Yesterday in my post “About me. How did you come to this business. System and Strategy ”, I wrote that I accidentally came across a description of this indicator, which I now continue to use.
I found the article with which I began to be interested in it:
Ishimoku's cunning simplicity (Konstantin Ilyushchenko, Magazine D` (D-stroke) No. 04 (88), March 1, 2010)
How a "big and kind" Khan plays on the stock exchange with his own and other people's funds using the "Ichimoku cloud" and why he regularly withdraws money from his brokerage account
Before the interview with Andrey Khlopin (known in the blogosphere as Khan), I tried to understand the indicator of technical analysis Ichimoku, which he uses so that the questions are not “tea”, but in essence. I looked at what they write about the indicator on the Internet, but it didn’t make it clear. I looked into Jack Schwager's book on technical analysis - the indicator is not considered in it.
In general, just before the interview, I had a rather poor understanding of Ichimoku. The reason for this, it seems to me, is as follows. As the legend says, more than 50 years ago (in the pre-computer era), some Japanese named Goichi Hosoda developed an indicator-trading system and formulated a number of rules for making transactions. Ichimoku is translated as "one glance", its full name is Ichimoku kinkou-hyou - "a table of equilibrium prices, which can be covered with one glance." What was the logic of reasoning and how he started building the system is unknown. The final result has been published - the Ichimoku indicator, which is now included in most computer programs for technical analysis of prices. The formulas in accordance with which the calculations are carried out are simple, but it is impossible to understand their physical meaning, as, for example, in the MACD or Alligator. Just as it is difficult for one programmer to understand the text of another's program, so here it is easier to create a sophisticated indicator of technical analysis by himself than to understand someone else's logic - to decompile the program in order to get the initial ideas from the final result.
Our communication with Khan took place in the form of an online lesson on February 4. We spoke on Skype (Andrey lives in Arkhangelsk), watched and discussed the same price charts. And when I started writing this interview, listening to the audio recording of our conversation and revising the schedules, I was imbued with the "cloud", tenkan, kijun and chinkou. Largely due to the fact that Andrey regularly withdraws profits from the brokerage account.
Ichimoku and some of his signals
Ichimoku indicator consists of three lines and "clouds":
1. Tenkan-sen (tenkan-sen)- this is the average price for nine days (High + Low) / 2. Tenkan shows the direction of the trend. In MetaStock (QUIK) it is represented as purple lines, in MetaTrader - red.
2. Kijun-sen (kijun-sen)- average price for 26 days. Kijun is an analogue of tenkan, but for a longer period of time. MetaStock (QUIK) presents red line, in MetaTrader - blue.
3. Chinkou Span- the line that is plotted based on the candlestick closing prices and shifted back by 26 days. Correlates with the price chart. In MetaStock (QUIK) it is displayed as brown lines, in MetaTrader - green.
"Cloud" (kumo) consists of lines: Senkou Span A / Up Kumo- the middle of the distance between Tenkan and Kijun, shifted forward on the time scale by 26 days. Senkou Span B / Down Kumo- the average price value for 52 days, shifted forward by 26 days. The classic values for the indicator are 9-26-52.
"Dead Cross"- the intersection of tenkan and kijun from top to bottom. Signal to open a short position. "Golden cross"- tenkan crosses the kijun from the bottom up. Signal to open a long position. If the price is in the "cloud" - this is a sideways movement of the market.
Spiritual approach
- My brain does not accept this combination of lines with offsets of 26 days and the rest. How did you come to Ishimoku yourself?
My path was long and long, it took a lot of time to read special literature and analyze a huge number of indicators and their combinations. At first we all use many different indicators at once on the price chart, and we get a funny, but goofy picture. Seeing the exact moment of entering the market and the exact moment of exiting is not the most cherished dream of every trader? And when I took only Ishimoku, the question arose: why all the other indicators, if you can only use this one, which shows everything? Before that, I started with mutual funds - a friend once suggested to me: let's, they say, invest in mutual funds. At that time I was going to buy a car, but as a result I bought shares of funds with all the money. Then he made good money and then decided to try himself in stock trading. It was in 2004, at first there was an interest: will I overtake the mutual fund, or it will overtake me. It turned out that the market was growing then, earned more on the bullish trend and refused from mutual funds.
Then Ichimoku did not use, but used moving averages, RSI and the like. There were losses. I made a big conclusion for myself, which may seem simple: all indicators graphically display the same thing. At one time he was fond of Japanese philosophy, culture, studied their traditions. I found out that there is an interesting, mysterious Japanese indicator Ichimoku. He gave me the opportunity to identify the most important events on the price chart, not in the past, but right at the moment of their occurrence. The main thing here is to understand that success in the market lies not only in the material plane, but also in the spiritual one. Today you can make a profit of 20%, tomorrow 50%, and the day after tomorrow, “drain” everything. Therefore, for me, for example, the money that you withdraw from the market and spend is considered profit. I live from the market, my goal is to buy something for myself and my family. There is no stupid desire to increase capital. This is probably my trading philosophy.
- The philosophy is that profit is only money withdrawn from the account?
Yes. A good profit should always be respected, appreciated and understood the reason for its appearance. I think each of us should experience the arrival of a "big profit" in order to understand why he needs it. Therefore, the money needs to be withdrawn or saved in another business.
-And how does this philosophy relate to the indicator?
- In 2006, I began to use Ishimoku seriously, which now warns me against serious mistakes. Simply put, when you work a lot, stability appears, you begin to understand how to cut off the chances of falling down. It is also necessary to be creative in conjunction with the basic principles of money management and control over emotions. This is my philosophy with this indicator that controls my emotions.
The indicator itself consists of several lines, the breakout and crossing of which means something. But this is all nonsense. The main thing is that I have a photographic memory, and the market sometimes repeats and draws on the charts what it once had. Let's take a look at Gazprom's chart in the XTick program.
"Cloud" workshop
- I don't have XTick. This is a gadget for Alor-Trade, isn't it?
- A good program XTick, and it is not only in "Alor". Many other companies use it now. It is designed for real-time technical analysis of Russian stocks and other financial instruments. In XTick, I like the correct display of the "clouds", the future is clearly visible. QUIK for me is only a means for making deals, and I look at charts in XTick.
- Well, let's take a look at the S&P 500 chart in MetaTrader.
- Let's. It is difficult for me to tell at a time how I trade, I will try to briefly and simply outline the essence of my trading system. The strategy for my game is as follows. I am waiting for the price to rise or fall - the slope of the "cloud" will then become 45 degrees. Let's look at the hourly chart of the S&P 500. Apply Ichimoku with parameters 8-24-48 on it. I am using these values instead of 9-26-52. The default settings are only suitable for long-term operation. This is the whole difficulty when beginners, mainly working on less than “days” or “weeks” timeframes, try to use the indicator in question in their trading with default settings. As a result, after a couple of unprofitable trades, disappointment appears and, as a result, another conclusion that the indicator does not work. You see, from January 7 to January 15, 2010 the price was hovering around the "clouds".
- Descended from above to the "cloud"?
Yes. Then the pre-emptive lines were broken - this indicates that a trend change has occurred. When the price is near the "clouds", I never enter the market for 100% of my funds (deposit). In such a situation, I can only use 25% of the money and speculate on 10 minute charts. This is an important rule! In fact, I always want to enter the market with my full amount of funds, which happens very rarely - six to eight times a year. That is, the first thing I need is for the price to start moving away from the "clouds". I love when the "clouds" go down for a long time - then a figure is formed. The figure of my dreams, which means that the moment has come for my work. Yeah, here's a rise on the S&P 500 chart. Around January 28-29, tenkan with kijun showed the "golden cross". This indicates the possibility of a trend reversal. But I love when the “cross” begins to form not close to the “cloud”, but far from it. Then there is the potential for sharp and rapid growth. If the “cross” is formed near the “clouds”, then this signal is not strong in the Ichimoku technique set. Here tenkan and kijun crossed on February 1. The "cloud" is near. This suggests that the upward trend is likely to be weak. Therefore, I will enter the market when the “candle” breaks through the “cloud”, more precisely, when the second “candle” is formed above the “cloud”, then I will think about buying.
- What are the canonical rules?
- Ichimoku helps to determine the direction and strength of the trend, as well as support and resistance levels. It consists of five lines that give us an idea of the past, the present and a little about the future.
The basic rule: I never go long when the price is under the clouds. At this time, I can calmly rest, do other things. I make my first purchase with 25% of my deposit on a 10-minute schedule. The price should break through the “cloud” from the bottom up. If this happens, then I switch to the 30-minute timeframe. And I buy another 50% of the deposit. The rule is the same.
And when the price breaks through the cloud on the 60 minute chart, I invest 100% of the money. If I feel that the growth potential is great, then I take a leverage. That's the whole principle, it's simple.
- And what about other lines besides the "cloud"?
- For example, chinkou span is a lagging line. She is like an additional signal for me. I am waiting for the chinkou span to break through the "candle", and preferably two "candles". The more candles there are, the stronger the trend will be. There is tenkan - the line of rotation, and kijun - the reference line. They show the direction of the trend, the mood of the market, and sometimes I use them to set “stops”.
Let's take another look at the S&P 500. Now the value is below the tenkan, the clouds are showing a bearish trend. What is there to twitch? Let other people try to find the bottom. And when the price starts to break through the kijun from the bottom up - this is now about 1080 points, I will not even think about the "long". But if I were in the "short" now, then for me this level would be a stop loss.
Someone else's money
- Wow, the stop is quite far from the current 1060 points.
We look at the hourly chart, and if we entered the market correctly, we would sell when 1086 points are broken - the intersection of the kijun and tenkan (“dead cross”).
And stop loss at 1080 pips is fine. In a few more hours or days, tenkan and kijun will descend below. This means that the stop loss will also move.
- Do you play short?
No. Some traders spend 24 hours at the computer playing both up and down. Therefore, during the fall, it is better to rest. Which is not so bad, because sometimes you get tired of the market. I also have an agreement with clients, whose money I manage, that I play only from purchases.
- Do you still manage other people's money?
It all started with friends who began to trust their money. Then people came on the recommendation, clients from other cities appeared. To be honest, managing other people's money is easy. Responsibility wakes up, which means that more accurate signals come to mind. True, 2008 taught me a lesson. In August, my friends and I went fishing. Before leaving, I put stop-losses at the breakeven level of purchases and left. When I arrived home, I heard that there was an armed conflict in South Ossetia. Our market has sagged well. Bids were submitted, but the paper did not sell.
The portfolio losses were 20-50%. Clients called, some were nervous, some said that we were not in a hurry, you will win back. Someone took the money. Someone later regretted that they took it. Those investors who survived the 2008 crash are now happy people.
- How much money is there in management?
The amount is good ... Now I manage the amount of at least 1 million rubles.
- Do you take a percentage of the profit?
Yes, 15-20%. If the portfolio has grown more than 50% in a year, I can ask for a bonus. My money is enough for me, and I am not chasing excess. Therefore, I trade now calmly and more confidently than before. I'd rather go to the market once a month, but that's right, than wait for something incomprehensible.
I do not envy those who have earned and are earning high interest. I usually say about such people: well done! For me, a profit of 50-100% means that I did a good job. Recently I sold Gazprom for 194 rubles. The portfolio was large with good leverage. This trade gave me a good profit.
- Excellent selling price!
Then a “dead cross” sell signal was formed. At the moment, there are no long signals. The price of Gazprom on the 60-minute chart is below the "clouds", on the 30-minute timeframe the picture is the same, which means I am resting. I can safely go in for sports or other favorite activity.
I don't watch the American market, I don't watch anyone. I have many acquaintances who say: here, look there, look here, listen to these. And I don’t see that all this can help me. Sometimes I look at the MICEX index - this is an additional psychological indicator of whether to enter the market or not.
Index Predictions
- When did you start buying shares in 2009?
Open the weekly chart of the MICEX index in MetaStock and overlay Ichimoku. I used to look at the RTS index, but due to the fact that it is a currency index, it is not very correct for me. You see the "golden cross" - tenkan crossed with kijun at the end of March 2009. The index was around 800 points. For me, this was a signal or the first sign that I would start trading quietly in the “long”. The market is set to go up, a powerful figure has formed, plus it additionally used the “parabolic” indicator. He also showed a buy signal. Therefore, then I played powerfully with "shoulders" and did not pay attention to any negatives.
I do not see a break in the growth trend yet. The market stopped at the moment where all the power is concentrated. Next week, either the trend will change or not. I will watch at the end of Friday. Now we have dropped to the tenkan, which is about 1350 points, then there will be support at the level of 1252 points - this is kijun. If we break the kijun, the market will move to the upper edge of the "clouds" - around 1000 points. The market must breathe, so I would like to go down to 1252 points in order to buy cheaper by the same Gazprom, LUKoil and VTB.
-If the index drops to 1252 points and you buy, where will the stop loss be?
When I buy, I have an emotional stop loss. I put "Stop" when I need to leave. Usually, when the portfolio is completely in securities, I constantly look at the market, I use a "parabolic" or "fractal" exit.
- What "chips" do you trade?
In 2009, I traded with Sberbank for a long time, but when it grew to 50-60 rubles, I became afraid of a sharp drop in prices and realized that I just needed to take a break from Sberbank.
This year I decided to trade in Gazprom, which lags behind the entire market, LUKoil and VTB. Now these three papers are basic for me. And, for example, I don’t understand Rosneft, therefore I don’t trade it. I need a nice picture on the chart. I don't follow a lot of stocks. I usually look at 10-12 papers. If there are no signals, I rest. This is normal and calm for me. And when you trade the same stocks, there is a feeling in the bones - a feeling that it will unfold somewhere here: it will rise or fall. I don’t buy more than three or four shares. There are long-term clients who are interested in the second echelon.
At the moment I hold the shares "Razgulyaya". I bought it for 42 rubles. (now 52 rubles), I chose it because the price moves smoothly and well. I also play with Transneft, but there is low liquidity. Last year, I made 27 transactions with its shares, of which only one turned out to be unprofitable.
- What, besides trading, do you do?
I like to relax in nature, go in for sports. But in the first place, probably, I have a passion for cooking. I constantly come up with new culinary recipes. Now I am also engaged in autotrading. So far, everything is going well, but it is difficult to entrust a large amount to a robot. That's all. I found myself in this world. Active trading gives me a sense of satisfaction. Only the patient can find the right path.
ICQ correspondence and purchases
Khan(13:26:59 16/02/2010) Hello! Well, I waited for the first purchase of Gazprom today, grabbed it in the morning. There is already a profit !!! I'm sitting smoking bamboo ... I'm waiting for development ... what will happen next ... everything is according to plan :)
Oligarhist(13:31:14 02/16/2010) Hi, super!
Khan(17:05:35 16/02/2010) Well, the second game was successful !!! "Gazik" well done !!! * Yahoo * I sent you a picture ... you will see everything for yourself ...
Oligarhist(17:07:15 16/02/2010) Yeah
Khan(17:16:31 02/16/2010) Everything is simple and original ... The easier it is for me to trade, the brighter the mind.
Ichimoku deals with Gazprom shares on the XTick chart
Ichimoku is the pseudonym of the Japanese trader Goichi Hosoda. Mr. Hosoda is known for over 30 years working on an indicator of his own invention. As a result, its indicator has received worldwide recognition and is now built-in by default in all technical analysis terminals. The full name of the indicator is "Ichimoku kinko hayo", which in Japanese means "instant look at the market." The main advantage of this indicator, as you might guess from the name, is the quick analysis. Despite the fact that Hosoda published his indicator almost half a century ago, Ichimoku is still popular with traders. So I propose to talk today about how to use the Ichimoku indicator.
What the Ichimoku cloud indicator consists of
At first glance, it may seem that the Ichimoku indicator is rather difficult to use. However, the most difficult thing here is to remember the names of the five lines of which it consists:
- Tenkan line (red) - fast trend line, in fact with a period of 9;
- Kijun line (turquoise) - the average trend line, in fact, a moving average with a period of 26;
- Chikou line (green) - a retarding line based on the candlestick closing prices with a shift of 26 periods back;
- Ap Kumo / Senkou A line (orange) - the middle between Tenkan and Kijun, shifted forward by 26 periods;
- Down Kumo / Senkou B line (pink) - average price for 52 periods, shifted forward by 26 periods.
The distance between the Senkou A and Senkou B lines is shaded, thereby forming the "Ichimoku cloud".
How to use the Ichimoku indicator
Despite the common misconception, using the Ichimoku cloud is not at all difficult. In my opinion, the easiest way to understand how the Ichimoku indicator works is to compare it with other well-known indicators.
Ichimoku clouds are very similar to the histogram of the indicator for binary options, they also change their color depending on the trend. The orange Ichimoku clouds show an uptrend, while the pink ones show a downtrend. At the same time, their intersections can be considered as a signal to buy an option. Buy a call option when Senkou A (orange) crosses Senkou B (pink) up. Or buy a put option when Senkou A (orange) crosses Senkou B (pink) down.
The Tenkan and Kijun lines work according to the same logic as the moving averages. When the Tenkan (red) crosses the Kijun (turquoise) upwards, it is a bullish signal. When the Tenkan (red) crosses the Kijun (turquoise) downward, it is a bearish signal. Such signals for binary options bear the beautiful names "golden cross" and "dead cross".
Chikou (green line) looks like an indicator that is built upside down. This line shows the direction of the trend. If Chikou is above the chart, it is an uptrend, and if it is below it, it is a downtrend.
The pink Senkou B line is a kind of long moving average. Crossing the Senkou B line by the chart indicates a change in the long-term trend and is considered a very strong signal for binary options. If the chart crosses Senkou B from the bottom up, it means that the market is growing. If the chart crosses Senkou B from top to bottom, the market falls.
Thus, the Ichimoku indicator is a full-fledged trading strategy, in which it is customary to consider not so much single signals (described above), but rather a combination of several signals at once. Considering that we have as many as five lines on the chart, there can be a large number of such combinations. For example, if the chart crosses the Chikou line upwards, after which the intersection of Tenkan and Kijun is formed from top to bottom (“dead cross”), is considered a good sell signal.
Goichi Hosoda analyzed the Japanese stock market based on weekly intervals. Therefore, the initially set parameters (9,26 and 52) are best suited for long-term analysis for 2 months, six months and a year in advance. However, many traders using the Ichimoku indicator claim that these parameters are suitable for all timeframes and should not be changed.
As you can see, upon closer inspection, Ichimoku is not a very complicated indicator. It is enough to work with it for 2-3 days and you will learn to analyze the market as quickly as the famous Japanese trader did. If you have any additional questions about using the Ichimoku cloud ... as usual I am ready to discuss them by mail ( [email protected]) or in the comments to this article :)
Free download the Ichimoku indicator.
The Ichimoku indicator is a versatile indicator that simultaneously provides information on support / resistance levels, trend direction and momentum.
The Ichimoku indicator is a very powerful tool, however, many traders get dizzy when looking at all the lines and the amount of information that the indicator gives them, so they often misinterpret Ichimoku signals.
In this article, we will fully analyze the Ichimoku indicator and demonstrate step by step how to use this tool to make trading decisions.
First step: parsing the indicator
The Ichimoku indicator consists of two separate components
- Coup and standard lines. They look like moving averages, but differ from them, as you will see shortly.
- Ichimoku cloud. The cloud is the most famous part of the indicator because it is more conspicuous than anything else.
Please note that in this article we are focusing on those aspects of the Ichimoku indicator that relate to momentum and trend trading. The Ichimoku lag is deliberately omitted since it doesn't really matter.
Now let's take a look at each component separately, and then put it all together to help you find the best trading signals.
Coup and standard lines
As mentioned earlier, the flip and standard lines look like moving averages, but serve a slightly different purpose.
The reversal and standard lines show the average value of the sum of the high and low prices for 9 and 26 periods.
This means that periods 9 and 26 are used to calculate them, the highest and lowest price levels during these periods are taken, and a line is drawn through the middle of this range.
In the screenshot below, the green and red lines are the Ichimoku standard and reversal lines.
For comparison, we also plotted a 9-period moving average, marking it in white; the moving average is very similar to the reversal line, but does not coincide with it 100%.
Tenkan Sen / Reversal Line: the average of the high and low prices over 9 periods.
Kijun Sen / Standard Line: the average of the high and low prices over 26 periods.
Signals and meaning of the coup and standard lines
Reversal and standard lines serve two purposes: First, they act as support and resistance levels during a trend, just like moving averages.
Second, they provide momentum information. When the price is above these two lines and the reversal line is above the standard line, the momentum is bullish.
They are also very similar to moving averages: if the shorter moving average rises above the longer moving average, it also shows that momentum is rising.
- Reversal and standard lines act as support and resistance levels during trends.
- When the price is above these two lines, open only buy trades, when the price is lower - sell.
- Crossing two lines confirms momentum
- when the line with the shorter period rises above the long-term line, it shows an increase in bullish momentum (and vice versa);
- momentum is confirmed when price rises above two lines.
Ichimoku cloud
The Ichimoku cloud consists of a lower and upper border, and the space between these two lines is often colored green or red. Let's see what this means.
The first and faster border of the cloud is the average between the standard and flip lines.
The second, slower border is the middle between the maximum and minimum prices for 52 periods. An important characteristic of the Cloud is that it is projected into the future for 26 periods.
Again, in the screenshot below, we placed two regular moving averages next to the Cloud and used an offset of 26 (shifted the moving averages into the future).
It can be seen that the moving averages practically coincide with the Ichimoku Cloud.
Senkou A - Faster Moving Border: Between Pivot and Standard Lines.
Senkou B - slower moving border: the average of the high and low prices over 52 periods.
Important note. The cloud is shifted 26 periods into the future.
Signals and meaning of the Ichimoku Cloud
In general, the Cloud is very similar to the coup and standard lines, since its two boundaries are based on the same premises.
First, the cloud acts as a support and resistance level and also provides information on trend direction and momentum.
But since the Cloud uses period 52 (not 9 and 26), it moves slower than the coup and standard lines.
In general terms, the Cloud confirms an uptrend when the price is above it and a downtrend when the price is below it.
The area inside the Cloud is called the Noise Zone, and trading is best avoided here. When the Cloud is green, we have a strong rally, and the red Cloud confirms a strong downtrend.
Thus, the Cloud is a way of trading on longer-term trends, and this allows us to summarize the following.
- Trading with the trend is carried out depending on which side of the Cloud the price is on.
- The cloud can act as support and resistance during trends.
- The area inside the Cloud is called the Noise Zone.
Signals - how to use the Ichimoku indicator to find trades
Having received a clear understanding of what the individual components do, what signals they give and what they mean, we can move on to using the Ichimoku indicator to analyze price charts and provide trading signals.
Cloud: long-term trend, resistance and color
With the Ichimoku Cloud, traders can easily filter out long-term up and down trends.
When the price is below the Cloud, the trend is downtrend and vice versa.
During strong trends, the Cloud also acts as support and resistance boundaries, and in the screenshot below, you can see how the price continues to bounce off the Cloud during trending waves.
Thus, the cloud is ideal for filtering out the bullish and bearish phases of the market.
However, like most momentum indicators, the Ichimoku Cloud loses its relevance during a flat.
Fast signals of coup and standard lines
Reversal and standard lines are the fastest moving components of the Ichimoku indicator and provide the earliest momentum signals.
In the screenshot below, we have marked the various points with numbers from 1 to 4, and now we can look at them to understand how to use the flip and standard lines correctly.
- The reversal line rises above the standard line, which is a bullish signal. At the same time, the price is above both lines, which confirms the uptrend. The price momentarily drops back into the Cloud, but immediately meets support. This situation can be viewed as an entry point.
- The price started trying to break through the standard line (yellow), which is a warning signal of a trend change. The reversal and standard lines also crossed in the bearish direction, which once again confirmed the change in momentum. Finally, the price entered the cloud, confirming the change.
- The price forcefully moved below the standard and reversal lines, while the reversal line also crosses the standard line - both of these signals are bearish. At the same time, the price was below the Cloud. All of these signals confirm a strong downtrend and could be used to enter a sell.
- The price started trying to break the standard line, which is an early warning signal. After that, the lines of the reversal and the standard continued to intersect with each other, which once again confirmed the change in momentum. Eventually the momentum faded and the price began to consolidate sideways.
RSI and confluence of factors
In trading, the issue of confluence of factors is very important, which means combining different trading tools and concepts to create a more reliable trading method.
When exiting a trade with a trend in connection with the corresponding Ichimoku signals, you should consider several points.
- If during a downtrend the price rises above the reversal lines and the standard, this could signal a temporary change in momentum.
- But as long as the Cloud is held as resistance, the trend is not considered broken yet.
- When the price breaks above the Cloud, the downtrend ends.
- Traders can use Ichimoku for conservative and aggressive exit options:
- Conservative way out (1). A more conservative trader would exit his trades as soon as the reversal and standard lines cross in the opposite direction of the current trend. Such a trader generally avoids the increased volatility that often occurs before a reversal. On the other hand, it may miss future trend moves when the price reverses in the original direction; not all intersections of the reversal lines and the standard lead to trend reversals.
- Aggressive exit (2). A trader who wants to stay in a trade with a trend for a longer time exits the trade only after the price breaks the cloud in the opposite direction. The advantage is that in some cases it will be able to hold trending trades for much longer and will be less vulnerable to temporary corrections. On the other hand, there is a possibility that he will exit some of his trades too late and may end up losing a significant amount of his profit, because the Cloud crossing is usually very late.
Conclusion. The Ichimoku indicator is a very reliable trading framework
Overall, the Ichimoku framework is a very solid universal indicator that provides a lot of information at the same time.
As we have already shown, there are no secrets in the use and interpretation of the Ichimoku indicator, and its individual components are very closely correlated with trading using moving averages.
Nevertheless, the Ichimoku indicator definitely has its own niche, and traders who use strategies based on it get a very reliable framework.
To summarize, let's list the most important points you should know when trading using the Ichimoku indicator.
- Use the Cloud for identifying the direction of the long-term trend... Trade only in the direction of the Cloud.
- Cloud can act as support and resistance during trends. But when the price enters the Cloud, it signals a change in momentum.
- When the flip line intersects with the standard line and turns out to be on top- this can be considered a shift in the direction of the bullish trend.
- During a trend coup lines and standard act as support and resistance.
- You can trade only in the direction of the lines of coup and standard.
- The trader can either use coup and standard lines for exit trades(conservative option), or wait for the price to break through the Cloud (riskier option).
- During a flat, the Ichimoku indicator loses its strength.
There are many resources that have information on how to use the Ichimoku indicator. Mostly traditional methods, familiar to hundreds and thousands of traders. Let's just say that the Ichimoku indicator itself is quite interesting, and it is very popular in Japan for obvious reasons. But the Ichimoku Cloud strategy is popular in rather narrow circles of traders.
First, let's figure out what the Ichimoku Cloud is, after which we will figure out how it is calculated and built, and then at the end I will tell you about what strategies are based on it.
What is Ichimoku Cloud?
The Ichimoku indicator consists of three lines that function as moving averages, as well as an area called the Cloud. The Ichimoku Cloud indicator is also sometimes referred to as the Ichimoku Kinko Hayo or the Kumo cloud. Let's take a look at a regular forex chart without any indicators.
This is a common chart of the well-known EUR / USD currency pair (see which is more profitable to trade EUR / USD or USD / RUR?). Here we see a downtrend. Now let's add the Ichimoku Cloud and see what changes.
Probably, if you see the Ichimoku Cloud indicator for the first time, you might think that this is a complete mess. There are three moving averages, colored blue, green, and red, respectively. Also here you can see the Cloud, which is an orange colored area on the chart. Although for the inexperienced eye everything looks quite chaotic here, for the ishimoku trader everything will be very clear here. But let's talk about everything in order.
Ichimoku calculation
As you can see in the graph above, there are three lines and a cloud here. Since the cloud is formed by the upper and lower levels, we already have as many as 5 lines on the chart. Each of these lines serves as ordinary moving averages, but at the same time there are some differences between the Ichimoku lines and the usual SMA or EMA (see SMA Tunnel Strategy).
By default, the standard parameters of the Ichimoku instrument are 9, 26, 52. The following explanation regarding the structure of each line will bring you closer to understanding how the Ichimoku indicator works. Here, in order not to repeat myself, I recommend just reading. Therefore, I assume that you already know how the Ichimoku works, and therefore let's go straight to the strategies based on the use of the Ichimoku Cloud.
Trading using the Ichimoku indicator
Now that we already know the structure of the cloud on the chart, let's go through some of the Ichimoku trading signals. It is probably worth noting right away that using stop losses is the first thing to do in any trade. You can read about how to place stop losses and take profits.
As for the Ichimoku Cloud, here I will not suggest any special places for placing protective orders. They need to be placed at a distance based on an analysis of the current volatility level so that the price does not knock them out under normal market fluctuations. For the Ichimoku trading strategy, we will need to use the indicator lines to close our trades faster than if we use stops fixed at a certain level. Let's take a look at several trading strategies based on the use of the Ichimoku Cloud.
Ichimoku Cloud - Kijun Sen Strategy
In this strategy, we will enter the market when the price exits the cloud. We will enter in the direction of the breakout trying to catch the trend. When the price after the breakout continues to move in the given direction, we will remain in an open trade until the price breaks the blue Kijun Sen line in the opposite direction. Below you can see how this strategy works.
This is the daily chart of the GBP / USD currency pair for the period July 2014 - February 2015. The image shows a classic downtrend that can be traded using this Ichimoku pattern.
On the chart, we see that the price began its movement under the Ichimoku cloud, which is colored in orange. This gives the trader a sell signal and subsequently the price goes into a bearish trend. The decline in the trend is quite sharp. On the way down, the price creates several corrective moves, during which the price almost breaks out the blue Kijun Sen. However, the resistance is strong enough and the price continues to move down. The black arrows on the chart show when the price is testing Kijun Sen as resistance. After the breakout attempts have been unsuccessful, one should continue to trade short positions.
Six months after the first reversal signal, the price breaks out and closes above the Kijun Sen line. This creates a signal to exit an open short position. You need to close at the candlestick that broke through the Kijun Sen and closed below its line.
Also interesting strategies:
Cloud - Chinoku Span - Tenkan Sen Ichimoku strategy
In this strategy, we will enter the market when the price breaks the cloud. We will open trades in the direction of the breakout of the Ichimoku cloud, trying to ride the trend. After the price starts moving in our direction, we will remain in the market until the green Chinoku Span breaks through the red Tenkan Sen. It works like this:
Here we have a chart of the EUR / USD currency pair for the period from April 26 to May 4, 2016. The Ichimoku indicator is also present on this chart.
On the chart, everything starts with the breakout of the Ichimoku cloud and the beginning of a bullish trend. The green circle marks the candles that closed above the cloud. We can use this buy signal from the Ichimoku cloud to enter the market for the EUR / USD currency pair. As you can see in the chart, the price starts to move up shortly thereafter.
Now we need to follow the green Chinoku Span line. We see that the upward movement begins. During the upward price movement, the green Chinoku Span line gradually moves away from the price. This confirms the strength of the bullish trend.
A week after the start of this movement, the price forms a top, after which a sharp decline begins. This can also be seen by the formation of the green line. After reaching the top point, the price begins to move downward, with enough force to draw the green Chinoku line under the red Tenkan Sen. According to our ischimoku cloud strategy, this is a close signal.
Other interesting strategies:
Ichimoku Cloud Strategy
It is possible to trade exclusively using the pure cloud ishimoku strategy. We will enter the market when the price breaks through the cloud and our trade will be in the direction of the breakout. We will keep the trade open until the price breaks through the cloud back in the opposite direction.
This is a 4-hour chart of USD / JPY from March to April 2016. Here you can see that the market is in a downtrend phase. And then we will simply follow the rules of trading according to the Ichimoku Cloud strategy.
In the image, the situation begins when the price rises above the Ichimoku cloud, and then quickly returns back below it. A breakout below the Ichimoku cloud can be used to open a short position on the USD / JPY currency pair. As you can see, further the price starts to fall. The price drop occurs quite sharply and the USD / JPY currency pair begins to lose about 4.5% of its value.
After the price hits the bottom, a period of consolidation begins (see the ADX indicator - an excellent tool for determining the strength of a trend), and after that, an upward movement back into the Ichimoku cloud. After a brief hesitation at the bottom of the cloud, price finally breaks it in a bullish direction. This is a very strong signal to open a long position. The short position should be closed when the candlestick closes above the Ichimoku cloud.
I think you've noticed that the cloud is the most lagging element in the Ichimoku strategy. Therefore, the ichimoku cloud trading strategy works best when the currency pair is trending, but on the other hand, this tool can give you a lot of false signals when the price is in consolidation.
When the price is in a period of consolidation, you will most likely often see price jumps above and below the Ichimoku cloud, creating a lot of false signals.
I would also like to draw your attention to the fact that for these strategies described above, I used exclusively the Ichimoku indicator and nothing more.
As far as I have heard from the information on the forums, traders from Japan and other eastern countries rely solely on this indicator for trading.
In addition, you probably noticed that each strategy used the Cloud component. This is because the Ichimoku cloud is the most important part of the Ichimoku indicator. Clouds are used to open trades when trading with the Ichimoku indicator.
Other interesting strategies:
Ichimoku indicator settings
The Cloud tool is fully customizable. You can remove or add components to the indicator at any time in order to choose an option that suits your trading style.
If you are trading using the Ichimoku Cloud strategy, then your Ichimoku indicator should be configured to look like this
Here you can see that we only have the cloud as part of the Ichimoku indicator. I removed Kijun Sen, Tenkan Sen and Chinooku Span. If you prefer to trade using only the cloud for this, then this is a good way to visually see what it will look like. This also applies to other strategies that I talked about today.
If you trade using the Ichimoku cloud and the blue Kijun Sen, then your chart may look like this
As you can see, there is no red Tenkan Sen and green Chinkou Span here.
And this is how the third option will look like, where we will use the Ichimoku indicator.
In this case, Kijun Sen is missing. At the same time, the red Tenkan Sen and Chinooku Span have been added here. If we use this strategy, we get a clearer picture.
As you can see, the Ichimoku indicator can fully adapt to our needs. You can remove or add components to the indicator at any time. Also, if you are testing an automated trading system based on Ichimoku, you can always change the periods of individual indicator components in order to adapt it to your trading as much as possible. But when testing, it is undesirable to fit the data to the indicator in order to avoid errors.
In conclusion, it can be noted that in practice, strategies based on the ishimoku indicator are among the least used, but this is certainly a very useful tool that is available for trading in the Forex market.
