why you should never use them just by themselves. Having them side by side is a good idea. A strong uptrend is characterized by white candles and no tail at the bo om, while in a strong downtrend the candles have no wick and are solid red. Figure 6: Heikin Ashi vs. candle s cks General Market Indicators You should always be aware of the general sen ment of the market. At mes a par cular strong stock might move violently in a direc on opposite of the overall market. If you have an excellent setup and every point in our analysis lines up, you may trade such a move but you should use extra cau on and possibly ghten your stops. In absence of a par cular setup you should trade with the general market and not against it. The odds are just be er and trading is about making money and not about being a hero. Heroes die young or lose their shirt very quickly in the markets. Two useful indicators to watch are the volspread and the ck index. On the ToS pla orm the symbols are $VOLSPD and $TICK. The volspread is the diﬀerence between up-volume and down-volume of the S&P 500. You can chart this indicator with 5-minute bars. At a glance you will see whether the market is in sideways chopping mode or whether the bulls or bears have a run. The deﬁni on of the ck index is the number of stocks trading on an up ck minus the number of stocks trading on a down ck. This index can ﬂuctuate widely within a very short period. Displaying it as a 5 minute chart takes a bit of the noise out. In addi on we emphasize the zero line and add a linear regression channel to show the trend. As I am using the ToS pla orm I use the TTM_LRC which you can ﬁnd under John Carter’s studies. Readings between +400 and -400 are just the noise of the market. When you get readings greater than +800 or less than -800 this is a sign of serious ac vity by bulls or bears and you should take it seriously. The following illustra on shows a very nice uptrend on the $VOLSPD a er 11:00 am while the cks spend most of the me above the zero line, with no excessive readings, however. You can keep the two charts in a small window somewhere in a corner where it does not obscure the view on an ac ve chart. Figure 7: Volspread and cks In the same period the SPX moved as follows: Figure 8: S&P 500 Time frame Does it really ma er which meframe you chose? Well, yes and no. The nature of stock price movements is o en referred to as fractal. There is a self similarity to the movements to the eﬀect that you cannot tell which me frame you are looking at if you don’t have a legend. The following three charts are all of AMZN, with 15 minute, hourly and daily bars. The principle of chart analysis should work the same in all me frames. Figure9: AMZN Figure 10: AMZN Figure 11: AMZN The choice of me frame you want to trade becomes important when you consider how to incorporate your trading ac vity into your daily life. If you are a day trader with the me, energy and determina on to sit in front of the screen during the trading day, you can choose 5-minute or even 3-minute charts to trade oﬀ of. You will have more signals ge ng you in or out of the market. More trades could mean many small proﬁts and losses and of course more commissions. Occasionally you will be able to ride a longer las ng trend rewarding you generously. You may have a day job and don’t have the me or pa ence to follow the market throughout the day. Your account size may not allow you to day trade. This will limit you to hourly or daily charts. If you catch a trend that lasts for a few days you could make quite a killing. At the same me your stops will have to be wider which might give you quite some heat once in a while. You can balance this by decreasing your posi on size, limi ng your risk to a more manageable level. Take only as much risk as not to aﬀect your sleep. For us, the ideal compromise is to trade oﬀ the 15-minute chart. More o en than not you can catch trends that are between 5 and 10 bars long which translates to about one to two and a half hours. The very same stock could give you 1 to 3 trades during one day. Of course, there are also days without a trade in one stock. But you are watching more than one anyway. The Heikin Ashi Trend trading strategy Now it’s me to get our act together and outline how to get into a trend early and how to ride it almost to the very end without being scared out of a trade prematurely. Setting up the Charts First we set up our charts which we will demonstrate on the ToS pla orm. You should be able to duplicate this on almost any other pla orm since we are using only standard tools and indicators. On the main page select the tab Charts in the top line and Charts again in the line beneath it. If you don’t see a virgin screen click on Reset in the upper right hand corner. A few posi ons le on it you can select how many chart windows you want on one worksheet. Select 2 adjacent ones. To see the progress of what you are doing put in a cker symbol in the box in the upper le corner. Between that entry box and the full company name are three colored squares. Click on that icon and select one color. (1) Do the same on the chart window on the right, selec ng the same color. This has the eﬀect that when you enter a cker on one chart, the other will do the same automa cally. Figure 12: Chart setup Next click on Style (2) and from the dropdown menu go down to Chart Type (bar) and go to the right and select Heikin Ashi. On the chart on the right do the same but select Candle Trend instead. Now change the me aggrega on to 15 minutes (3) on both for now. If you see lightly yellow shaded areas on your charts this tells you that a er market hours are displayed as well. On the volume sub graph you will also see periods with almost no volume. This is what will distort the squeeze indicator. Deselect Show Extended Session as explained earlier. The volume shows up on a sub graph but we prefer to have it overlapped on the chart. To change that go to the Chart se ng page again and choose the General tab. Under Layout check the box Overlapped Volume. Now we are ready to set up the squeeze. On ToS you can ﬁnd this neat indicator under Studies -> Add Study -> John Carter’s studies -> TTM_Squeeze. If you do not have ToS or access to this indicator on another pla orm you can set up the Bollinger Band, the Keltner Channel and a momentum indicator as described above. The informa on is the same, just not as neat as the TTM_Squeeze. Next we add the moving averages. We will use them to stay on the right side of the trend. We are using the exponen al averages with a length of 13, 21 and 55 periods. Once you are done with se ng up the studies, save them as a study set with an appropriate name. Then you move over to the other chart and just load that study set and you are done. Every morning we scan our watch list for squeezes. This can be pre y tedious if you have a long watch list and want to scan not just the 15 minute me frame. During the week before the market opens I do another scan for 15 minute squeezes. And I have set up an alert no fying me whenever a stock enters or exits a squeeze. In ToS there is not yet a readymade scan for squeezes giving an easy output. On the tradethemarkets.com website one of the users had posted a very handy workaround for ToS. If you are working with a diﬀerent pla orm you might be able to rewrite the code accordingly. Cau on: Please use this scan only as a good approxima on. Occasionally the scan does not show ac ve squeezes even though they will show up when you inspect the charts. There might be an update available in the mean me that we are not aware of at this point. To set up the scan go to your watch list which is listed under gadgets on the le side of the main screen. Right click on the small dot just le of the Heading Symbol. Choose the top choice Customize. Here you can change what to display in the watch list by adding or removing items. Under available items go to any of the items labeled Custom and double click. A Custom Quote Formula window will open with the tab Condi on Wizard opened. Click on Delete to remove the one item displayed and then click on the tab thinkScript Editor to open a blank window. Into this window you copy the following: input BollingerDevia ons = 2.0; input BollingerLength = 20.0; input KeltnerFactor = 1.5; input KeltnerLength = 20; input price = close; def bk = reference BollingerBandsSMA("num_dev_up" = BollingerDevia ons, "length" = BollingerLength )."upperband" - reference KeltnerChannels("factor" = KeltnerFactor, "length" = KeltnerLength)."Upper_Band"; def grnconsecdots = if bk>0 and bk>0 and bk>0 and bk>0 and bk>0 and bk>0 and bk>0 then 7 else if bk>0 and bk>0 and bk>0 and bk>0 and bk>0 and bk>0 then 6 else if bk>0 and bk>0 and bk>0 and bk>0 and bk>0 then 5 else if bk>0 and bk>0 and bk>0 and bk>0 then 4 else if bk>0 and bk>0 and bk>0 then 3 else if bk>0 and bk>0 then 2 else if bk>0 then 1 else 0; def redconsecdots = if bk<0 and bk<0 and bk <0 then 3 else if bk<0 and bk<0 then 2 else if bk<0 then 1 else 0; plot signal = if grnconsecdots > 0 then grnconsecdots else redconsecdots + 10; signal.assignValueColor (color.BLACK); assignBackgroundColor( if bk < 0 then color.red else if grnconsecdots< 7 then color.green else color.black); Give the Column name an appropriate name and choose the aggrega on. Click Apply and Ok and repeat the same process on the next Custom label. Since your computer will do all the work without complaining I choose weekly, daily, hourly, 30 minutes, 15 minutes and 5 minutes. Ini ally it will take a quite while un l all ﬁelds are calculated. For be er viewing you can detach this list into a new resizable window by clicking on the li le icon next to the printer icon. The result is as follows: Figure 13: Squeeze scan The ac ve squeezes are in red and the green ones show that the stock has moved out of the squeeze. The numbers in the green boxes indicate how many periods we are out of the squeeze. The numbers in the red boxes are not so clear, 11 means one period in the squeeze, 12 stands for two period and 13 for anything longer than that. Don’t put too much emphasis on these numbers, much more important is the visual inspec on anyway The ﬁrst step is to iden fy the stocks that are in a squeeze within your selected me frame which for us is 15-minutes. We sort the list on that column so that the red boxes are on top of the list. These are the candidates deserving a closer inspec on and we will visually inspect the charts for possible trade set ups. The stocks that are in a squeeze in a higher me frame as well merit special a en on, since they could develop longer las ng trends once they come out of the vola lity squeeze. The long entry rules Make sure your stock is in a squeeze in the me frame you are trading in. If you see a squeeze in a higher me as well, that reinforces any signals. Make sure the moving averages are stacked in the right order. It’s ok if the shortest average is just heading up and about to cross to the upside. The buy signal: A white Heikin Ashi bar following another white bar, both with very small or no tails is the signal bar. These two bars will typically show a size of about double or more of the average true range of the last 14 periods. You enter a buy order with a limit at the midpoint of the signal bar which hopefully will be executed during the next bar. If you don’t get a ﬁll, don’t chase it. There are lots of other opportuni es. The vola lity break out will occur at about the same me or one or two bars later and the momentum will expand as well which is a good conﬁrma on that we are on the right track. The short entry rules Make sure your stock is in a squeeze in the me frame you are trading in. If you see a squeeze in a higher me as well, that reinforces any signals. Make sure the moving averages are stacked in the right order. It’s ok if the shortest average is just heading lower and about to cross to the downside. The sell signal: A red Heikin Ashi bar following another red bar, both with very small or no wicks is the signal bar. These two bars will typically show a size of about double or more of the average true range of the last 14 periods. You enter a sell order with a limit at the midpoint of the signal bar which hopefully will be executed during the next bar. If you don’t get a ﬁll, don’t chase it. There are lots of other opportuni es. The vola lity break out will occur at about the same me or one or two bars later and the momentum will expand as well which is a good conﬁrma on that we are on the right track. Stops and exit Place an ini al stop just below the signal bar. Trail the stop one bar behind the current bar. If one bar is followed by one or more inside bars, leave the stop at its last posi on and con nue trailing it up once the inside situa on is cleared. When you see one or more dojis with long tails and wicks treat this as a warning sign and ghten your stops. Don’t be afraid to be stopped out prematurely. It’s usually be er to be on the safe side. Should a con nua on move develop you will get a signal for reentry and be able to par cipate. Note The squeeze is a very reliable setup since no stock will stay in a low vola lity situa on forever. And exi ng a squeeze is very o en done with a powerful move. A scan for squeezes quickly iden ﬁes these candidates. But there are many situa ons in fast moving markets that a squeeze has no me to develop or when the Bollinger Bands come close but don’t penetrate the Keltner Channel. The Heikin Ashi entry rules are the most important ones and may be taken just by themselves or with the support of any other ra onale to enter the market. Real life examples Friday, August 9, 2013 We will leave the Heikin Ashi chart as a 15 minute chart and set the regular candles ck chart to a higher me frame of one hour for now. That way we can observe the major trend. We will change the me frame on the candle chart frequently anywhere between 5 minutes and one hour to have the proper perspec ve across all me frames. In the scan we did earlier NFLX drew our a en on since it showed squeezes in all me frames down from the hourly. We visually inspect the 15-minute Heikin Ashi chart: Figure 14: NFLX setup, Friday, August 9, 2013 We no ce that NFLX has been in a squeeze most of Friday and the Heikin Ashi candles are all inside the long bar at the beginning of the day. They also alternate between white and red and many of them are doji bars with small bodies and long tails or wicks, a clear sign of indecision. Towards the end of the day we see a slight upward trend conﬁrmed by the moving averages which are neatly stacked in the right order and with the momentum showing a moderately posi ve trend. But there is no real convic on at all and we are s ll trading within the long bar from this morning. This is certainly not enough to convince us to take a posi on over the weekend, but we are going to watch this closely on Monday morning. Monday, August 12, 2013 Here is what happened on Monday: Figure 15: NFLX, Monday, August 12, 2013 The morning sickness on Monday morning surprised us a bit, but the recovery to the established trading range was swi . The second bar of the day is of a shape we want to see, a white bar with no tail. We need to see one more of these. But the next two bars are red again with contrac ng momentum. And only two bars later we see a perfectly shaped long range bar much larger than the average true range of the last 14 periods. At the same me this is also the ﬁrst one outside the squeeze. We place a buy order at the mid-point of that long bar and get ﬁlled at 254.25 around 11:00. We set the ini al stop at 253.40 risking only 0.85. Since the next several bars are inside bars we leave the stop where it is. NFLX needs some me to digest the advance and when it resumes its upward trend we can trail up the stop to 254.75 at 13:00. Again we see a number of inside bars with mostly white bars. There are a few small dojis and the momentum is slightly wearing oﬀ which is some warning sign to ghten our stops. There is also a squeeze which tells us that the move might be over for now. That the squeeze lasts only for one bar we will not know un l the next bar closes. This will also be the last bar of the trading day. We decide to get out before the closing bell and get ﬁlled at 256.50 near the high for the day and for a proﬁt of 2.25. Tuesday, August 13, 2013 Figure 16: NFLX, Tuesday, August 13, 2013 Figure 17: NFLX Tuesday, August 13, 2013 5-min candles Since we had the one dot squeeze just before the close on Monday we want to sit on the side lines for a while. As the 5 minute chart (Figure 17) reveals we had a gap up followed by a serious sell oﬀ. From the strong close on Monday we might have an cipated a gap up the following day. But seeing the brutal sell oﬀ right a er the opening bell we were not too disappointed. The next three Heikin Ashi bars showed a nice downtrend (Figure 16). Why did we not jump on it? Because the moving averages remained posi vely stacked and did not conﬁrm a trend change. Consul ng the higher meframe of the hourly chart showed that both the trend as well as momentum was absolutely unbroken. We rather would be looking at chances for a long entry. The 10:45 Heikin Ashi bar was the signal bar and we entered a limit buy at its midpoint and got ﬁlled at 256.50. We set the ini al stop below the signal bar at 255.40 risking 1.10. We could quickly trail the stop up to 257.50. The next three bars were inside bars, so we did not move the stop un l the trend resumed and we could raise the stop to 260.30 just below the 13:15 bar. The price ac on showed a lot of indecision despite the momentum on the rise. We ﬁnally got stopped out at 260.30 for a proﬁt of 3.80. There was not enough convic on to go short since the moving averages were s ll posi ve and the Heikin Ashi bars hat s ll a few wicks on top which is not a sign of strong convic on. And we did not want to enter a new posi on before the close. Wednesday, August 14, 2013 Wednesday started like the day before with wild swings during the ﬁrst half hour. Please refer to Figure 16 showing Tuesday and most of Wednesday. The ﬁrst bar was a doji with a huge tail and wick, producing a squeeze las ng only for one period. The moving averages were s ll posi ve and the third bar of the day became a signal bar. We entered a limit buy order at the midpoint and got not ﬁlled. Checking the $VOLSPD we saw that the overall market looked rather weak. The cks showed also no real convic on with a slight downward bias, a few readings lower than -800 which got rejected very quickly, though. We felt to be in chop mode, cancelled our buy order and remained si ng on the sidelines for the rest of the day. It is not our style to chase a move and we prefer rather to look for opportuni es elsewhere or even take the a ernoon oﬀ. Figure 18: VOLSPD on Wednesday, August 14, 2013 Figure 19: Ticks on Wednesday, August 14, 2013 Thursday, August 15, 2013 Figure 20: NFLX on Thursday, August 15, 2013 We came into Thursday s ll within a squeeze from the day before. The ﬁrst bar catapulted us through the bo om of the squeeze and we had quite a violent down move. It was also the second red bar without a wick and the short and medium moving averages were heading down, but s ll above the longer one. Since the S&P and the Dow had opened with a big down gap and the $VOLSPD and the cks were strongly nega ve, we entered a limit short sell order at the midpoint at 259.60. We placed the ini al stop at 261.90 risking 2.30. We moved this stop down to 260.60 as soon as the new bar opened reducing our risk to just 1.00. We saw some very serious selling with ck readings spending most of the morning below the zero line and hi ng a reading of – 1,000 several mes. The occasional excursions above the zero line were regularly rejected at the +400 level. And the $VOLSPD con nued relentlessly its way down. We decided to trail the stop two instead of one bar behind the current one to limit the risk of whipsaws. In case you set the stop on the previous bar as we usually do you would have been stopped out but you soon had a new chance to reenter the short. Here is how the $VOLSPD and the $TICKS looked like: Figure 21: VOLSPD on Thursday, August 15, 2013 Figure 22: Ticks on Thursday, August 15, 2013 A er 10:15 we got a few dojis and inside bars, the nega ve momentum of NFLX subsided a bit, though not convincingly and the overall market showed con nued weakness. That’s why we decided to sit through the diges on period. A er 9 bars the down trend ﬁnally resumed. We con nued to trail our stop two bars back and got stopped out on the very last bar of the day at 253.6o for a proﬁt of 6.00. We would have exited the trade anyway before the close to be on the safe side. A er such a move anything can happen overnight and could hurt our proﬁts. Friday, August 16, 2013 Figure 23: NFLX on Friday, August 16, 2013 Friday morning we were faced with a tricky situa on. A er that deep descent we are tempted to play a retracement move, or the dead cat bounce. However, there was no squeeze anywhere in sight. Checking all higher me frames up to the weekly chart also produced no squeeze to give us an excuse to play NFLX long this morning. The moving averages were stacked in the nega ve order which is logical a er such a sharp decline, thus allowing us to look out for shorts at best. But the ﬁrst two bars of the day were two dojis with long tails and wicks showing complete indecision in the market. The third bar was a perfectly shaped strong white bar which was a clear indica on that the trend had changed and we decided to give it a try and entered a buy order at the midpoint which was ﬁlled at 254.80. We set the ini al stop at 252.80 risking 2.00. Feeling a bit cau ous we trailed the stop up just one bar behind and got stopped out at 259.10 for a proﬁt of 4.30. Following the same logic the 13:45 bar could have served as a signal bar for a short entry. We did decide against taking this signal as there were only 2 hours le in the trading day and week. And Friday was op on expira on day which usually has a slight upward bias into the close anyway. As we have experienced quite o en, anything can happen on expira on day and we did not care for any surprises. It was a good week. With just 4 trades we made a total of $16.35 per share. Trading just a hundred shares this gave us $1,635 before commissions for the week. The margin requirement on this posi on would have been less than $9,000. If you are addicted to percentages this translates into a weekly return of over 18%. Final Remarks We have shown you a whole week of trading just one stock with only four trades and we hope that you could realize the simplicity and power of the Heikin Ashi trend trading strategy. NFLX was not the only stock showing great signals during this week and you could have traded other stocks in addi on and with similar results. Permit us a few general remarks: Once you had a few proﬁtable trades you are entering a psychological danger zone. It is so easy to get carried away and start playing with the rules, especially the stop loss orders. S ck to your rules, even though this might be boring at mes. You are not in this business for the excitement but to make money. Not all trades will work out as well as ours during the week shown. You have to expect and accept occasional losses. They are part of this business. Keep your risk under control at all mes. This includes not only se ng and trailing stop losses but also the strict control of posi on size. Take on your plate only so much as you can handle without losing sleep about it. Reducing risk by diversiﬁca on is a great concept in inves ng, but don’t count on it in day trading. It doesn’t need the notorious black swan ﬂoa ng by, just a regular sell oﬀ will teach you diﬀerently. Avoid losing money like the plague and put the lion share of your eﬀorts into that goal. Proﬁts will take care of themselves. You should also be able to monitor your posi ons constantly. How many you can handle at the same me depends on your personal a en on span and how much screen real estate you have. --$$$$$-- We sincerely hope you were able to make some proﬁtable trades already using our Heikin Ashi Trend Trading Strategy. We would like to hear it. For your success stories and sugges ons we welcome your email at firstname.lastname@example.org. 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