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Lavender's Cheat Sheet
for the Simple 1-2-3 Advanced Trading Workshop
Components of a
Price Bar on a Chart
Bar charts can be time-based, tick-based or volume-based. When using
time-based data resolution (intraday, daily, weekly, or monthly), each
bar on the chart illustrates the Open, High, Low, and Closing prices for
the time increment represented by the bar. When using tick-based data
resolution, each bar illustrates the first, lowest, highest, and last
tick in the group of ticks comprising the bar. When using volume-based
bars, each bar illustrates the first, lowest, highest and last price in
the group of transactions comprising the bar.
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The price range between
the open and close is plotted as a rectangle on the single line.
-
If the close is above the
open, the body of the rectangle is white.
-
If the close is below the
open, the body of the rectangle is red.
Basic candlestick = Open ,
High, Low, and Close
Tick bars -
Tick-Based Chart
Tick bars plot the price of each transaction. Tick bars differ from
time-based bars because tick bars plot prices based on a
transaction-by-transaction basis while time-based bars plot prices
during a specified time period, regardless of the time that has elapsed.
A transaction can represent 100 shares, 200 shares, 1,000 shares, and so
on. When plotting tick bars, price and number of ticks are the only
factors used, as time and volume are not considered.
For example, you can create a 5-tick chart, where one bar is comprised
of the Open, High, Low, and Closing ticks for each set of 5 ticks. The
length of time in that 5-tick bar could be a few seconds, a minute, an
hour, or even a day. In a tick-based data interval, the time it takes to
record 5-ticks is of no relevance and is not represented in the bar—each
bar will contain the range of open, high, low, and closing prices for a
specified number of ticks.
Volume or Share – based Chart
Volume or share bars plot based on a user specified # of shares that are
actually traded. They are not based on ticks (transactions) or time.
Each candle will always represent the same specified number of shares
actually traded. For example - when plotting a 500 share bar on a chart
the number of candles that may be plotted in any 1 minute may be one or
many or it could take 10 minutes or more to plot one candle. Periods of
high volume then will be represented by numerous candles and conversely
periods of low volume will be represented by few candles.
Linear regression
Linear regression is a statistical tool used to predict future market
values relative to its past values. Linear Regression is a concept also
known as the "least squares method" or "best fit." Linear Regression
attempts to fit a straight line between several data points in such a
way that distance between each data point and the line is minimized.
This function calculates the slope and angle of a linear regression
line, and also determines the value of the line on the current bar or a
specified number of bars ago or projected bars into the future.
Linear Regression Curve
Market Synopsis
Linear regression is a statistical tool used to predict future market
values relative to their past values, and is normally plotted on a price
chart as a straight line like a trendline. The Linear Regression Curve
indicator, however, does not plot a straight line – when it is plotted,
it curves through price activity. Its curve is a result of plotting a
line through each end point of invisible linear regression trendlines.
Each invisible trendline plots the minimal distance between closing
prices, using the "least squares" method, over the number of bars
defined in the input, Length.
The indicator helps to determine where a market's price might be in the
near future using current and past price history. If prices are trending
up, linear regression attempts to logically determine what the upward
bias of the price may be relative to the current price. If prices are
trending down, it will attempt to determine the downward bias of the
price. Some analysts believe that when prices rise above or fall below
the linear regression line, they are overextended and will begin to move
back towards the line. Thus, the line is used to monitor when a price
move may change direction.
TRIX - Triple Exponential Average Indicator
Calculates the percent rate-of-change of a triple exponentially smoothed
moving average of the item's closing price. Usage
TRIX is a momentum indicator that displays the percent rate-of-change of
a triple exponentially smoothed moving average of the item's closing
price. The TRIX indicator oscillates around a zero line. Its triple
exponential smoothing is designed to filter out noise.
Market Synopsis
The Triple Exponential Average (TRIX) indicator is an oscillator used to
identify oversold and overbought markets and it can also be used as a
momentum indicator. As is common with many oscillators, TRIX oscillates
around a zero line. When used as an oscillator, a positive value
indicates an overbought market while a negative value indicates an
oversold market. As a momentum indicator, a positive value suggests
momentum is increasing while a negative value suggests momentum is
decreasing. Many analysts believe the TRIX crossing above the zero line
is a buy signal while closing below the zero line is a sell signal.
Also, divergences between price and TRIX can indicate significant
turning points in the market.
TRIX calculates a triple exponential moving average of the log of the
Price input over the period of time specified by the Length input for
the current bar. The current bar's value is subtracted by the previous
bar's value. This prevents cycles shorter than the period defined by
Length input from being considered by the indicator.
Two main advantages of TRIX compared to other trend-following indicators
are its excellent filtration of market noise as well as its tendency to
be a leading rather than a lagging indicator. It filters out market
noise using the triple exponential average calculation thus eliminating
minor short-term cycles that may otherwise indicate a change in market
direction. Its ability to lead a market stems from its measurement of
the difference between each bar's "smoothed" version of the price
information. When interpreted as a leading indicator, TRIX is best used
in conjunction with another market timing indicator to minimize the
effect of false indications.
Bollinger Band (Simple Function)
The BollingerBand function calculates an n standard deviation (StdDev)
line (usually 2 StdDevs) above or below a center-line simple moving
average. By using a number of standard deviations within the normal
distribution range of values, the BollingerBand adjusts for price
volatility.
Normally BollingerBands are used with price data, but they can also be
used with indicators and other calculated values.
The BollingerBand function can be interpreted in many ways and can be
used in multiple time frames. The traditional interpretation would look
for a bar to cross over one of the bands and then cross back over,
signaling a potential market reversal.
TRADER'S TIPS
Stocks and Commodities Magazine, Issue: February, 2004 pg. 96 Article:
"Using the Heikin-Ashi Technique" by Dan Valcu
Heikin-Ashi: A Better Candlestick ???
Most profits (and losses) are generated when markets are trending--so
predicting trends correctly can be extremely helpful. Many traders use
candlestick charts to help them locate such trends amid often erratic
market volatility. The Heikin-Ashi technique--"average bar" in
Japanese--is one of many techniques used in conjunction with candlestick
charts to improve the isolation of trends and to predict future prices.
Calculating the Modified Bars Normal candlestick charts are composed of
a series of open-high-low-close (OHLC) bars set apart by a time series.
The Heikin-Ashi technique uses a modified formula:
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xClose = (Open+High+Low+Close)/4
o Average price of the current bar
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xOpen = [xOpen(Previous
Bar) + Close(Previous Bar)]/2
o Midpoint of the previous bar
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xHigh = Max(High,
xOpen, xClose)
o Highest value in the set
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xLow = Min(Low, xOpen,
xClose)
o Lowest value in the set
Constructing the
Chart
The Heikin-Ashi chart is
constructed like a regular candlestick chart (except with the new values
above). The time series is defined by the user--depending on the type of
chart desired (daily, hourly, etc.). The down days are represented by
filled bars, while the up days are represented by empty bars. Finally,
all of the same candlestick patterns apply.
Here is a normal candlestick chart:
Chart by Educofin.com
Here is a Heikin-Ashi chart:
Chart by Educofin.com
Putting It to Use
These charts can be
applied to many markets; however, they are most often used in the equity
and commodity markets. Traders often program these new instructions into
existing trading programs, such as MetaTrader, or use many online tools
(listed in the reference section below). Finally, it can be applied via
Microsoft Excel or other similar spreadsheet programs.
There are five primary signals that identify trends and buying
opportunities:
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Hollow candles with no
lower "shadows" indicate a strong uptrend: let your profits ride!
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Hollow candles signify
an uptrend: you might want to add to your long position, and exit
short positions.
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One candle with a
small body surrounded by upper and lower shadows indicates a trend
change: risk-loving traders might buy or sell here, while others
will wait for confirmation before going short or long.
-
Filled candles
indicate a downtrend: you might want to add to your short position,
and exit long positions.
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Filled candles with no
higher shadows identify a strong downtrend: stay short until there's
a change in trend.
These signals show that
locating trends or opportunities becomes a lot easier with this system.
The trends are not interrupted by false signals as often, and are thus
more easily spotted. Furthermore, opportunities to buy during times of
consolidation are also apparent.
Conclusion The Heikin-Ashi technique is extremely useful for making
candlestick charts more readable--trends can be located more easily, and
buying opportunities can be spotted at a glance. The charts are
constructed in the same manner as a normal candlestick chart, with the
exception of the modified bar formulas. When properly used, this
technique can help you spot trends and trend changes from which you can
profit!
Here are some additional resources: Heikin-Ashi TradeStation Addon
Heikin-Ashi MetaData Addon
By Justin Kuepper
Heikin-Ashi Explained
by Howard Arrington
The February 2004 issue of 'Technical Analysis of Stocks and
Commodities' magazine contains an article by Dan Valcu titled 'Using The
Heikin-Ashi Technique'. Too often traders hear about a technique and
think the 'holy grail' train is leaving the station and they rush to get
on board without taking time to understand what it is all about. The
purpose of this article is to comment in greater detail on the visual
presentation created by the mathematics of the method.
Mr. Valcu says that 'heikin' in Japanese means 'average' and 'ashi'
means 'bar'. So a literal translation would be 'average bar'. Indeed,
the method employs an averaging technique as follows:
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haClose = (Open + High
+ Low + Close) / 4
-
haOpen = (haOpen(previous
bar) + haClose(previous bar))/2
-
haHigh = Maximum(High,
haOpen)
-
haLow = Minimum(Low,
haOpen)
Now for those who have
pulled out the Valcu article and compared his formulas with those given
above, please do not be too quick to claim that I made a mistake in
plagiarizing the formulas. My formulas are equivalent and it represents
one of the criticisms I have.
haHigh and haLow
Mr. Valcu's formulas in the article were give as:
-
haHigh = Maximum(High,
haOpen, haClose)
-
haLow = Minimum(Low,
haOpen, haClose)
It is mathematically
impossible for the haClose to be higher than the bar High, or lower than
the bar Low. haClose is an average of the bar's open, high, low and
close. The open must be in the high-low range. The close must be in the
high-low range. The low must be equal to or lower than the high.
Therefore, the haClose can never be higher than the High, nor lower than
the Low.
Because the haClose can never be higher than the High, the Heikin-Ashi
High does not need to test for the haClose as a possible price that
would set haHigh. Choosing the higher of High and haOpen is sufficient.
The same reasoning applies to picking a price for the Heikin-Ashi Low.
Choosing the lower of Low and haOpen is sufficient. haLow does not need
to consider haClose because haClose will never be lower than the Low.
I consider it unfortunate that Mr. Valcu did not understand these
principles before he published his article. And, every programmer who
published script code to implement Heikin-Ashi in their charting package
used the Valcu formulas with scripts similar to this example:
-
haHigh = MaxList( H,
haOpen, haClose);
-
haLow = MinList( L,
haOpen, haClose);
Not one of the twelve
programmers who published scripts in Stocks and Commodities magazine
pointed out that testing for haClose is unnecessary because it is an
impossibility. It does not hurt to test for it, but it is an unnecessary
step. Missing something obvious like this makes me wonder just how much
serious thinking is being made to understand what this technique is all
about. Now, let's leave that issue and continue with the analysis.
haClose
The Heikin-Ashi Close is the average of four bar prices: open, high, low
and close. This creates an interesting effect in strongly trending
markets which I feel is misleading for chart readers. Let me illustrate
the effect with the following example.
The example shows the original bar data in the top half of the chart,
and the Heikin-Ashi method in the bottom half. Ensign Windows was used
to prepare the examples. Bars 1 through 4 are strongly trending up, and
bars 5 through 8 are strongly trending down. Now permit me to point out
several things by comparing the two images.
The Heikin-Ashi data points are also shown on the original chart using
small red dots, connected by solid red lines through the highs and lows,
and a dotted red line through the closes. These dots and lines will aid
in the comparison of what Heikin-Ashi is doing to 'average' the original
bar data.
In an Up candle the haClose will always be below the actual close, and
in a Down candle, the haClose will always be above the actual close.
These two principles are illustrated by comparing the position of the
close red dots to the bar closes in the Original chart image. In fact,
haUp candles will ALWAYS have a high wick, and haDown candles will
ALWAYS have a low wick. This is a built in behavior that may surprise
most Heikin-Ashi candle readers. It is one of the primary areas I feel
is misleading.
Note: haUp candles may or may not have a low wick. haDown candles may or
may not have a high wick.
A wick on the top of a regular Up candle implies that selling pressure
has moved the market back down from the high. Thus, I consider it
misleading to see a high wick on a Heikin-Ashi up candle when no selling
pressure is present. The inverse applies to low wicks. A wick on the
bottom of a regular Down candle implies that buying pressure has moved
the market off of the low. Again, it is misleading using conventional
interpretation for low wicks to be present on a Heikin-Ashi down candle
when no buying pressure is present.
Mathematically the haClose can never exceed 75% of the original bar's
range. 75% would be achieved when the Open and the Close occur at the
extreme of the bar's High. In that case, haClose = (H+H+H+L)/4. Simple
example: O=4, H=4, C=4, L=0, so haClose = 12 / 4 = 3 So the maximum
haClose value is 3/4th of the range because the range was 4. Thus the
high wick size in an Up candle will be 25% of the original bar range or
greater. The low wick size in a Down candle will be 25% of the original
bar range or more.
In the Chartpoint Magazine, No. 12 (2003), Yashuji Yamanaka gives five
rules for trading the Heikin-Ashi charts. His Rule 2 reads, 'Positive
candle with upper shadow means "strong BUY"', and 'Negative candle with
lower shadow means "strong SELL"'. I have proved out that every haUp
candle must have a high wick, and every haDown candle must have a low
wick. Therefore, Rule 2 would have EVERY Heikin-Ashi candle be either a
'strong BUY' or a 'strong SELL'. This obviously is not the case, so I
must conclude that Yamanaka's Rule 2 is an illogical statement.
haOpen
The haOpen formula can be stated more simply as the midpoint of the
prior Heikin-Ashi bar's candle body. See the graphical illustration of
this where the cyan lines from the prior bar's candle body range point
to the candle body midpoint. This midpoint is used as the open of the
following Heikin-Ashi bar.
The haOpen can be outside of the original bar's range. Therefore, the
range of the Heikin-Ashi bar is extended to include the haOpen price.
This extension is done by choosing the higher of High and haOpen for the
haHigh, and the lower of Low and haOpen for the haLow. Mr. Valcu
describes this process as eliminating 'irregularities from a normal
chart', and creating a 'better picture of trends'. My opinion is that
this process is creating misleading perceptions. Let's look again at the
example.
One misperception in the Heikin-Ashi chart is the absence of gaps. There
are 6 gaps in the original chart and they have all been 'averaged' out
of the picture. If gaps mean something to you either as an indication of
momentum or a price level that will eventually be filled, you will have
to do without that insight when you use Heikin-Ashi charts.
Another misperception in the Heikin-Ashi chart is the length of the
bars. In our example many of the HA bars are twice as tall as the
original bars. HA bars will always overlap a portion of the bar on its
left-hand side. In the up trending portion of the example, the HA Lows
are all lower then the original lows, giving the impression the market
traded at prices during that time period when no such trading occurred.
As an example, consider bar #3. The original bar price range is from 700
to 740. The Heikin-Ashi bar implied that during the #3 time period, the
trading was from 640 to 740. That is misleading. The visual presentation
does not make any differentiation between the portion of the range that
is actual and the portion that is invented.
Another misperception is the combination of bar #4 and bar #5. On the
original chart, these two bars make a formation known as a Key Reversal
Pair. That significant information is totally lost in the Heikin-Ashi
chart. In fact, bar #5 on the HA chart is shown as an Up candle which is
100% opposite what actually happened. That too is misleading in my
opinion.
Summary
I guess by now you have concluded I am not overly impressed with the
Heikin-Ashi method. It may be serving a beneficial purpose for many of
you, and if so, that is wonderful. I encourage you to continue using
what works for you. Heikin-Ashi charts are included in Ensign Windows
because users asked for it. But, I do not know if it is going to help
anyone trade more profitably. Seasoned trader Ira Tunik recently stated,
'There are those that are constantly looking for the Holy Grail and
[think] every new or revived study or tool is necessary. Over the years
I have found that the majority of the exotic, complicated and supposedly
new studies don't help anyone's trading ability or profitability.'
Whatever the case may be, at least by reading and understanding the
points made in this article you will be using the Heikin-Ashi method
better informed about how it is creating 'average bars'.
Commodity Channel Index
The CCI function, is calculated by determining the difference between
the average price of a commodity and the average of the average prices
over some number of bars.
This difference is then compared to the average difference over the same
time period, to factor in the commodity's volatility. The result is then
multiplied by a constant that is designed to adjust the CCI so that it
fits into a normalized range of about +/-100.
Traditionally there are two basic methods of interpreting the CCI,
looking for divergences, or treating it as an overbought/oversold
oscillator. Remarks
The CCI value usually does not fall outside the -300 to 300 range and is
normally in the -100 to 100 range.
The value for the Length input parameter should always be a positive
whole number greater than 0.
Market Synopsis
The Commodity Channel Index Average, like the Commodity Channel Index,
is used primarily to identify beginning and ending of cycles in futures
markets and is commonly used to identify buy and sell opportunities. The
CCI is calculated so that 70-80% of all price activity falls between
+100 and -100 on its vertical scale. Many analysts believe a long
position is indicated when the CCI exceeds +100 while a short position
is indicated when the CCI falls below -100 but these values should be
based more on your market analysis. For example, you may decide that for
the market you are evaluating, a -125 indicates taking a short position
while a +150 indicates taking a long position.
Many analysts also use this indicator to indicate overbought and
oversold markets, much like an oscillator. Breakouts above the
OverBought line indicate an overbought market and breakouts below the
OverSold line indicate an oversold market. The CCI often misses the
early part of a new move because of the amount of time it spends in the
neutral position (between the OverBought and OverSold lines). Many
analysts believe the CCI Average crossing above or below zero identifies
market conditions before the OverBought and OverSold lines are crossed.
CCI (Commodity Channel Index)
The Commodity Channel Index, which can be used effectively for stocks,
not just commodities, was developed by Donald Lambert. It is meant to
decipher a stock's trendiness. The faster the indicator is moving the
stronger the trend is, and if the CCI bounces around in a small range,
it simply indicates the lack of a trend.
The CCI can be used as an overbought/oversold indicator. Readings above
100 imply an overbought situation and a possible pullback while readings
under -100 imply an oversold condition and a possible reversal bounce.
The CCI can also be used as a divergence. If a stock makes a new high
but the CCI fails to follow suite, a warning is given that a pullback is
likely.
This QQQ chart shows how CCI can be used as an overbought/oversold
signal. The indicator is not perfect, but if you bought when the CCI
fell below -100 and then moved up and sold when the CCI moved above 100
and then fell, you would have done pretty well.
Here is another example of the CCI being used to determine entries and
exits. Again, it's not perfect, but when used with other indicators, it
has a place in your technical analysis library.
Click here for Lavender's chart for July
11th
Lavender's Chart Explanation
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another Lavender Trade Analysis |
