The
Modified
Heikin Ashi – Fibonacci
Trading System
 

by Avinash Khilnani
 
 
 
 
 
 
 
 
 
 
 
 
Copyright @ 2013 Avinash Khilnani
Table of Contents
Chapter 1: Introduction
This Book is Not About
What this book IS about
Chapter 2: The Business of Trading
The Must Haves of Your Business Plan
The Don’ts of Your Business Plan
Chapter 3: Charting: the Art of Tactical Observation
The Basic Chart
The Standard Heikin Ashi Chart
The Modified Heikin Ashi Chart
Observing the Candles
Chapter 4: The Fibonacci Triggers
The Appearance of a Bullish Candle
The End of a Bearish Trend
The Bullish Candle
The End of a Bullish Trend
The Appearance of the Bearish Candle
The Long and Short Targets
Chapter 5: the Spreadsheet
Tomorrow’s Data Today
Tomorrow’s End of Trends Today
Tomorrow’s Triggers Today
Re-arranging Triggers and End of Trends
The Projected Targets
Distinguishing the Triggers and Targets
Trimming the Spreadsheet
Chapter 6: Trading the Dow Jones
The First Trading Insight to Go Long
The Second Trading Insight to Short
Thanks, Mr. Fibonacci!
Going Long and Short Again
A Good Long and a Great Short
Way to Go!
Chapter 7: the FTSE 100 and the NIFTY 50
 The FTSE 100
The S&P CNX NIFTY 50
A Cursory Glance at the Results
Chapter 8: Conclusion
 
 
 
Although the whole of this life were said to be nothing but a
dream and the physical world nothing but a phantasm, I
should call this dream or phantasm real enough, if  using
reason well, we were never deceived by it.    – LEIBNIZ.
 
 Chapter 1: Introduction
We, the humans, can never make up our minds as we keep
changing them at our slightest whims. When it’s cold, we
want hot and when it’s hot, we want cold. While some want
to get rid of a possession, others want to acquire it. When
somebody sells, somebody else buys and somehow they
agree to a consensus that arises from expectations born of a
complex mix of human emotions comprised mainly of
varying degrees of greed and fear in a chaotic place called a
market, which incidentally makes up the dream world for
this book.
Human expectations and their actions, combined with the
numerous irrelevant criteria for their decision making
processes and the sheer variety of participants in the
market, are not quantifiable or predictable and the very
inherent nature of this arrogant species guarantees the
unpredictability and the thrill of the market place.
In the light of this insight into human nature influencing
market gyrations, let us be clear as to what:
 This Book is Not About
This book is certainly not about predicting market or stock
or currency or commodity price movements. It is also not
about predicting the beginning or ending of trends or trying
to quantify the duration of a trend.
It is not about timing the markets, nor about setting any
targets to be achieved.
It is not about how to go about making a fortune in the
market place or even about how not to take losses.
It is not about economic fundamental analysis or financial
number crunching, and definitely not about hedging or
complex strategies involving derivative products.
It is definitely not about intra-day trading or about intricate
arbitrages hunting.
It is not about the concept that what has worked in the past
will work in the future (it may or may not), and so not about
complex technical analysis or its clamorous, often confusing,
jargon.
But above all, it is absolutely not about discouraging you
from jumping into the wonderful, exciting world of trading
indices, stocks, currencies and their derivatives.
So, really:
 What this book IS about
This book is about encouraging you to take up trading
indices or stocks derivatives as a business by offering you a
preparation plan.
It is about trying to be on the right side of the market by
submitting to whatever the market dictates, objectifying the
market as an entity in itself, and giving it the respect it
deserves in spite of its adorable eccentricities. (The boss is
always right, right?)
It is about riding a market trend as long as it lasts, whether
northwards or southwards. It is also about getting out
quickly if the market changes its mind and getting in again
whenever the market feels it must run in whatever direction
it chooses to.
Above all, this book is about letting the profits on winning
trades run and cutting losses short on losing trades so as to
maximize profits and minimize losses.
And to do exactly that, this book is also a manual to help
you create your own spreadsheet and charts, assuming you
have a working knowledge of a spreadsheet. If not, acquire
a little skill in this area. Spreadsheets are easy and fun to
work with, so don’t be intimidated by them. Besides, you
can always interact with the author at his website at
http://niftytracker.com if you need assistance.
So, let’s get on with creating your very own trading system
that allows for the laws of averages and probabilities in an
unpredictable world to work in your favor by keeping you in
step with the irrational movements of our markets.
 A reasonable probability is the only certainty.
-E.H. Howe (Sinner Sermons)
 
 Chapter 2: The Business of Trading
I hate to be a bearer of bad news, but there is no perfect
trading system that will give desired results all the time.
If you did ask a mathematician and insisted upon a
mathematical system to predict a price movement
phenomenon about to happen in a stock or index, the
mathematician or statistician, if unluckily, knew the laws of
these phenomena, he could only make the prediction by
inextricable calculations and would have to give up trying to
answer in words.
But unlike a mathematician or statistical analyst, I have the
good fortune of not knowing these laws so I will answer with
a workable system immediately. And what is surprising is
that, my answer will be probably more right than wrong.
Can one actually conduct a business on what is more
probably right than wrong?
Should one be in the business of trading at all?
Consider what the business of trading should be about and
your place in it.
A business serves only to make you profits and trading as a
business should be doing just that. The business of trading
should also be about freedom from your routine job,
deadlines and above all your boss (well, not exactly because
the market is your boss now).
Trading stock, or its derivatives as futures and options, is
about making money, and not about being right or picking
the brightest star of them all. But this business, like any
other, does require a strong commitment from you. It needs
discipline, patience, enthusiasm, perseverance and above
all preparation.
Sound preparation for a business is just about having a
working plan with a clearly defined goal in mind, which in
your case is taking profits in your trading account. A good
working plan should eliminate all emotional involvement on
your part and remove every psychological block in your
psyche.
Generally, the major psychological and emotional blocks in
most traders are greed, fear
and pride. Greed is what makes you lose a reasonable profit
when you remember a past trade which could have turned
into a huge pile of money but you booked a profit very early
in that trade. Fear is what keeps you from taking a new
position because you remember the last one which turned
sour. Pride is getting attached to a stock because you feel
like you have discovered a winning star that could go a long
way (or fall headlong, if you were shorting it).
 The Must Haves of Your Business Plan
The best way to keep your emotions out of your trading
actions is to have a clearly defined plan of action every
morning before the markets open for trading. So, let’s see
what a great working plan as your trading system should
entail and how this book is going to help you create just
that.
1. You must have a chart for the index or stock you
are planning to trade in and Chapter 3 of this book
is going to do just that. You would be creating a
clearly defined candlestick chart that shows the
trend of the stock at just a cursory glance. This
would be your very own modified Heikin Ashi chart.
2. You should have a trigger value to enter a trade
and exit profitably from that trade, with the
necessary evil of a stop-loss figure in place.
Chapter 4 and 5 explain exactly how to calculate
your entry and exit points, while fixing a stop-loss
value using the Fibonacci numbers and the magical
Golden Ratio. Chapter 6 discusses the actual results
of trading the modified Heikin Ashi Fibonacci
system for the DJIA (US 30), the FTSE 100 and the
S&P CNX NIFTY 50. The continued modified charts
and Fibonacci triggers for these indices are also
updated regularly at the author’s website at
http://niftytracker.com so that the book is ‘live’ in
that sense and interactive.
These two components of your trading system alone would
ensure that:
1. You are always ready with your working figures right
before the markets open for trading.
2. You are always on the lookout for fresh trends or
trend reversals in the stocks you are monitoring and
you hardly miss any.
3. You have overcome your psychological blocks of
greed, fear and pride because you now have a
mechanical trading system in place with pre-defined
figures for entry into a positional trade, a profit
target and a stop-loss figure to exit if the trade turns
sour.
 The Don’ts of Your Business Plan
While these are the essential components of your working
plan, there are quite a few distractions you should be
avoiding.
1. Do not overtrade. Monitor only the most liquid stocks
or indices whose derivatives are traded actively. I like
to keep track of just 21 stocks including 5 indices.
2. Do not overanalyze. There are a maze of technical
charts and technical indicators out there. Even
adding a couple or two to your trading system would
make you either lose out on a fresh opportunity or
miss your target or even mess up with your stop-loss.
Let me point out a few here that kept me out of
making money on many opportunities and made me
take a loss on quite a lot of trades.
The stochastic oscillator and its close cousin the
William’s % R. This indicator would make me
hesitate, because it either happened to be an
oversold or overbought territory every time I was
ready to jump onto a trade with a great looking
candle. And when the indicator looked good, the
candle wasn’t attractive enough, or else the trend
was just before or after completion.
The ADX and directional indicators +DR and –DR.
Like other lagging indicators, these appeared good
only after I had missed the trend, or kept me from
taking a profit. At times, it kept me from exiting at
a stop-loss, in the hope that as ADX and its
associates seemed right, perhaps the price would
correct. As the loss increased, I found to my
dismay that the ADX and DRs changed negatively
rather too late.
Volume and its derived indicators and oscillators
like the On Balance Volume, the Money Flow Index,
smart money (low volumes) entering and exiting a
 stock, the Accumulation-Distribution index and a
host of others, usually were in conflict with the
Stochastic or the ADX.
Momentum indicators like the Rate of Change and
Relative Strength Index. Funnily enough, I found
(and perhaps you do, too) that volumes and
momentum were generally always good at a
breakout from a consolidation. But a good-looking
candle does indicate a breakout, so looking at the
volume (smart or not) was quite redundant
anyway.
Trading stocks or derivatives needs a calm mind but
analyzing too many technical indicators will only serve to
distract your focus, making you either fearful of taking a
trade, or getting out too early or even worse, not taking a
profit when you should have.
3. Do not be the perfectionist. There is no perfect trade.
There are only average trades and average profits.
No one can be right all the time. But if you do take all
the available trades in your trading system and stick
to your plan, you will, on an average, make more
profitable trades than losing trades. And that will
make all the difference as gradually the law of
averages will work in your favor and will keep you in
the money, trading away happily.
So, with the do’s and don’ts over and done away with, let’s
get down to some serious work with charting your way to
possible profits in the next chapter.
 The essence of the Tao is that the observer can evolve the observed through the
act of tactical observation.
–R.L. Wing, (A New Translation of the Tao Te Ching).
 
 
 Chapter 3: Charting: the Art of
Tactical Observation
Candlestick charts have been in use for a long time now,
and with the recent introduction of the Heikin Ashi way of
charting, observing the underlying trend in a stock price
movement has become even easier.
Heikin Ashi, a Japanese term, mingles the use of ‘balance’ or
‘average’ to ‘foot’ or ‘bar’. Combine these four words in any
way you like to arrive at your own interpretation of what
Heikin Ashi should mean for you.
Simply observing a Heikin Ashi candlestick chart, that you
can now be creating yourself in your excel workbook would
give you a fairly good idea of the strength or weakness of a
trend. Further modifying this chart by introducing averages
suggested in this chapter, will give an even better visual
technique to gain greater confidence in your trades.
Now, let’s get started with creating the visuals.
 The Basic Chart
Your first step when making your chart is to collect the data
for the index or stock prices you want to trade in for a
certain date range. You can get the data from the official
websites of the stock exchange where your stock is traded,
and can even find the data at any financial website like
finance.yahoo.com or google.com/finance. You may have to
sort the acquired data in an ascending order of date.
For a working example, I have selected historical prices for
the Dow Jones Industrial from the date range of 21-Mar-2012
to 21-Dec-2012.
Paste the data you have just acquired into your excel
worksheet, with the first column heading showing as the
date, and next four columns as the Open, High, Low and
Close.
You have used up columns A to E here so far now.
Here is how your spreadsheet looks with the data pasted
from column A to E.
 
A B C D E
Date Open High Low Close

21-
Mar
13,170.79 13,190.02 13,112.93 13,124.62

22-
Mar
13,124.40 13,124.47 13,017.42 13,046.14

23-
Mar
13,045.99 13,099.91 13,002.77 13,080.73

26-
Mar
13,082.62 13,243.86 13,082.39 13,241.63

27-
Mar
13,242.09 13,264.98 13,194.33 13,197.73

28-
Mar
13,195.39 13,212.64 13,069.26 13,126.21
13,125.99 13,151.57 13,032.67 13,145.82

29-
Mar

30-
Mar
13,147.94 13,224.49 13,147.78 13,212.04

2-
Apr
13,211.36 13,297.11 13,153.69 13,264.49

3-
Apr
13,258.96 13,265.36 13,131.21 13,199.55

4-
Apr
13,198.19 13,198.19 13,020.86 13,074.75

5-
Apr
13,067.18 13,088.11 13,012.46 13,060.14

9-
Apr
13,057.57 13,057.72 12,903.78 12,929.59
12,929.44 12,929.59 12,710.56 12,715.93

10-
Apr
11-
Apr
12,716.92 12,844.82 12,716.92 12,805.39

12-
Apr
12,806.45 12,986.96 12,806.30 12,986.58

13-
Apr
12,986.20 12,986.35 12,845.28 12,849.59

16-
Apr
12,850.88 12,986.77 12,850.80 12,921.41
  

Select the area of this data that you want to chart, and use
the “insert-chart-stock-open-high-low-close” option to see a
graphical chart for your date range as a simple candlestick
chart. You may adjust the axes, the gridlines and the grid
interval to get a better view of the chart.
I have selected the area from cells A2 to E78 to show the
chart here:

 
Well, that’s a good looking chart, but there are still a lot of
candles that distract you from forming a general idea of the
underlying trend. You may now convert the original data to
display the Heikin Ashi chart in the next section.
 The Standard Heikin Ashi Chart
 
Leaving the column F blank, as a separating mark, assign
columns from G through K to “Date”, “hOpen”, “hHigh”,
“hLow” and “hClose” in the first row.
 
Cell G2 is again the date, so you might equate this column
G to column A by typing “=a2” in cell G2.
 
The Heikin Ashi open is simply the average of the previous
day’s open and close. Since you are starting from day-1, let
the hOpen for day-1 be the same as actual open. This is
done by writing the formula “=b2” in cell H2.
 
The Heikin Ashi high is the maximum value of today’s
hOpen, actual high of the day, and today’s hClose. This is
accomplished by typing in the formula “=max(h2,c2,k2) in
cell I2.
 
Similarly, the Heikin Ashi low is the minimum of today’s
hOpen, actual low of the day and today’s hClose. This can
be calculated by typing the formula “=min(h2,d2,k2)” in cell
J2.
 
Finally, the hClose is obtained by typing in the formula “=
(b2+c2+d2+2*e2)/5” in cell K2.
 
Here, the Heikin Ashi close is taken as the average of the
actual high, low and close of the day, and since we want to
place more emphasis on the actual close, we have weighted
the actual close twice and then taken the average of the
five values (the open, the high, the low and two closes).
 
This is the first modification of the standard Heikin Ashi
technique we have introduced since this imparts greater
importance to the closing price.
 
Now, the hOpen in the Heiken Ashi chart is the middle value
of the previous day’s modified close (hClose) and the
previous hOpen. Thus, in cell H3, you are typing in the
formula : “=(h2+k2)/2”.
 
The next two cells can be just pulled down from their
previous cells, and will show as the new high and new low
for today’s date.
 
The hClose for today, in cell k3 would have the modified
formula
“=(h3+c3+d3+2*e3)/5”.
 
Note that here we are deviating for the second time from
the standard Heikin Ashi calculation of hClose, by not only
placing greater emphasis on the recent close, but also
substituting hOpen instead of the actual open.
 
The next step simply involves dragging down the formulae
from row 3 to the latest date for which you have the most
recent data.
 
You may now select the chart area for the modified Heikin
Ashi values and chart them as a stock candlestick chart.
 
The spreadsheet for the columns F through K should now
look like this:
F G H I J K
  Date hOpen hHigh hLow hClose
21-
  Mar 13171 13190 13113 13145
22-
  Mar 13158 13158 13017 13078
23-
  Mar 13118 13118 13003 13076
  26- 13097 13244 13082 13181
Mar
27-
  Mar 13139 13265 13139 13199
28-
  Mar 13169 13213 13069 13141
29-
  Mar 13155 13155 13033 13126
30-
  Mar 13141 13224 13141 13187
  2-Apr 13164 13297 13154 13229
  3-Apr 13196 13265 13131 13198
  4-Apr 13197 13198 13021 13113
  5-Apr 13155 13155 13012 13075
  9-Apr 13115 13115 12904 12987
  10-Apr 13051 13051 12711 12825
  11-Apr 12938 12938 12717 12822
  12-Apr 12880 12987 12806 12929
  13-Apr 12905 12986 12845 12887
  16-Apr 12896 12987 12851 12915
 
 
 
 
 
 
 
This is how your standard Heikin Ashi chart should look like:
  

Comparing this chart to the previous raw chart, you can see
that much of the noise hindering you from spotting trends
clearly is done away with.
There are however, still many candles with spikes at both
ends that do present an awkward view.
A further modification by introducing a simple 5-day moving
average of the hOpen in place of the hHigh and the 5-day
moving average of the hClose in place of the hLow should
eliminate many of these spikes.
This would complete our special modification for the Heikin
Ashi chart, and the modified values would be used to
calculate buying or selling triggers and stop-loss figures for
our trading purposes.
 The Modified Heikin Ashi Chart
 
To calculate the modified HA chart, leave the column L blank
and perhaps fill it up with a suitable color to act as a
separator column.
 
Column M holds the dates, so you might equate this column
to column A by typing “=a2” in cell M2, and dragging down
the cell formula to the latest date in the data range.
 
Column N holds the mhOpen, which we are keeping the
same as the hOpen, so type in the formula “=b2” in cell N2,
and further the formula “=(n2+q2)/2” in cell N3. Drag down
this cell formula to the last data in your range.
 
Now, the hHigh is replaced by the 5-day simple moving
average of hOpen, by typing in the formula
“=average(n2:n6)” in cell O6. The first five cells in this
column are left blank. Drag down this cell formula from O6
down to the last data in your date range.
 
Similarly, to calculate the modified mhLow in column P,
calculate the simple average of the last five hClose by
placing the formula “=average (q2:q6)” in cell P6, leaving
the first five cells above blank.
 
Drag the cell formula from P6 down to the last value in your
date range.
 
Finally, the mhClose is the same as in the standard Heikin
Ashi chart, so type in the formula “=(n2+c2+d2+2*e2)/5” in
cell Q2, and dragging down the cell formula to the latest cell
in your date range.
 
Now you have the final working Heikin Ashi values to create
the modified Heikin Ashi chart and the modified values to
calculate the triggers for profitably trading an index or stock.
 
This is how your spreadsheet looks from column L to Q:
L M N O P Q
  Date mhOpen mhHigh mhLow mhClose
21-
  Mar 13171     13145
22-
  Mar 13158     13078
23-
  Mar 13118     13076
26-
  Mar 13097     13181
27-
  Mar 13139 13137 13136 13199
28-
  Mar 13169 13136 13135 13141
29-
  Mar 13155 13136 13145 13126
30-
  Mar 13141 13140 13167 13187
  2-Apr 13164 13154 13176 13229
  3-Apr 13196 13165 13176 13198
  4-Apr 13197 13171 13171 13113
  5-Apr 13155 13171 13161 13075
  9-Apr 13115 13166 13121 12987
10-
  Apr 13051 13143 13040 12825
11-
  Apr 12938 13091 12964 12822
12-
  Apr 12880 13028 12928 12929
13-
  Apr 12905 12978 12890 12887
16-
  Apr 12896 12934 12876 12915
If you select the area from cell M6 to Q78, and chart this as a
stock chart in your Excel worksheet, you should see the
modified chart as below:

 
As you can see, almost all the distracting noise and the
spiking candles have vanished. We have now a most
pleasing chart to look at and with just a cursory glance you
can see that presently (10-July-2012) in the chart recorded,
the DJI is in a downtrend.
 
 Observing the Candles
Tactically observing, we see either black or white candles.
Let us categorize the candles further.
The bullish white candle has a white body with a tail and
seems to rise upward as the tail below the white body gives
the visual of a kite pushing upward into the sky.
The tail is almost always the 5-day moving average of
mhOpen (5mhOpen) which is actually our mhHigh. Though
we have placed this value in the ‘mhHigh’ column, it not
actually a high but for our purposes does serve to give the
impression of a motion to the visual.
The mhLow which is the 5-day moving average of mhClose
(5mhClose) is rarely seen on the charts except in a candle
which shows both a tail and a peak which we shall call a
Doji, and does appear in indecisive or stagnant price
patterns. Again, this is not a low but falls somewhere
between the mhOpen and mhOpen.
We are primarily concerned only with the color of the candle
which is decided by the mhOpen and mhClose.
If the mhClose is greater than the mhOpen, we have a white
candle while the black candle appears if the mhClose value
is less than the mhOpen.
The bearish black candle gives the exact opposite perfect
visual image of a kite diving downward to the earth, with its
tail following the dive. The tail again, is invariably the
5mhOpen.
Besides these prominently observable candles, frequently
seen is the reversal candle, which has no tail to it, and
could be either black or white. The white reversal candle
signifies a reversal in trend from bearish to bullish, while the
black reversal candle denotes a reversal from bullish to
bearish trend.
Notice that during an uptrend there may appear a rising
candle but with a black body and a tail below it. This
anomalous rising candle may signify a weakness in the
upward move which may prompt you to book profits, or
even indicate that a reversal in trend may be in offing.
Contrariwise, an anomalous falling candle (white body
with a tail above it) during a downtrend may be a signal for
you to book profits after a significant fall in prices if you had
shorted the stock or index. Soon enough, after viewing such
a candle, you may either see a reversal in trend, or with
more new bearish candles, a continuation of the downtrend.
Observing the chart above, you can see your entry and exit
points for your shorts and longs quite clearly. There are
some trends which may bring in huge profits, while others
may not last long enough, but if you worked with your
candle plan, you may well have made a small profit or a
small loss even with indecisive market movements.
Here, one might well ask, how long may a trend last?
Well, the best answer is: as long as it can!
Stay with the trend as long as it lasts and move out to ride
the next trend whether upwards or upwards again or
downwards or downwards again.
The best trading plan is one that lets your profits run to the
maximum and cuts your losses to a minimum, and with your
modified Heikin Ashi charts you have just the right visual
tool to plan your trading to do exactly that.
You may be seeing a number of reversal candles that do not
turn into significant trends, or the candle does not appear
significant enough in size to confidently begin a trend.
Should there be a threshold to the size of a candle, a sort of
a trigger mark, which justifies going long or short with
confidence in the start of a trend?
I love to be the bearer of good news! There certainly is a
threshold, a trigger ratio, and it is known as the Golden
Ratio, the magical ratio, derived from the Fibonacci series.
The next chapter is devoted entirely to the magical
Fibonacci number and ratios that you shall be using along
with the modified Heikin Ashi chart that you have just
created and the mhOpen values that you just calculated.
 One cannot escape the feeling that these mathematical
formulae have an independent existence and an intelligence
of their own, that they are wiser than we are, wiser even
than their discoverers, that we get more out of them than
was originally put into them.     – HEINRICH HERTZ.      
 
 Chapter 4: The Fibonacci Triggers
The Fibonacci series begins with 0 and 1.
Adding the previous two numbers yields the next number.
So, 0+1=1, gives 1 as the next digit in the sequence, 0, 1,
1.
Adding 1+1 gives 2 and the series progresses to 0,1,1,2.
Keep on adding the last two digits to provide the next digit,
and so the series progresses to:
0,1,1,2,3,5,8,13,21,34,55,89,144…..
You have already been using the Fibonacci numbers 5 in the
5-day simple moving average of mhOpen and mhClose and
are also going to use the same number of days in projecting
targets.
As the series progresses, dividing two consequent digits
yields the ratio approaching 0.618, often called the ‘Golden
Ratio’ or the “Divine Proportion”, a term that was recently
popularized by Dan Brown, in his book the “Da Vince Code”.
The ratio is actually an irrational number obtained by
halving the difference of the square root of five and one.
Market price movements are irrational, and the magical
ratio, for irrational reasons, seems to work as a very
important tool in price retracements, resistances and
supports projections.
We are going to use this ratio a lot to assist us in calculating
trigger values for entering a trade, for setting targets, trend
reversal points and stop-loss figures.
 The Appearance of a Bullish Candle
As you ponder over a modified Heikin Ashi you have just
created, you might notice some candles of sufficient size
and strength that lead on to a reasonable trend where you
might have taken a profitable trade.
What makes for a right sized candle that has a reasonable
probability to begin a fresh trend and what should be the
trigger price that could show such a candle on your chart?
Let us consider the bullish candle and the three most
important attributes it must have in order to qualify a trend
beginning candle.
Firstly, it must appear after the end of a bearish
trend.
Secondly, it must be either a white bullish candle or
at least a white reversal candle.
Thirdly, and most importantly, it must be of
sufficient size so as to break above at least the
previous two candles on the modified Heikin Ashi
chart.
You already know tomorrow’s mhOpen, which is fixed as it is
based on the today’s mhOpen and mhClose. The 5-day
moving average of mhOpen (let’s call this moving average
the 5mhOpen from now on) is also fixed for tomorrow
because it is anyway calculated from the already fixed
mhOpen.
Tomorrow’s mhClose will, of course, change as the markets
trade during the day. And this last figure is what will decide
how the candle will look like tomorrow. The 5mhClose does
not take part in our calculations but may sometimes appear
in indecisive market movements, which we shall assume to
be a continuation of the existing bearish trend.
Now, for a candle to be bullish it must have white body,
therefore tomorrow’s mhClose must be above tomorrow’s
mhOpen in order for the candle to have a white body.
Additionally, the mhClose must also be higher than the
maximum value of the past two Heikin Ashi candles from
your modified HA data, which can be ensured by checking to
see that it is also at least equal to or above the 5mhOpen of
tomorrow.
A good thing about the HA chart is that tomorrow’s mhOpen
and the 5mhOpen are already fixed by today’s close, so you
have a working plan for tomorrow’s triggers and stop loss
figures that relies mostly on values that have been
predetermined.
But before the bullish candle can appear in its true glory, we
must have an end to the bearish trend.
 The End of a Bearish Trend
For the bearish trend to over, we must have mhClose for
tomorrow to be at least equal to tomorrow’s mhOpen.
Thus, we should have
mhClose(tomorrow) = mhOpen(tomorrow).
Now that we have tomorrow’s mhClose, we can easily
calculate the actual value of the price that would ensure the
above equation to be true from the formula we have been
using for the mhClose.
Remember that the mhClose is calculated as: mhClose =
(mhOpen+High+Low+2*Close)/5
where close is the actual close of the day.
For the bearish trend to be over, the Close of the day has to
be such an High that it brings the value of mhClose to
confront the mhOpen equally.
So, calling this High that ends the bearish trend as Ebr, we
have: mhOpen=(mhOpen+Ebr+Low+2*Ebr)/5
(We have replaced mhClose by mhOpen in the formula for
mhClose, and renamed the High that equalized mhClose to
mhOpen as Ebr).
We can therefore deduce that:
Ebr = (4*mhOpen – Low)/3
Here, mhOpen is the modified Heikin Ashi Open for
tomorrow, and Low is a presumed value of the low for
tomorrow.
This Ebr gives the value of the high for tomorrow which, if
hit, would signal the end of a bearish trend, since the value
equals mhClose to the mhOpen resulting in a reversal
candle or an anomalous bearish candle.
Since, the Ebr indicates the end of a bearish trend, it also
naturally acts as a stop-loss value for your short position in
the index or stock being traded.
 The Bullish Candle
But how much higher should the actual close be than this
Ebr for tomorrow be for a bullish candle to appear and not
just a reversal candle or an anomalous candle?
Shouldn’t there be a certain trigger value that prompts you
to go long on seeing such a bullish candle?
There sure is.
Please welcome the Golden Ratio!
The trigger is provided by the Golden Ratio and in our case
the bullish candle trigger for tomorrow must be 0.618 %
more than the Ebr to be a buying trigger. Let’s call this
higher value as the buying trigger : Btrg.
Thus, Btrg = 1.00618*Ebr.
This value of Btrg predicts the shape of the candle tomorrow
to be a bullish candle.
The mhClose with this Btrg would then be sufficiently higher
than the value of mhOpen in order to be an attractive
candle for going long into the stock or index.
Great! You now have a stop-loss figure of Ebr for your
existing sell positions, and a bullish trigger Btrg for going
long or buying the stock (or index) for tomorrow!
You may also want to make sure that this buying trigger is
greater than the 5mhOpen for tomorrow. Invariably, it
usually is, but in the rarest of rare cases when the markets
are highly volatile, when you do see the Btrg less than the
5mhOpen, refrain from going long in the index or stock that
you are tracking, or defer your buying decision to the next
day.
Once you have gone long into the index or stock, you would
like to calculate the stop-loss value for tomorrow in the case
that this bullish trend is compromised.
 The End of a Bullish Trend
To calculate the end of a bullish trend, we must have the
mhClose for tomorrow moving down to meet the mhOpen
for tomorrow, so we are interested in knowing the value of
the low for tomorrow that would equalize these two values.
Again, we should have:
mhClose (tomorrow) = mhOpen (tomorrow)
Let’s call this low value the end of bullish trend as Ebl, which
can be calculated by the formula:
Ebl = (4*mhOpen – High)/3
(You may easily deduce how this came about in quite the
similar way we deduced the Ebr).
This figure of Ebl then gives you the value of the low
tomorrow, which if hit would signal the end of the bullish
trend, and therefore also act as a natural stop-loss value for
your buy position in the index or stock.
 The Appearance of the Bearish
Candle
Further on, the bearish trigger that should prompt you to
short the index or stock, can now be calculated as 0.618 %
less than the Ebl to give you the sell trigger which we shall
name Strg.
Thus, Strg = 0.99382*Ebl
It’s time to sit back and take a breather now that you have
the bullish and bearish stop loss values plus the bullish and
bearish triggers.
 The Long and Short Targets
All right, let us be done with the final step of fixing the
bullish and bearish targets now.
For a rough estimate of the bullish target, simply find the
lowest price of the past five days and increase its value by
6.18 percent to get the bullish target value.
For a rough estimate of the bearish target, find the highest
value of the past five days and decrease its value by 6.18
percent to get the bearish target value.
You may want to vary the past five days to eight days
highest or lowest value, but for most cases either number of
days work. Besides, the target values are only support or
resistance values that may be over shot or not touched at
all but they do serve as a tool to decide if you want to go
long or short.
If you find that the target is too near your trigger price, you
may want to stay out of taking the trade. This does happen
when the price movements are erratic to volatile, and
perhaps your trading system wants to keep you out of such
movements.
I find that fixing targets does help in such times, while
otherwise it is usually better to stay with the trend until the
Ebr or Ebl prompts me to move out of the bearish or bullish
trend, and get ready to buy or sell into the reversing trend
or go back again to the inherent trend.
Staying with the trend is always preferable as the stop-loss
value can go much above the target value of 6.18 percent
which is merely a resistance level and if violated, more
highs can be expected.
Conversely, in case of a bearish trend, the support level of
6.18 percent if violated can result is lower lows.
So, keep in mind the resistance and support values as
achievable targets but not strictly sacrosanct.
Now that you have the key figures and your trading system
dictating your trading style, let’s get down to the actual
Excel worksheet construction in the next chapter.
The essential fact is that all the pictures, which science now draws of nature and
which alone seem capable of according with observational facts, are
mathematical pictures.            – Sir James Jeans
 
 Chapter 5: the Spreadsheet
Once you have the modified Heikin Ashi values and you
know the formulae for calculating the stop loss values of Ebr
and Ebl, the corresponding buying and selling triggers Btrg
and Strg along with the bullish and bearish targets, it is easy
enough to create the spreadsheet in Excel.
Let’s walk through the construction of the sheet here.
 Tomorrow’s Data Today
Assume that you have the past five days data and have the
worksheet ready with modified Heikin Ashi values from row
2 to row 6 for the dates ranging from 21st March to 27th
March of 2012.
For our demonstration purposes, 27th March has just closed
and you have the actual closing data for 27th March filled in
row 6.
For tomorrow, that is, 28th March, we will presume a range of
price movement that has a high of 0.618 percent higher
than the close of 27th March and a low which is 0.618
percent lower than the close of 27th March.
For simply hypothetical calculation purposes, we will also
assume that tomorrow’s open is the same as today’s close,
and that tomorrow’s close will be just 0.1618 percent higher
than today’s close. Notice that here again we are involving
the Golden Ratio and the next Fibonacci ratio of 0.1618 in
our calculations.
To get the hypothetical values, choose the columns from S
to W, leaving column R blank filled with a suitable color to
mark this as the separator column. Label column S through
W as ‘Date’, ‘hpOpen’, ‘hpHigh’, ‘hpLow’ and ‘hpClose’.
Column S holds the dates, so equate this to column A by
typing the formula “=a7” in cell S7. In cell T7, type in the
formula “=e6” to equate this to the previous day’s close as
the hpOpen. To get the hypothetical high, type in the
formula “=1.00618*e6” in cell U7, and the hypothetical low
is obtained by typing in the formula “=0.99382*e6” in cell
V7. The hypothetical close, hpClose, is given by putting in
the formula “=1.001618*e6” in cell W7.
Copy the hypothetical values for 28-March from cells T7 to
W7 in the cells B7 to E7 as probable data for 28-March using
the ‘paste values’ tool available in your Excel tool bar.
Next section involves the calculations for the Ebr and Ebl.
 
 Tomorrow’s End of Trends Today
Leave column X blank as a separator column, colored
appropriately to distinguish it from the calculating columns.
Columns Y and Z will be used to calculate the end of bearish
and bullish trends so label these two as Ebr and Ebl
respectively.
To get the Ebr for 28th March, type in the formula “=(4*N7-
D7)/3” in cell Y7.
This is also almost your stop-loss value for a short position if
you do have one in the index or stock that you are
monitoring.
To get the Ebl for 28th March, type in the formula “=(4*N7-
C7)/3” in cell Z7.
This is the also your stop-loss value for a long position if you
do have one in the index or stock that you are tracking.
So, now you have a reasonably accurate handle on your
short or long positions, since the stop-loss value depends
mostly on the mhOpen for tomorrow (28th March, in this
case) by a factor of 4, and much less on the low or high for
tomorrow by a factor just 1 compared to 4 for the mhOpen.
The mhOpen is fixed already by the mhClose and mhOpen
of today (27-March, in this case) and is not going to change
at all tomorrow, that is on 28th March.
If the actual high and low remain in the + 0.618 percent and
the -0.618 percent values tomorrow, the Ebr and Ebl values
will be severely restricted to the range you have already
obtained above.
 Tomorrow’s Triggers Today
Next, to calculate the Buying trigger Btrg, leave column AA
blank, filled with a color to mark it as a separator column
and label column AB as Btrg. Type in the formula
“=1.00618*Y7” in cell AB7 to get the buying trigger for
tomorrow, i.e. 28-March.
Further, label column AC as Strg for the selling trigger and
type in the formula “=0.99382*Z7” to get the selling trigger
for tomorrow.
You may now drag the formulae from cell R7 through AD7
down to the last data.
Here is how your spreadsheet looks now for columns R
through AD:
R S T U V W X Y Z AA AB
Date hpOpen hpHigh hpLow hpClose Ebr Ebl Btrg

28-
Mar 13198 13279 13116 13219 13202 13155 13284

29-
Mar 13126 13207 13045 13147 13196 13156 1327

30-
Mar 13146 13227 13065 13167 13138 13113 13219

2-
Apr 13212 13294 13130 13233 13167 13120 1324

3-
Apr 13264 13346 13183 13286 13218 13173 13300

4-
Apr 13200 13281 13118 13221 13256 13197 1333

5-
Apr 13075 13156 12994 13096 13203 13178 13284

9-
Apr 13060 13141 12979 13081 13186 13134 1326

10-
Apr 12930 13009 12850 12951 13165 13092 13246

11-
Apr 12716 12795 12637 12737 13012 12969 1309
12- 12805 12885 12726 12826 12905 12844 12984
Apr

13-
Apr 12987 13067 12906 13008 12924 12877 1300

16-
Apr 12850 12929 12770 12870 12911 12866 12991

 
 Re-arranging Triggers and End of
Trends
Let us see what you have now so far.
You have the buying trigger as Btrg in column AB and its
stop-loss Ebl as end of the bullish trend in column Z. You
also have the selling trigger Strg in column AC and its stop-
loss value Ebr as end of the bearish trend in column Y.
If you have indeed gone long in the index or stock under
consideration, you will want to keep its stop-loss value
handy, so in columns AE to AI, you need to re-arrange your
buying trigger and its stop-loss value as well as your selling
and its stop-loss value.
For keeping your triggers and their stop-loss figures
adjacent to each other, leave column AD blank filled with a
color to mark this as a separator column. Label the next
column AE as “Buy” and column AF as its “Stop-loss”. Copy
the figure for Btrg in cell AE7 by typing in the formula
“=AB7” and then copy the figure Ebl in cell AF7 by “=Z7”.
But wait; remember that the Ebl is actually the figure that
equalized mhClose to mhOpen, and for a valid stop-loss
figure, we need the mhClose a bit lower than the mhOpen.
So let us also scale down this equalizing value by a factor of
0.1618 %, another Fibonacci ratio so as to make this a final
threshold. Only then can the Ebl be termed a stop-loss for a
bullish trend where we need to actually get out of the long
position.
So, instead of a simple “=Z7”, type the formula
“=0.998382*Z7” in cell AF7.
Leave the column AG blank and label column AH as “Sell”.
Also label column AI as “Stop-loss”. Copy the Strg in cell
AH7 by putting in the formula “=AC7”, and the Ebr by
typing the formula “=Y7” in cell AI7.
Again, let us increase the Ebr value for the bearish trend by
a factor of 0.1618 to really call this a stop-loss, by typing in
formula “=1.001618*Y7” in cell AI7, instead of =”Y7”.
Now, there you are, all set with the buying/selling triggers
and their stop-loss values in one place.
 The Projected Targets
You still need to calculate the bullish and bearish targets.
Continue by leaving column AJ blank, appropriately colored
to mark as a separator.
Head column AK as ‘LgTarget’ to represent the bullish or
long target, and head column AL as ‘ShTarget’ to represent
the bearish or short target.
Type in the formula “=1.0618*min(C2:D6)” in cell AK7 to get
the long target and put in the formula
“=0.9382*max(C2:D6)” in cell AL7.
Refer back to chapter 4 with the section on targets to be
clear on calculating targets from the past 5 days’ highest
and lowest values.
You may now drag down the cells from S7 through AL7 down
to the last data in your worksheet and be ready for
tomorrow’s trading by pasting the hypothetical values for
tomorrow in cells Bn through En from cells Tn through Wn,
where n represent the number for the row for tomorrow’s
date.
This is how your worksheet should look like now for columns
AD through AM:
AD AE AF AG AH AI AJ AK AL AM
Buy StLoss Sell StLoss LgTarget ShTarget

13284 13133 13073 13224 13806 12445

13277 13135 13075 13217 13806 12445
13219 13091 13031 13159 13806 12445
13249 13098 13038 13189 13838 12445
13300 13152 13092 13239 13838 12475
13338 13176 13116 13278 13838 12475
13284 13156 13096 13224 13826 12475
13267 13113 13053 13207 13817 12475
13246 13071 13011 13186 13701 12475
13092 12948 12889 13033 13496 12446
12984 12824 12765 12925 13496 12383
13004 12857 12798 12945 13496 12279
12991 12845 12786 12932 13496 12251

 
 Distinguishing the Triggers and
Targets
Notice that I have changed the format for text color in
column AL for bearish targets to red, denoting the short
targets, while the text color for the long target has been
kept the default black color.
For the buy triggers too, you may want to edit the color to
red where the high of the day is lower than the buy trigger,
keeping the color black when the high of the day has been
above the buy trigger. Likewise, the stop-loss figures should
change to red where the low of the day has breached the
stop-loss value and stay black if the low has not been
compromised.
This can be accomplished by replacing the formula in cell
AE7 by : “=if(C7>1.00618*Y7,1.00618*Y7,-1.00618*Y7)”
and replacing the existing formula in cell AF7 for stop-loss
value by :
“=if(D7<0.998382*Z7,-0.998382*Z7,0.998382*Z7)”
Note that the factor of 0.1618 has been placed into the
stop-loss value here.
You may now change the number format for these two
columns to show negative numbers as red (use the format-
cells-number menu to do this).
The advantage of formatting this way is that the numbers
will show up automatically as red on days when the trend is
not bullish, or the stop-loss value will turn automatically red
as the stop-loss value is breached.
You can simply update your data every half an hour to keep
track of the index and check to see if the color for the stop-
loss has turned red to alert you to get out of the long
position.
Similarly, for the sell trigger and its stop-loss value, you
need to replace the existing formula in the following
manner.
In cell AH7, replace “=AC7” by:
“=IF(D7<0.99382*Z7,-0.99382*Z7,0.99382*Z7)”
And cell AI7, replace the existing formula by:
“=IF(C7>1.001618*Y7,1.001618*Y7,-1.001618*Y7)”
You must now change the format for these two columns (AH
and AI) also to show negative numbers as red colored.
At the risk of repetition, I must point out again that if you
see a black color in the stop-loss value for the bearish trend,
you need to be alert to possibility of an end to the bearish
trend and get out of your short position.
A red color sell trigger after a couple of black figures in the
sell trigger will alert you to the beginning of a bearish trend.
A black colored number here on the other hand, shows that
the bullish trend is still on.
Here is how your worksheet looks like now for columns AD
through AM, again:
AD AE AF AG AH AI AJ AK AL AM
Buy StLoss Sell StLoss LgTarget ShTarget

13284 13133 13073 13224 13806 12445

13277 13135 13075 13217 13806 12445
13219 13091 13031 13159 13806 12445
13249 13098 13038 13189 13838 12445
13300 13152 13092 13239 13838 12475
13338 13176 13116 13278 13838 12475
13284 13156 13096 13224 13826 12475
13267 13113 13053 13207 13817 12475
13246 13071 13011 13186 13701 12475
13092 12948 12889 13033 13496 12446
12984 12824 12765 12925 13496 12383
13004 12857 12798 12945 13496 12279
12991 12845 12786 12932 13496 12251
 Trimming the Spreadsheet
 
For explaining and demonstrating the construction of the spreadsheet, it had been
necessary to include every small bit of calculation resulting in some redundant
columns that have made the spreadsheet quite bulky.
 
It is time now to slim down the spreadsheet by removing the unnecessary columns.
 
Begin by completely deleting the columns from F to K which were used to calculate
the standard Heikin Ashi values which you no longer need.
 
Next, select columns G to L and use the cut and paste function to shift these columns
to AH through AM. These columns hold the modified Heikin Ashi values which you
need to chart and they also contain the very important mhOpen and 5mhOpen
figures.
 
You also do not need the columns V, W and X, since these triggers have already been
included in the Buy/ Sell columns. So delete these three columns altogether.
 
Now, you need the buy/sell triggers, their stop-loss values and the targets closer to
the actual data. These are a total of 9 columns from V through AD, so make space for
these by inserting 3 more columns prior to column L. (you already have 6 blank
columns after column F. By inserting 3 columns, the triggers, stop-loss and the targets
columns have now assumed columns names Y to AG).
 
Use the cut and paste function to remove columns Y to AG, and place them at blank
columns from G to O.
 
You now have blank columns Y to AG which may be deleted so as to move the
modified Heikin Ashi columns closer to the Ebr and Ebl columns.
 
The most visible part of your spreadsheet now shows the actual data and the
triggers/stop-loss/targets adjacent to each other.
 
This is the first few columns look like from column A through O:
A B C D E F G H I J K L M N O
Date Open High Low Close   Buy StLoss   Sell StLoss   LgTarget ShTarget  
21-
Mar 13,171 13,190 13,113 13,125                    
22-
Mar 13,124 13,124 13,017 13,046                    
23-
Mar 13,046 13,100 13,003 13,081                    
26-
Mar 13,083 13,244 13,082 13,242                    
27-
Mar 13,242 13,265 13,194 13,198                    
28-
Mar 13,195 13,213 13,069 13,126   13284 13133   13073 13224   13806 12445  
29-
Mar 13,126 13,152 13,033 13,146   13277 13135   13075 13217   13806 12445  
30- 13,148 13,224 13,148 13,212   13219 13091   13031 13159   13806 12445  
 Mar
2-
Apr 13,211 13,297 13,154 13,264   13249 13098   13038 13189   13838 12445  
3-
Apr 13,259 13,265 13,131 13,200   13300 13152   13092 13239   13838 12475  
4-
Apr 13,198 13,198 13,021 13,075   13338 13176   13116 13278   13838 12475  
5-
Apr 13,067 13,088 13,012 13,060   13284 13156   13096 13224   13826 12475  
9-
Apr 13,058 13,058 12,904 12,930   13267 13113   13053 13207   13817 12475  
10-
Apr 12,929 12,930 12,711 12,716   13246 13071   13011 13186   13701 12475  
11-
Apr 12,717 12,845 12,717 12,805   13092 12948   12889 13033   13496 12446  
12-
Apr 12,806 12,987 12,806 12,987   12984 12824   12765 12925   13496 12383  
13-
Apr 12,986 12,986 12,845 12,850   13004 12857   12798 12945   13496 12279  
16-
Apr 12,851 12,987 12,851 12,921   12991 12845   12786 12932   13496 12251  
 
Further, the columns P through AC should appear this way on your spreadsheet:
P Q R S T U V W X Y Z AA AB AC
Date hpOpen hpHigh hpLow hpClose   Ebr Ebl   Date mhOpen mhHigh mhLow mhClose
21-
                  Mar 13171     13145
22-
                  Mar 13158     13078
23-
                  Mar 13118     13076
26-
                  Mar 13097     13181
27-
                  Mar 13139 13137 13136 13199
28- 28-
Mar 13198 13279 13116 13219   13202 13155   Mar 13169 13136 13135 13141
29- 29-
Mar 13126 13207 13045 13147   13196 13156   Mar 13155 13136 13145 13126
30- 30-
Mar 13146 13227 13065 13167   13138 13113   Mar 13141 13140 13167 13187
2- 2-
Apr 13212 13294 13130 13233   13167 13120   Apr 13164 13154 13176 13229
3- 3-
Apr 13264 13346 13183 13286   13218 13173   Apr 13196 13165 13176 13198
4- 4-
Apr 13200 13281 13118 13221   13256 13197   Apr 13197 13171 13171 13113
5- 5-
Apr 13075 13156 12994 13096   13203 13178   Apr 13155 13171 13161 13075
9- 9-
Apr 13060 13141 12979 13081   13186 13134   Apr 13115 13166 13121 12987
10- 10-
Apr 12930 13009 12850 12951   13165 13092   Apr 13051 13143 13040 12825
11- 11-
Apr 12716 12795 12637 12737   13012 12969   Apr 12938 13091 12964 12822
12- 12-
Apr 12805 12885 12726 12826   12905 12844   Apr 12880 13028 12928 12929
13- 13-
Apr 12987 13067 12906 13008   12924 12877   Apr 12905 12978 12890 12887
16- 16-
Apr 12850 12929 12770 12870   12911 12866   Apr 12896 12934 12876 12915
 
 
As new actual data comes in tomorrow morning’s trading, you will have actual high,
low and close values. You can then type in the actual values as the day’s trading
progresses and create or square off your positions if the triggers and stop-loss are hit
which prompt you to trade accordingly.
 
At the close of the day, you would have all the actual data for the day and the
hypothetical figures for tomorrow.
 
You may also eliminate the need for those columns calculating the hypothetical
figures by typing in their formulae for tomorrow’s data in cells B, C, D and E.
 
Let us presume that today’s date is 21st Dec 2012 in cell A193, and you already have
the actual values after today’s close in cells B193 to E193.
 
The date in cell A194 reads 24th Dec 2012.
 
For tomorrow’s hypothetical values, simply type in the formula “=e193” in cell B194
to presume that tomorrow’s open would be the same as today’s close. The next cell
C194 holds the assumed high for the day, so put in the formula “=1.00618*b194” in
this cell. The cell D194 has the low of the days which should have “=0.99382*b194”
here and finally in cell E194 type in the formula “=1.001618*B194”.
 
You may now drag these formulae for the whole row 194 down to any row to
represent the hypothetical data figures, the triggers, targets and the modified Heikin
Ashi calculation for a couple of decades dates ahead ( or as long as your worksheet
permits). It does not really matter to what future date you reach, because as
tomorrow’s ( 24th Dec 2012) actual data comes in, you will be updating the
hypothetical values in row 194 by typing in the real values, effectively wiping out the
formulae in cells A194 through to E194 but keeping actual data.
 
As you type in the actual data for 24th Dec, you would have the next day’s
hypothetical values updated accordingly since you are not disturbing the formulae
there. This eliminates the need for pasting hypothetical figures from columns Q to T
and saves you the labor and time to do that.
 
The critical calculations for triggers, targets, end of trends and the mh values will
update themselves which you won’t be editing at all. It is only the date, the actual
open, high, low and close columns that are to be altered every day and during the
day as the trading progresses.
 
 
Do remember to only type in the actual data on the day of trading. Color the cells for
the current date differently or perhaps highlight these cells for today’s date by using
the bold function on your worksheet so that you do not inadvertently erase the
formulae for the next date. Once today’s trading has closed for the day, you may un-
highlight this day but highlight the next day’s row which you would updating next as
fresh data comes in.
 
Now, delete the columns P through U, which you no longer need.
 
You are now ready with your triggers and stop-loss values for the next day with a very
pretty lean looking spreadsheet with just 24 columns including the separator columns.
 
A trading system is now in place for you where you only have a mechanical role to
play the markets as the system dictates, a system that has been reasonably and
rationally worked out, based on irrational market movements and an irrational
mathematical ratio derived from a simple mathematical sequence comprised of
numbers that depend on each previous number.
 
The system is inherently derived from a visual chart, rather easy to look at, that
immediately reveals the existing ongoing trend as a tactical observation.
 
In the next chapter, the charts and the triggers together are discussed as a trading
system, taking up the case of the DJI first, the FTSE 100 and the S&P CNX Nifty of the
NSE, India.
 
You may create more charts and triggers for your favorite stocks, currency or
commodity price movements, and back test your trades for the past many months or
years to gain the needed confidence in this trading style.
 Here and elsewhere we shall not obtain the best insight into things until we
actually see them growing from the beginning….    – ARISTOTLE (Politics)

 
 Chapter 6: Trading the Dow Jones
(for demonstration purposes, we are concerned here with
the spot values, not the futures prices which may have been
at a discount or premium to the spot).
To get an insight into your trading style, keep your chart and
the triggers well in view, and begin contemplating from the
start of a new trend by noticing the first bullish candle that
appears on 30th March.
This candle has indeed appeared after a couple of weak
bearish candles signifying perhaps the end of a bearish
phase prior to 30th March.
The spreadsheet also shows our trigger rows from cell G7 to
K8 as all red, and the first bullish signs appear on the 9th row
for the date of 30th March.
For a clear understanding of the trigger calculation based on
the HA candles, let us assume that 29th March trading has
just closed for the day, and we have our hypothetical range
of projected data calculated in cells B9 to E9 for tomorrow,
i.e. 30th March.
If you have these projected values in the actual data row in
cells B9 to E9, you will have the triggers and stop-loss
calculations for 30th March in cells G9 to K9.
The values would show up for the ‘Buy , Stop-loss , Sell ,
Stop-loss’ would show as:
13247 13090 13031 13187
You can see that for tomorrow, bearish trend may end if the
Dow goes above 13187, and the buy trigger to go long is
13247 which is still red colored since our range for the high
is not above this threshold level. But now you know that if
this trigger price is taken by the Dow, you should be ready
to go long, and in case you have a short position, you should
square off the position on seeing the Dow violating the
13187 level.
Well, that is some useful information to have even before
the market opens tomorrow morning.
As the Dow opens on 30th March, you would replace the
hypothetical figures by actual data streaming in your
trading account screen, and immediately notice that with
the actual low and high coming in, the stop-loss value for
the bearish trend changes to 13159, while the buy trigger
adjusts itself to the more plausible value of 13219.
And soon enough, the Dow does cross over 13219,
prompting you to go long, while noticing that now the stop-
loss value for the bullish position is 13093, instead of the
13090 you had before the markets opened.
You did buy the Dow futures around 13219, and the day
closed with the Dow at 13212 with the stop-loss for the long
position standing at 13091.
Of course, now all the critical figures in row 9 are colored
black so you can see in a flash that the trend is now clearly
bullish, a scenario that is also easily discernible on the
modified Heikin Ashi chart where you see a strong white
bullish candle.
Let us recollect what we have understood so far.
 The First Trading Insight to Go Long
Although this bullish candle of 30th March looks good on the
charts, did it really have the strength to justify a reasonable
probability of a sustainable uptrend?
This very important question may be answered by two
figures:
1. the End of Bearish trend figure Ebr at 13,138 in cell
P9 and
2. the End of Bullish trend figure Ebl at 13,113 in cell
Q9.
Since the trading price had indeed crossed 13,138, we were
cautioned not to sell the index anymore, and also since the
price has also moved above the stop-loss figure for buying
(Ebl), we do have a stop-loss figure if we were to go long in
the index.
To put it simply, we are now allowed to buy, and at the same
time not permitted to sell.
Now, as the trading progresses, the DJI may just touch the
Ebr and then go below the Ebl effectively nullifying our long
position.
We needed to draw a line where we could go long without
fear of the candle transforming once again into the dark
bearish candle again.
Here is where the Golden Ratio helped us.
To set our buying trigger, we made sure that the trigger is at
least 0.618 percent above the Ebr. To calculate this trigger,
we multiplied Ebr by 1.00618 to give 13,219 as the trigger
price for buying the DJI.
Did you notice that the buying trigger on putting in the
actual data in the early hours of 30th March changed to
13,219 from the 13,247 we had when we pasted the
hypothetical data after the close of 29th March?
This change occurred because the low in the hypothetical
figures was assumed to be 13065, but the actual low on 30th
March was just 13,148 which was also the opening value for
the index. Since the buying trigger is dependent on the
mhOpen by a factor of 4 and on the low by a factor of 1, the
trigger was lowered to 13,219 as the actual low was higher
than the hypothetical low.
This higher actual low meant that the downward pressure on
the index had eased, and so we should naturally have more
confidence in an upward move. And indeed, our formula did
move our buying trigger to a better place at 13,219 instead
of 13,247.
Having bought the DJI and taken a long position, we now
wait for either the target to be hit, or if the trend does not
last long enough to hit the target, we get out of the long
position by squaring off the position near the end of the
bullish trend.
The end of a trend would be indicated by either a black
bearish body of the candle, or a flat anomalous candle.
In either case, for such a candle to appear, the mhClose
must be either equal to or less than the mhOpen for the day.
So, for a fizzled out trend, we should have: mhClose < or =
mhOpen.
By the reverse formula, the value of the low (Ebl) that
makes the above equation true is given by: Low(Ebl)=
(4*mhOpen – High)/3
In our case of 30th Mar, this was calculated at 13,113, as the
end of bullish trend or the stop-loss value for a long
position.
Again, the DJI may just touch this value, and resume its
uptrend, so we should keep the stop-loss threshold just
below this low, reducing the low by 0.1618 percent of itself.
To find this threshold, we simply multiplied the low by
0.998382, giving the figure of 13,091 as our stop-loss value
for the long position.
Thus, having bought long at 13,219, we are either looking
for a target of 13,806 or to get out of our position at 13,091,
believing the trend to be over.
Having set your buying trigger at 13,219 and the stop-loss
at 13,091 at the start of the trading day, you can see that
the Dow moved from 13,147 to above 13,219 where you
bought the futures and then patiently waited for either the
target or the stop-loss value, which did not happen that day.
So far, so good.
At the end of the trading close on 30th March, you repeat the
steps as above by first having the hypothetical values for
tomorrow, which is 2nd April, in data cells B10 to E10.
Looking at the trigger row you would find that the trigger
cells in row 10 (cells G10 to K10) are all black colored,
giving you confidence in having gone long today.
The stop-loss for the long position is shown at 13099, so you
know when to square off your long position tomorrow. This is
the figure that would yield an anomalous flat candle
signaling the end of the bullish trend.
On the actual trading day data, your Excel work sheet shows
the Stop-loss at 13,098 which again did not appear that day,
keeping your long position intact. Note that you must keep
updating your data every 30 minutes or so as the value of
stop-loss depends on the High of the day. You may notice
that as the High of the day rises more, the stop-loss values
drops a little more, keeping you into the game as new Highs
are made, which does make sense, since if a higher high is
not made the trend cannot be considered bullish.
At the close of 2nd April, as you paste the hypothetical
figures for 3rd April in cells B11 to E11, you notice that the
stop-loss figure stands at 13125 for 3rd April.
But as the morning actual data pours in, you find that a
higher high is not made, and so the stop-loss which depends
on the value of the high achieved so far, is raised from the
projected 13125 to 13152.
This does seem fair enough, because in a bullish trend we
do expect a new high to be made on subsequent days and
not seeing such a phenomenon should undermine our
confidence in the trend. So it is quite logical that we should
be willing to get out of the faltering trend early on.
The 3rd April, however seems to be indecisive and soon
enough, you find that the stop-loss value of 13152 is hit,
prompting you to get out of the long trade as the candle
body is flattened with mhClose getting below the mhOpen,
signaling the end of the bullish trend.
Fine, you may now get out of the trade, taking a loss of 67
points.
 The Second Trading Insight to Short
Is it time then to short the Dow Jones?
To short the Dow, you must have the selling trigger below
the Ebl (which is actually the end of bullish trend or the stop
buying figure) and the Ebr (which is the stop-loss for
selling).
The sell trigger (as the equal and opposite of the buy
trigger) should be below 0.618 percent of the Ebl, which is
calculated by multiplying Ebl by a factor of 0.99382.
In cell J11, this comes to 13,092.
So, on 3-April, having squared off your long position, you are
now waiting for the sell trigger of 13,092 to short the index.
This figure was never reached on that day and you stayed
out of the index.
At the end of this day, as you put in the hypothetical values
for 4th April, you note down the sell trigger at 13088 for
tomorrow.
The next morning, as you put in the actual trading data in
the morning, you see the sell trigger at 13116 not at 13088.
The selling trigger was raised slightly by your formula
because it is dependent on the High for the day which was
not high enough as the range of hypothetical data you had
placed yesterday. Not having a higher high indicated that
perhaps the downward pressure on the Dow was pretty
heavy and the formula took the liberty to prompting you to
sell earlier.
(Did not somebody say that mathematical formulae acquire
an intelligence of their own?)
In the meanwhile, also noticing that the sell trigger is quite
below the stop-loss value of 13278 for selling, you did go
ahead and sell the Dow near 13116.
Since the stop-loss value for the short position was not
reached on this day, you can carry the short position to the
next trading day.
Carrying on in this manner, you found that the fifth of April
indicated the stop-loss for shorts at 13,224, which of course,
you kept updating as every half an hour passed by. Since
you never saw this stop-loss being compromised on this day
too, you were good with your shorts in the Dow.
Over the next few days, while on the lookout for the target
of 12, 475 to be taken, you sit up becoming alert on 12th
April to note that the Dow approached the stop-loss around
12,925. As this does indeed happen, you mechanically
square off the short position around this figure, taking a
profit of 191 points.
Since these figures are based on the mhClose and mhOpen
for the day, you also notice the shape of the HS candle on
that day as an anomalous white candle, signifying the end
of a bearish trend.
Fortunately, the trend lasted longer than 3 days, giving you
a substantial profit even though the projected target was
not hit.
 Thanks, Mr. Fibonacci!
Now, you can either be looking forward to the resumption of
a bullish trend or another bearish trend. The trigger for
going long seems to 12,984 on this day but since the day is
nearly over and the approximate figure for buying tomorrow
is around 13004, you decide to postpone going long into the
index to tomorrow morning.
In any case, the index has just recovered from a bearish
trend, and with the stop-loss value of a long position
compromised early in the morning, you are not too
confident of the resumption of a bullish trend yet.
Indeed, the next day of 13-April never saw the buying
trigger of 13,004, or the selling trigger of 12,798.
Again, on 16th April, the buying trigger of 12,991 was never
hit, nor the selling trigger that was at 12,876.
You may now thank Mr. Fibonacci for raking in profits so far
as well as keeping you out of trading the Dow on the 13th
through 16th April.
 Going Long and Short Again
The 17th April sees you going long on the DJI at the buying
trigger of 12,980, for a target of 13,496 and a exit point
below 12,810.
You hold to the long position on the 18th with the exit point
of 12,903 not compromised.
The 19th of April, however gets you out of the long position
at 12,957 with a loss of 23 points, and although the sell
trigger is reached below 12,898 is hit, you do not short the
index since the selling stop-loss of 13,061 was compromised
for the day. You do want to see all the 4 triggers in the
trigger row as red colored.
(Or, in the case of a taking a long position, you want to see
all the 4 triggers to be black colored).
Waiting for the next day to short the index would be more
prudent.
On 20th April, neither buying nor selling trigger was
activated, so you move on to 23rd April with no positions in
the DJI.
You do take the short position on 23rd April just below the
selling trigger of 12,919 with a target of 12,320 and a
selling stop loss of 13,081.
The 24th April, only the next day, prompts you to book
another loss as the selling exit point of 13,014 is hit. The
loss in this trade comes to about 95 points.
Since the buying trigger is not hit on 24th April, you would
wait for the next day to go long on the index again.
 A Good Long and a Great Short
Next day, you buy the index at 13,061 as the trigger is
activated for a target of 13,639 and an exit figure at 12,922
that would render the uptrend void.
For the next few days, the trend does continue until the 3rd
of May, when you exit the long position at 13,185 as the
buying stop-loss is breached. This trade has given you a
profit of 124 points.
You do not wish to short the Dow on this day since the
selling trigger is not breached.
On 4th May, you may short the index below 13,147 for a
target of 12,514 as all the four parameters (triggers) are
indicating a sell.
This time the downtrend continues till the 24th May with the
selling exit never compromised during this time, and the
bearish target hit on 17th May. You could square off the short
position at the target, or wait to see when the trading
system gets you out of the trade by its selling exit point.
The system prompts you to exit the trend on 24th at a value
of just above 12,544. This is surprisingly very near the
original target but higher than the lowest point of the
downtrend which appeared on 23rd May as 12,312.
It is entirely up to your judgment or intuition whether to exit
at the target or to exit when your trading system tells you to
do so.
This trade made you a profit of 603 points even if you
ignored the target.
 Way to Go!
Continuing in this manner, you can back test the DJI on your
trading system to calculate how much of a profit or loss you
could have made.
I have summarized the results for you here.
During the period from 30th March through 20th Dec of nine
months, you took 40 trades out of which 19 were losing
trades and 21 were winning trades.
The maximum loss on a losing trade was 121 points, while
the maximum profit on a winning trade was 603.
The total loss from 19 losing trades turned out to be 1448
points which is an average of 76 points per losing trade.
The total profit from 21 winning trades turned out to be
3421 which is an average of 163 per winning trade.
The net profit from these 40 trades was 1973 points.
I may point out here that targets were hit in only 2 of the 38
trades, but if you had squared off your positions at the
targets, you would have taken a slightly higher net profit of
2066 points during this time period.
There were also days when the index opened beyond your
exit points, but I have reasonably adjusted the points for
those days, which were the 28th June and 16th August.
While actually executing your trades in real life, you may
not be able to get in or get out of the trades at the exact
triggers, so let us add an error margin of 5 percent to these
results.
Adjusting for this error margin, you may reduce the total
profits for the winning trades by 5 percent to 3250, and
raise the total loss for the losing trades by 5 percent to
1520. This is actually reducing the total profit by more than
12 percent.
We may now safely conclude that out of given number of
trades, half of the trades may lose at an average of 80
points per trade while the other half of the trade may gain
at an average rate of 155 points, even after accounting for
an error of 5 percent and gap up or gap down opening days.
This empirical analysis, therefore suggests that over a
reasonable length of time, one may execute all available
trades with a reasonable probability of making money if one
mechanically obeys a simple trend following system.
I have given you the guidelines for creating just that trend
spotting system by slightly modifying the usual Heikin Ashi
candlestick charts and incorporating the Golden Ratio into it
to define candle strengths.
You may further modify the system to suit you or use the
existing one by changing a couple of parameters here or
there, but remember to back test the system on a few more
indices, stock prices or currencies.
A good thing about a trend following system is that it lets
your profits run to the maximum and cuts your losses to the
minimum. Statistically, it then keeps you in profit as long as
you keep trading to its dictates, keeping your emotions of
fear and greed aside.
So, go ahead and follow your preferred system and allow
the law of averages work in your favor by taking every trade
the system offers you.
Factual science may collect statistics and make charts. But
its predictions are, as has been well said, but past history
reversed.      -  JOHN DEWEY.
 
 
 Chapter 7: the FTSE 100 and the
NIFTY 50
 

You now have the compact spreadsheet for calculating and

charting the modified Heikin Ashi chart. All you need to do is
paste the data for any other index or stock or currency that
you would like to trade.
I have back tested the results obtained by the same
spreadsheet for two actively traded indices – the FTSE 100
at London and the S&P CNX NIFTY 50 at Mumbai for the
period from 21-March-2012 to 21-Dec-2012, a total of nine
months.
 The FTSE 100
Here is a consolidated summary of the results for FTSE 100:
Out of a total of 35 trades available as per the triggers
taken, 17 turned out to be profit making while 18 trades
made a loss. The maximum profit made by a winning trade
was 376 points while the maximum loss incurred by a losing
trade was 54 points.
The 18 losing trades made a total loss of 574 points, which
after accounting for a 5 percent error margin comes to 603
points loss over a nine months period.
The 17 winning trades made a total profit of 1521 points.
With a 5 percent reduction to account for errors, this can be
safely assumed at 1445 points over the same period.
The net profit then stands at 842 points.
The average loss per trade was estimated at 33, while the
average gain was put at 85 points per winning trade.
On the whole, an average profit of 24 points per trade is
apparent for all the 35 trades taken together, after
accounting for an error margin and gap up opening days.
The two gaps up openings on 7th June and 19th July are
already accounted for in the results shown above.
So, as evident in the DJI trading profit and loss results, you
can surmise that about half of the total trades are losing
trades but the average profit figure from the winning trades
is almost twice the average loss figure of losing trades.
 The S&P CNX NIFTY 50
Next, the consolidated summarized results for the NIFTY 50
are presented here.
For the same period under study from 21st March to 21st
December, 41 trades were available and taken. Out of these
41 trades, 25 trades resulted in losses while 16 trades made
gains.
The maximum profit from a winning trade was 239 points,
while the maximum loss from a losing trade turned out to be
100 on a gap up opening day.
However, even with so many losing trades, the total loss
from such trades was recorded at 1030 points, which on
adding a 5 percent error margin, came to 1082 points.
The total profit on the winning trades is calculated at 1638
points and after subtracting 5 percent still stands at 1556
points.
The average loss per losing trade is 43 points, while the
average gain per winning trade is at 97 points, again
highlighting the fact that average gain is almost always
more than twice the average loss per trade.
The average profit per trade comes to about 12, while the
total profit over the 9 months under study stands at 475
points after accounting for gap up and gap down opening
days.
 A Cursory Glance at the Results
 
Finally, here is a tabular summary showing the effective
results of the trades executed based on the modified Heikin
Ashi – Golden Ratio trading system presented so far.
 
 
Loss Average
Gain per Net
  Trades Winner/Loser
winner
per gain per
Gain
loser trade
DJIA 40 21 / 19 155 80 43 1730
FTSE 35 17 / 18 85 33 24 842
NIFTY 41 16 / 25 97 43 12 475
 
 
As you work with more data over longer time periods,
statistical laws may asymptotically lead you closer to the
outcome that half of the total trades will be losers but the
gain from the other half winner trades will be almost double
the loss from the losers.
 
Isn’t statistics gratifying!
 Common people are alarmed by stock market gyrations because they don’t
know what causes them. The best kept secret of experts is nor do they. –
Kaushik Basu, chief economist to the World Bank, on the ebb and flow of stock
markets (as quoted in “The Times of India”, ‘They Said It’ column, 4th Jan 2013).
 Chapter 8: Conclusion
As you ponder over your spreadsheet, you realize that some
trades can continue for a longer period than others, ranging
from a couple of days or less to perhaps a week to over a
month. The spreadsheet works to give you entry and exit
points for a trade readily but is certainly not a tool for
investing long term in securities or market indices.
Trading derivatives (futures or options) of indices or of
highly liquid stocks therefore, seems a good idea to profit
from the hard work you have put in to create the
spreadsheet. Select a number of stocks and indices that you
can easily monitor and consider trading their derivatives. I
would suggest no more than a total mix of 21 stocks and
indices. (Am I obsessed with these Fibonacci numbers, or
what?)
Do not bother that you are using spot values of indices or
stock prices in your calculations but are trading their
derivatives which may have a discount or premium to the
actual spot values, because futures prices will follow the
spot prices anyway, though premiums or discounts may
vary with time. Since you are not staying with your trades
for too long, these variations can come in your 5 percent
error margin already allowed for.
There may be times when the markets are volatile and your
triggers or stop-losses are breached as momentary spikes.
To avoid getting out too soon or getting in too early, you
might consider entering or exiting when the past one hours’
average price of the index or stock has breached the trigger
or stop-loss values. You can check a 13 tick moving average
of 5-minutes ticks on a 3-day or 5-day chart of your index or
stock at finance.yahoo.com or investing.com. This 13MA
would be about an hour’s average of the price and hence
the criterion for getting in or out of trades based on your
triggers.
Now, futures have a potential for unlimited loss in case the
markets suddenly go horribly against your existing position,
like at the time of the fiscal cliff resolution or any other
major event, though there is also the potential for unlimited
profits, too. To protect your position in such a scenario, you
would buy a contrary position in options. For example, if you
had a long position in futures, you should also have bought
put options in the same underlying, in case the markets
crash tomorrow morning, or vice versa, if you have a short
position in futures, you must have a buy position in call
options too to protect you against unlimited loss in case the
markets shoot up the next morning or the next moment.
Such a combination ensures that you won’t take a huge loss
but limits your potential for profits in a lasting trend by the
fact that you are going to lose all the money paid for buying
the options. And in the event of the trade turning sour, you
will anyway incur a loss on futures that would be somewhat
limited by the profits in the contrary options.
Alternatively, you could also write options instead of buying
them along with futures and build up covered calls or
covered puts combinations.
On the other hand, if you simply buy just the call options in
a bullish trend, you have the potential for unlimited profit if
the trend lasts long, and are also insured against unlimited
loss because if the trade turns contrary to your position you
can only lose the money you paid for buying the call option.
In the case of a bearish trend, you would simply buy put
options to profit from a lasting downtrend while limiting your
maximum potential loss only to the cash you paid for the
option.
However, your trading system will prompt you to exit your
position at some value if the trend does not last, so you will
still recover some of the money you paid for the option, if
not all, and sometimes, as you have empirically seen, the
exit point can still result in a small profit too. As the system
detects the end of a trend in a couple of days, the premium
on options would not change much anyway. Try not to buy
options that are just a week away from expiry though, as
the premiums on these can vary significantly as the date of
expiry approaches quickly. Go for the next months’
contracts then.
Choosing to trade futures coupled with options, or just the
options is entirely up to your temperament and preference.
But whatever you do, trade as the market dictates and as
your spreadsheet prompts you to enter and exit while
gauging the prevalent mood of the market mechanically.
There are a host of complex strategies out there involving
hedging with various combinations of futures and options
but none perfected yet to yield profits all the time.
I have proposed a simple Contrary Position Rule F & O
strategy in the next book titled: “The Simplified Futures and
Options Trading Strategy”, that you might consider since
this strategy further reduces those intermittent losses that
invariably result from following the trend patterns of the
MHAF trading system.
In summation, stick to your plan of riding a simple trend but
don’t trust it just because it’s simple. Be ready to abandon a
trend or to jump on to a new trend as the market changes
its mind and as that fickle mind is revealed in your
spreadsheet.
Feel free to interact with me through my website at
http://niftytracker.com and remember to sign up for
receiving updates to the book and an occasional newsletter
there. There may yet be some oversights in text or
formulae, even though I have gone through the book’s
figures many times over. Do point these out when you find
them by contacting me through my website.
Since your views are very important to authors and their
book, please visit the book page again and scroll down to
the ‘Customer review’ area to write about what you liked
and choose your star rating for the book.
Happy Trading!
  

Other books by Avinash Khilnani:

The Simplified Futures and Options Trading Strategy

A simple Contrary Positions Rule strategy is outlined for
playing Futures and Options combinations, named the CPR
F&O strategy. The reader is guided to create an optimum
strategy that exploits the existing trend, implied volatility of
options and the time decay inherent in options to one’s
advantage. Right at the start of executing initial trades, the
reader can estimate maximum profit potential, reversal and
exit points using just plain arithmetic and follows those
figures through for one calendar month.

The Fibonacci Dictated Trading Script

A stage play is set for playing index futures against index
options, demonstrated as a real world example of the Dow
E-mini futures and the DJX options. The reader is guided to
write a trading script for the stage before the play actually
begins as a simple Excel worksheet. Fibonacci ratios and
numbers dictate the writing of the script and extensive use
of the Black-Scholes option pricing model ensures that
optimum exit point, reversal points, profit or loss, rolling up
or rolling down figures are calculated well in advance of the
actual play.
 Genetic Hacking: Your DNA Can Be Hacked!
Are you literate enough in the codes of life, of reading and
writing DNA?
And should you be hacking your own biology?

This book explains why it is about time you hacked your own
DNA and shows how the recent developments in genetics
and genomics enable you to understand your personal
biology. The benefits of bio-hacking yourself range from
personalized medicine for your quantified self to looking into
your ancient past to trace your personal ancestors to get to
know yourself better, to evolve quicker than nature
intended and to intentionally create genetically superior
children by design. In a slightly futuristic scenario, the book
ponders if you can live healthily (and happily) ever after by
hacking your genome and connectome through re-booting
your genome with your connectome again and again.
--------------------------------