Ichimoku Indicator – Giving a Clear Picture

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Ichimoku Indicator – Giving a Clear Picture

Price is the ultimate indicator, as it’s the only thing upon which your profits are determined. Yet many traders like to use indicators. While indicators are only manipulations of price data, they can provide you with insight that you may not be seeing in the price movement itself. For those who like indicators, the Ichimoku Kinko Hyu or “Ichimoku cloud” is an indicator that deserves a bit of study. There are many ways to use the indicator, but one way stands out in my mind. The Ichimoku indicator is a visual way to trade, and can very quickly give you a snapshot of the health of a trend, whether a trade is worth taking or if a trend is reversing.

At first this indicator can be a little overwhelming, and adding it to your chart will clutter things up a bit. Fear not though, as this will likely be one of the only overlay indicators you need, and for the most part I only focus one major aspect of the indicator–the cloud. More on that shortly.

Add the indicator in a charting platform and you’ll be asked to input some default values for the indicator. Here are the default values for the various lines:

Tenkan-Sen (Conversion Line): 9 Periods

Kijun-Sen (Base Line): 26 Periods

Senkou Span A: This isn’t usually asked for as it’s the mid-point of the Conversion and Base line.

Senkou Span B: 52 Periods

Chikou Span (Lagging Span): 26 Periods

Once you are familiar with the indicator, and are using it effectively you may find adjusting the values slightly helps with your particular time frame, strategy or market.

After inputting the values, you’ll see something like Figure 1.

Figure 1. USD/CHF – 1 Hour Chart with Ichimoku Kinko Hyo

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A little confusing, but remember, when first learning this indicator you only need to concern yourself with the “cloud.” The cloud is the dotted white lines that move along with the price, as indicated on the chart.

Ichimoku Cloud Interpretation

By focusing just on the cloud, you can quickly extract a lot of information from a price chart. The cloud can be used to confirm trend, indicate reversals, determine strength or weakness as well as give you “no trade zones.” Here is how the cloud does each of these things.

Confirming Trends: Similar to a simple moving average, when the price is trading above the cloud this typically signals that the asset is in an uptrend. When the price is trading below the cloud this typically indicates the asset is in a downtrend, as shown in Figure 2.

Figure 2. USD/CHF – 1 Hour Ichimoku Downtrend

Indicating Reversals: Strong uptrends or downtrends usually stay above or below the cloud respectively. Pullbacks (moves against the trend) will often “bounce” off of the cloud or penetrate it slightly but then resume the trend direction. If the price moves fully through the cloud it indicates a reversal of the trend is potentially underway.

Determine Strength and Weakness: The thicker the cloud typically the harder it will be to pierce. On the other hand, if the cloud is very thin it indicates indecision and that the trend losing a bit of steam. A thin cloud does not indicate a reversal though; it simply is showing that the trend doesn’t have as much momentum currently, relative to prior price action.

Using “No Trade” Zones: Since we are using the cloud to help isolate trends, reversals and strength/weakness, establishing a no trade zone helps to clear up any conflicting signals which may arise. When the price enters the cloud, don’t take new positions. Wait to see what happens; either the former trend will continue and you can trade with it, or the price will move right through the cloud indicating there may be a reversal trade.

Putting it Together

Ultimately, the best strategies are the ones that align your trades with the trend. The cloud helps you see the trend so you can trade with it. If the trend is up, you want to buy (calls) when the price drops toward the cloud but then begins to bounce off of it, moving higher once again. If the trend is down, you want to short (buy puts) when the price rallies toward the cloud, bounces off it and starts moving lower again. When the price enters the cloud, hold off on making a trade until the price starts trading either above or below the cloud, and then use the strategy mentioned above. This approach allows for a lot of information to be quickly absorbed, allowing you to decide if a potential trade is possible or if it’s better to wait. While all indicators have their weaknesses, and losing trades will always occur, Ichimoku is good for traders who like the visual nature of indicators and are looking for a quick way to assess trades.

Best Ichimoku Strategy for Quick Profits

Best Ichimoku Strategy for Quick Profits

The best Ichimoku strategy is a technical indicator system used to assess the markets. This unique strategy provides trading signals of a different quality. Forex trading involves substantial risk of loss. Although, with Ichimoku cloud trading, those losses are contained and kept small.

The Ichimoku system is a Japanese charting method and a technical analysis method. Our team at Trading Strategy Guides mastered the method over a long period of time.

The Ichimoku indicator was published in 1969 by a reporter, Ichimoku Kinkou Hyo, in Japan. This candlestick trading technique has stood the test of time.

The name Ichimoku tells a lot about the trading system, or at least it gives a description of the system.

Ichimoku = “One look, glance”.

Kinkou = “Balance, equilibrium”.

Hyo = “Chart, Graph”.

Ichimoku cloud trading attempts to identify a probable direction of price. It helps the trader determine the most suitable time to enter and exit the market by providing you with the trend direction. It gives you reliable support and resistance levels and the strength of these market signals.

Before we delve deeper into the Ichimoku Cloud strategy, let’s look at the indicators needed to successfully trade the strategy.

The most popular Forex trading platforms use the Ichimoku Cloud indicator. The Ichimoku indicator paints all the components needed to help visualize the price action better. The Ichimoku cloud is one of the most comprehensive technical indicators in modern use. Unsurprisingly, it has quickly become the “go-to” indicator for forex traders around the world.

In the Ichimoku cloud section, we are going to give you an in-depth overview of the Ichimoku components.

So, before moving forward, let’s define all the Ichimoku Cloud components. We will review how to correctly interpret the trade signals generated by this technical indicator.

Ichimoku Cloud Explained

The Ichimoku Hinko Hyo is a momentum indicator used to recognize the direction of the trend. It can also define accurate support and resistance levels. The Ichimoku Cloud indicator consists of five main components that provide you with reliable trade signals:

  1. Tenkan-Sen line, also called the Conversion Line, represents the midpoint of the last 9 candlesticks. It’s calculated with the following Ichimoku formula: [(9-period high + 9-period low)/2].
  2. Kijun-Sen line, also called the Base Line, represents the midpoint of the last 26 candlesticks. It’s calculated with the following formula: [(26-period high + 26-period low)/2].
  3. Chiou Span, also called the Lagging Span, lags behind the price (as the name suggests). The Lagging Span is plotted 26 periods back.
  4. Senkou Span A, also called the Leading Span A, represents one of the two Cloud boundaries and it’s the midpoint between the Conversion Line and the Base Line: [(Conversion Line + Base Line)/2]. This value is plotted 26 periods into the future and it’s the faster Cloud boundary.
  5. Senkou Span B, or the Leading Span B, represents the second Cloud boundaries and it’s the midpoint of the last 52 price bars: [(52-period high + 52-period low)/2]. This value is plotted 52 periods into the future and it’s the slower Cloud boundary.
  6. Chikou Span, represents the closing price and is plotted 26 days back.

While the Ichimoku Cloud indicator involves multiple (five) different lines, reading the graph is actually very easy. Using the trend lines mentioned above, you will then need to determine whether Leading Span A or Leading Span B is currently higher.

Once Leading Span A and Leading Span B have been identified, the “cloud” component of this graph will be shaded in. When Leading Span B is above Leading Span A, this indicates to traders that price momentum is currently increasing. When this is the case, the graph will be shaded green.

On the other hand, when Leading Span A is below Leading Span B, the underlying asset is likely moving in a negative direction. When this happens, the cloud will be shaded red. Despite the graph’s complications, simply looking at the colors of the cloud can help you determine the direction of the market.

Here are some basic interpretations of the Ichimoku charts:

  • When the price is above the Cloud, we’re in a bullish trend.
  • When the price is below the Cloud, we’re in a bearish trend.
  • When the price is in the middle of the cloud the trend is consolidating or ranging.

Furthermore, the Ichimoku charting technique provides bullish and bearish signals of various strengths.

When the Tenkan crosses Kijun from below, it is considered a bullish signal. When the Taken crosses the Kijun from above, it is considered a bearish signal. The Kijun line is shown as the red line above.

The strength of the Ichimoku trading signals are assessed based on three factors:

  • How far away is the price movement relative to the Cloud?
  • How far away is the Chiou Span relative to the Cloud?
  • How far away is the Cross-over relative to the Cloud?

Because many of the lines on the Ichimoku Cloud chart are created using averages, the chart is often compared to a simple moving average chart. However, Ichimoku is more dynamic than a simple moving average chart as it’s designed to help detect changes in support and resistance.

The relationship between Leading Span A and Leading Span B will indicate whether there is a strong downtrend or uptrend. Pay attention to both the color (green for bullish, red for bearish) and the size of the cloud. When the “cloud” between these lines is small, then the trend will not be very strong.

The Ichimoku Cloud is useful for day traders and others who need to make quick decisions. The cloud is often paired with other technical indicators, such as the Relative Strength Index, in order for traders to get a complete picture of resistance and support. Many traders will also look out for crossovers in order to determine when trends have reversed.

Ichimoku cloud trading requires a lot of self-discipline. This is because you have to wait for the best trade signals. We’re going to use the default settings of the Ichimoku Cloud system.

Now, let’s move one step forward and learn how to make money by applying the Ichimoku trading rules.

Note* Moving forward, we’re not going to delete the Lagging Span moving average from our charts. This is because we don’t base our trade decision on it since it’s lagging the price.

The Best Ichimoku Strategy – Buy Rules

The Ichimoku Cloud system is designed to keep traders on the right side of the market. Our trading rules will help you follow the trend for as long as possible. At least until it’s clear that a reversal is occurring. The Ichimoku system suits swing trading best. This is because it maximizes profits while minimizing the risk involved in trading. Here is how to identify the right swing to boost your profit.

The Ichimoku Kinko Hyo best time frame is the one that fits you best. As we don’t have a preferred time frame.

This swing trading strategy will teach you how to ride the trend right from the beginning. You will also learn how to capture as many profits as possible.

Ichimoku Cloud Trading: Step by Step

Step #1 Wait for the Price to Break and close above the Ichimoku Cloud.

Ichimoku cloud trading requires the price to trade above the Cloud. This is because it’s a bullish signal and potentially the beginning of a new up-trend.

The cloud is built to highlight support and resistance levels. It highlights several layers deep because support and resistance is not a single line drawn in the sand. It is several layers deep.

So, when we break above or below the Ichimoku Cloud, it signals a deep shift in the market sentiment.

A high probability trade setup requires more layers of confluence before pulling the trigger.

This brings us to our next requirement for a high probability trade setup.

Step #2 Wait for the Crossover: The Conversion Line needs to break above the Base Line.

The price breakout above the Cloud needs is followed by the crossover of the Conversion Line above the Base Line. Once these two conditions are fulfilled, we can look to enter a trade.

The Ichimoku Cloud indicator is a very complex technical indicator. The indicator is even used as a moving average crossover strategy.

Now, we’re going to lay down a very simple entry technique for the Ichimoku Kinko Hyo trading system.

Step #3 Buy after the crossover at the opening of the next candle.

Ideally, any long trades using the Ichimoku strategy are taken when the price is trading above the Cloud. Our team at the TSG website has adopted a more conservative approach. We added an extra factor of confluence before pulling the trigger on a trade.

So, after the crossover, we buy at the opening of the next candle.

(Notice the strong buy signal in the graph below.)

The next important thing we need to establish is where to place our protective stop loss.

Step #4 Place protective stop loss below the breakout candle.

The ideal location to hide our protective stop loss is below the low of the breakout candle. This trading technique accomplishes two major things. Here is an example of a master candle setup.

First, it’s significantly lowering the risk of losing big money. Second, it helps us trade with the market order flow.

Since this is a swing trading strategy, we’re looking to capture as much as possible from this presumably new trend. We’ll be looking to trail our stop loss level below the Cloud or exit the position once a new crossover happens in the opposite direction.

The next logical thing we need to establish for the Ichimoku trading system is where to take profits.

Step #5 Take Profit when the Conversion Line crosses below the Base Line.

We only need one simple condition to be satisfied with our take profit strategy.

When the conversion line crosses below the baseline we want to take profits and exit our trade.

Alternatively, you can wait until the price breaks below the Cloud, but this means risking to lose some parts of your profits. In order to gain more, sometimes you have to be willing to lose some.

Note** the above was an example of a BUY trade using the advanced Ichimoku trading strategies. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.

(See the strong sell signal in the conversion line.)

Conclusion: Ichimoku Cloud Explained

The best Ichimoku strategy is slightly different than probably anything you’re used to when it comes down to technical analysis. If you’re having a very difficult time finding true support and resistance, please apply the Ichimoku cloud trading techniques highlighted in this course.

We hope that by now you’re convinced that the Ichimoku Cloud system is a good way of identifying the trends and profit from trading any market on any time frame. It can easily capture 80% of the trend if you follow the rules in the Ichimoku Cloud explained section.

Thank you for reading!

Please leave a comment below if you have any questions about Best Ichimoku Strategy!

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Ichimoku Indicator – Giving a Clear Picture

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