The Ichimoku technique is increasingly followed by traders for its concreteness and especially for its ability to filter the volatility of supports and resistances. Its fame is mainly due to the presence of the “cloud” in the graphs that are using these indicators.
Traders who make extensive use of this technique find in the cloud an excellent graphical indicator to identify in advance and quite clearly the future levels of support / resistance of the market.
But that’s not all: there are other factors in favor of this technique that allow the trader to effectively manage supports, resistances, entry and stop levels.
For those who still do not know this technique, here are the five main indicators of Ichimoku:
- Tenkan Sen (trigger line): it’s the sum of the highest value and the lowest one divided by 2 for the last 9 periods. This line represents the fastest moving average and it is used in contrast with the Kijun Sen: for this reason it is also called signal line;
- Kijun Sen (base line): it’s the sum of the highest value and the lowest one divided by 2 concerning the last 26 periods. As it is the slowest moving average, it is defined baseline or standard line;
- Senkou A / Leading Span A: it’s the average value of Tenkan and Kijun Sen divided by 2 and moved forward by 26 periods;
- Senkou B / Leading Span B: it’s the average value of the highest price and the lowest one of the last 52 periods divided by 2 and moved forward by 26 periods.
The two lines, Senkou A and B contain within them a colorful space defined Kumo or cloud. Some traders prefer to differentiate the color of the cloud depending on where the Senkou A and B are placed, in order to get an immediate impact on the current trend. Usually, when the cloud is colored in red, the Senkou B is positioned above the A and then the trend is bearish. Vice versa, when the color of the cloud is green, the Senkou A is placed above the B, witnessing a bullish trend with prices above the 52-weeks average. Other traders prefer to keep a single color instead of relying on the extreme Senkou line, to have an immediate graphic impact of the market trend.
The fifth important indicator is represented by the Chikou Span. This line measures the current price back by 26 periods, an important data if we want to understand what trend is dominating the market.
The opening of a long trade requires five basic requirements:
– The price should be positioned above the Kumo cloud
– The Tenkan Sen should be placed above the Kijun Sen
– The Chikou Span (hence the price of 26 periods ago) must be placed above the price
– The Kumo projected forward must have an increasing trend with Tenkan above the Kijun
– The price should not be exceed 150-200 pips higher than the Tenkan Sen to avoid an entry on a volatility peak.
The XAUUSD trend is particularly negative when viewed from the beginning of the year due to the probable tapering that the Fed will adopt. However, since the end of June, the price of gold has risen and has started to provide some reversal signals. As an example, let’s see the graph of XAUUSD to check how some long entry conditions are met in order to try an entry.
Prices has risen above the Kumo, the Tenkan is higher then the Kijun, the projected Kumo trend is rising and finally the Chikou is positioned above prices corresponding to 26 periods ago and also above the cloud.
As always happens, the trade has to be better. The long entry can be made on the return of prices on the Tenkan by placing a stop at the prices break point of the Kumo.
Another example that help us understanding how to make a clear and definite trend: EURNOK is in the bull market from early 2013 and the prices test with the lower wall of the Kumo becomes an exemplary long entry opportunity. The last case of August 2013 was particularly profitable for the trader who could also count on the strength of the support of 7.76 on July 29th. If 7.76 is the ideal stop-loss of a long EURNOK operation, when should we enter long after this correction? Let’s come back to the five above mentioned requirements.
The price has not dropped below the cloud and a few days later it has risen above, with the Senkou that cuts the Kijun upward. The Chikou is not a problem as amply above the entry level and neither is the trend of the cloud moved forward by 26 periods with a clear bullish inclination. At that point the buy EURNOK was a must and the next result has been a great success.
A last consideration regarding long-term trades based on weekly charts. We can quote USDZAR, whose trend is being upward for several quarters now. The interesting element of the Ichimoku technique is the ability to provide valid information about the health state of a trend. In this case, for USDZAR the golden rule was to remain long whilst increasing the exposure each time the prices went up above the Kijun line. When we find this sort of correction without all the other available indicators showing uncertainty, then there are high chances of success even within a long-term trend.