Friday, November 12, 2010 EST
The Heikin-Ashi Technique, developed by Dan Valcu, for creating candlestick charts that help to identify trends.

The heikin-ashi method {heikin means "average" or "balance" in Japanese, while ashi means "foot" or "bar") is a visual technique that eliminates irregularities from a normal chart, offering a better picture of trends and consolidations. Just by looking at a candlestick chart created with this method, you get a snapshot of the market's direction and strength.

Compare the two charts below: PowerShares QQQQ Candlestick Chart vs. a Heikin-Ashi Chart.

The heikin-ashi candlestick technique uses modified open-high-low-close (OHLC) values and displays these as candlesticks. The modified values are computed using these definitions:

 haClose = (O+H+L+C)/4
 haOpen = (haOpen (previous bar) + haClose (previous bar))/2
 haHigh = Maximum(H, haOpen, haClose)
 haLow = Minimum(L, haOpen, haClose)

Scenario Trend Up Trend Down Trend
1 Trend is Normal Rising green bodies Falling red bodies
2 Trend gets Stronger Rising longer green bodies with no shadows Falling longer red bodies with no upper shadows
3 Trend gets Weaker Candle bodies get smaller. Emergence of lower shadows Candle bodies get smaller. Emergence of upper shadows
4 Consolidation Smaller bodies with both upper and lower shadows Smaller bodies with both upper and lower shadows
5 Change of Trend Very small body with long upper and lower shadows Very small body with long upper and lower shadows

If you have saved your chart settings to Candlestick or another format go to the Charts page and under Chart Settings select Heikin-Ashi as the Chart Type.

Saturday, November 6, 2010 EST

With five days until expiration we used the Expert Option Search to find short term naked put trades with the goal of earning option income without assignment.

Before we continue let us review some terms used in the Expert Option Search.

  • Downside Protection: DSP is defined as how far a stock would have to fall before the option position was underwater.
  • Return on Investment: ROI is the expected return based on the monies invested in the covered call or naked put trade.
  • Probability of Assignment: POA represents the likelihood that an option seller will be assigned the stock (or have the stock called away) when the option expires. The goal with short term naked put trade as discussed here is to sell options that will expire worthless so the lower the POA the better.
  • Out of The Money: OTM is a common term that means how far the strike price is away from the stock price.

The settings we used for this search were Option Expiration Date of 11/12/2010, stock price of $1 to $50 a share, and a return of investment (ROI) of at least 1%. 

 It may seem that looking for a 1% gain is low but consider we are attempting to gain 1% on monies invested for 5 trading days.