The Kumo Break

The Kumo break is one of the strategies that traders can use to make profits trading the Ichimoku. The basis of this strategy is on the break of the area known as the “kumo” or cloud by the price action of the asset.

One of the ways in which the Ichimoku Kinko Hyo is used to trade the forex market is by finding trends and identifying reversals. The kumo component of the Ichimoku is one of the features used in trend identification as well as identification of reversal points. The kumo is the area located between the two Senkou lines, (i.e. Senkou Span A and Senkou Span B).

The Kumo break is basically used for trading reversals with the Ichimoku Kinko Hyo. As a reversal strategy, the best way to look at the Kumo is as an area that can function as a support or resistance. When prices are in an uptrend, the Kumo will serve as a support area and when there is a downtrend, the Kumo will function as a resistance zone. The thickness of the Kumo is what determines the ease with which it can be broken. In other words, it is easier for a Kumo break to occur if the Kumo area is thin, than when it is thick.

The position of the price action of the forex pair or instrument, relative to the Kumo determines the current trend. If the price is above the Kumo, the instrument is in an uptrend, while a downtrend is in place if the price of the asset is below the Kumo.

Therefore, in order for a true reversal to be in place, the price of the asset must change sides, with the price previously above the Kumo breaking the Kumo to go below it, and a price located below the Kumo breaking it to the upside for a bullish reversal.

Just as is the case with any other strategy used to trade reversals and breakouts, there are parameters that are used to gauge the strength of the break of the Kumo.

a)      If the asset has been in a trend for a long time, a break of the Kumo to the opposite side is more likely to last for a long time.

b)      A break of a thick Kumo is a more reliable signal of a break; the thick Kumo is more likely to resist any attempts by the price of the asset to return to the side of the Kumo it is coming from.

c)      Longer time frames will produce better signals and a greater number of pips.

The chart below for the EURAUD illustrates the Kumo break, which in this case was from a prior downtrend to the upside.

Kumo Break

 

We can see the previous downtrend, and the point at which the Kumo was broken. The chart is a 4hour chart, and the Kumo is fairly thick, which satisfies the conditions for the Kumo break trade.

Usually, the price of the asset will attempt to return to where it is coming from. This is where the thickness of the Kumo makes a difference. A thin Kumo is easily broken again, thus negating the signal. But in our example, the thick Kumo which was a resistance now acting as a support, resisted two attempts by the price to return to the underside of the Kumo (two yellow circles). This is where the trader should enter the trade; at the point where the asset’s attempted return is blocked by the Kumo.

As we can see, the asset continued to move upwards and yielded a lot of pips in this trade. This is an easy way to trade the Kumo break and if the trader remembers the rules, the trade will work out well all the time.