The Ichimoku Trading Strategies.
Simplified Ichimoku strategy – rogaineformen.cf Page 2 A simplified Ichimoku system by rogaineformen.cf First of all, let me say that the system I trade is a simplified Ichimoku system derived from a strategy. Ichimoku Kinko Hyo is a purpose-built trend trading charting system that has been successfully used in nearly every tradable market. It is unique in many ways, but its primary strength is its use of multiple data points to give the trader a deeper, more comprehensive view into price action.
There were two sell signals during this period. Signal 3 resulted in a whipsaw, but Signal 4 preceded a sharp decline. After a sharp reversal in August, the trading bias turned bullish with the upside breakout in September and remained bullish as the advance extended. The first pullback produced a buy signal 5 with a dip below the Base Line red and subsequent move above the Conversion Line blue. Chartists can use volume to confirm signals, especially buy signals.
A buy signal with expanding volume would carry more weight than a buy signal on low volume. Expanding volume shows strong interest and this increases the chances of a sustainable advance. Chartists also need to consider a strategy for stops, which can be based on indicators or key levels on the actual price chart. The low just before a buy signal would be logical for an initial stop-loss after a buy signal.
The high just before a sell signal would be logical for an initial stop-loss after a sell signal. Once the trade is underway and prices move in a favorable direction, chartists should consider a trailing stop to lock in profits.
Some traders set stops two ATRs below current prices for long positions and two ATRs above current prices on short positions. This Ichimoku Cloud system provides chartists with a means to identify a trading bias, identify corrections and time turning points.
The cloud sets the overall tone and provides a longer perspective on the price trend. The Conversion Line blue is a relatively short-term indicator designed to catch turns early. Catching the turn early will improve the risk-reward ratio for trades. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences, and personal judgments. Click here for a chart of IBM with the Ichimoku trading strategy.
In order to use StockCharts. There the three Moving Average lines — red, blue, and green. You also see the Cloud, which consists of the orange area on the chart. Although it looks quite chaotic to the untrained eye, to the Ichimoku trader, there is clarity within the chart. So, as you can see from the Ichimoku chart above, there are three lines and the Cloud. Since the Cloud is formed by an upper and a lower level, we have a total of 5 lines on the chart.
Each of these lines has Moving Average functions, and the lines do take into consideration past data from a certain number of periods on the chart, but there are also some distinct differences between the Ichimoku and the standard SMA, or EMA. The default parameters of the Ichimoku tool are 9, 26, The following explanation regarding the structure of each line will move you closer towards understanding how the Ichimoku is constructed.
The green line on the Ichimoku Indicator is called a Chinoku Span. If you have a look at the green plotted line on our chart above, you will notice that the green Chinoku Span mimics the price action of the currency pair. However, the line is displaced to the left by 26 periods. In this manner, the Chinoku Span line is a displaced lagging component within the Kumo Cloud structure.
The Tenkan Sen is the red line on the Ichimoku Indicator. This line has Moving Average functions as well. It takes into consideration the highest and the lowest points on the chart for a 9 period time frame.
The blue line of the Ichimoku Cloud is called Kijun Sen. This line has absolutely identical functions as the red Tenkan Sen. The only difference is that the Kijun Sen considers 26 periods instead of 9. The blue Kijun Sen creates a mid value between the highest and the lowest period on the chart, among the last 26 periods. Since the Kijun Sen takes more periods into consideration than the Tenkan Sen, it is slower and it reacts later to price moves.
As we said, the Cloud is the orange area on this Metatrader chart illustrated above. Notice that it is formed by an upper and a lower level, consisting of two lines.
The first line forming the Cloud averages the highs and the lows of the Kijun Sen and the Tenkan Sen. Also, the line is displaced 26 periods forward to the right. The other line of the Cloud shows a midpoint of the highs and the lows on the graph for a 52 period timeframe. As with the other line of the Cloud, this line is also displaced by 26 periods to the right.
These two lines constantly interact with each other. Furthermore, since there is an equal displacement, it tends to keep the two lines in close proximity of each other. Now that we are familiar with the structure of the cloud chart, we will now go through some Ichimoku trading signals. The usage of a stop loss when trading with Ichimoku is recommended, so that you will be protected from any rapid price moves in the opposite direction.
For Ichimoku style trading, we will want to use the lines of the indicator to close our trades rather than using fixed targets or trailing stop loss orders. In this Ichimoku Clouds trading strategy we will enter the market when the price breaks out of the Cloud. We will enter in the direction of the breakout, attempting to catch a trend.
When the price starts trending in our favor, we will continue to stay in the trade until the price action breaks the blue Kijun Sen in the opposite direction. Below you will see the way this trading strategy works: When price is trading above the two lines and when the Conversion line is above the Base line, it signals bullish momentum.
This is also very similar to moving averages: The Ichimoku Cloud is made up of a lower and an upper boundary and the space in between the two lines is then often shaded either green or red. The first and faster moving boundary of the Cloud is the average between the Conversion and the Base lines.
The second, slower moving boundary is the middle between the 52 period high and low. An important characteristic of the Cloud is that it is projected 26 periods into the future. Again, in the screenshot below we plotted two regular moving averages next to the Cloud and used an offset of 26 shift the moving averages into the future. You can see that the moving averages are almost identical to the Ichimoku Cloud. Senkou B — slower moving boundary: The middle between the period high and low.
The general idea behind the Cloud is very similar to the Conversion and Base lines since the two boundaries are based on the same premises. First, the Cloud acts as support and resistance and it also provides trend direction and momentum information. But since the Cloud uses a 52 period component as opposed to 9 and 26 , it moves slower than the Conversion and Base lines. Basically, the Cloud confirms an uptrend when price is above the Cloud and a downtrend when price is below the Cloud.
The space within the Cloud is a noise zone and trading here should be avoided. A rally is reinforced when the Cloud is green and a strong downtrend is confirmed by a red Cloud. The Cloud, thus, is a way to trade with the longer term trend and we can sum up our findings as follow:. Now that we have a solid understanding of what the individual components do and what their signals and meanings are, we can take a look at how to use the Ichimoku indicator to analyze price charts and produce trading signals.
With the help of the Ichimoku Cloud, traders can easily filter between longer term up and down trends. When price is below the Cloud, it reinforces the downtrend and vice versa. During strong trends, the Cloud also acts as support and resistance boundaries and you can see from the screenshot below how price kept rejecting the Cloud during the trend waves. Thus, the Cloud is ideal when it comes to filtering between bullish and bearish market phases. However, as most momentum indicators, the Ichimoku Cloud loses its validity during range markets.
The Conversion and Base lines are the fastest moving component of the Ichimoku indicator and they provide early momentum signals.
In the screenshot below we marked different points with the numbers 1 to 4 and we will now go through them to understand how to use the Conversion and Base lines:. At that time, price was also trading above both lines which confirms the bullishness. Price dipped back into the Cloud for a moment, but found support.
This could have been seen as an entry. The Conversion and Base lines also crossed into a bearish setup, further confirming the momentum shift. Finally, price entered the Cloud validating the change. At the same time, price was trading below the Cloud.
All those signals confirm a strong downtrend and could have been used as a sell entry.
The Cloud, thus, is a way to trade with the longer term trend and we can sum up our findings as follow: Such a trader usually avoids a lot of the choppiness that exists before reversals happen.
After the pair reaches a bottom, it starts consolidating, and then starts moving upwards, back into the Cloud. The Cloud, thus, is a way to trade with the longer term trend and we can sum up our findings as follow: