The Ichimoku is an indicator that provides information about dynamic support/resistance, trend direction, momentum, and volatility in one chart. It is a powerful trading indicator, but many traders often misunderstand the signals due to its overwhelmed information. In this article, we will talk about the Ichimoku indicator and its trading strategies.
June 23, 2020, | AtoZ Markets – The Ichimoku indicator is not quite easy to understand at a glance, and many traders find it a little scary. But, Mr. Gochi Hosoda, a Japanese journalist, built the indicator with more than 30 years of research experience to provide everything that a trader needs to know about the market just by looking at the chart.
What Is the Ichimoku Indicator?
The Ichimoku is a set of indicators that show support and resistance as well as momentum and trend direction. It is also called as Ichimoku Kinko Hyo means “one look equilibrium chart.” It is designed as traders can determine trend direction and potential trade signals at a glance. The indicator consists consisting of 5 moving averages lines and a Cloud. Each line has its own unique formula for calculation:
Tenkan-Sen line (Conversion Line)
It is calculated using the following formula: [(9-period high + 9-period low) / 2].
Kijun-Sen line (Base Line)
It is calculated using the following formula: [(26-period high + 26-period low) / 2].
Chiou Span (Lagging Span)
It is plotted the closing price 26 periods back
Senkou Span A (Leading Span A)
It is calculated using the following formula: [(transform line + baseline) / 2].
Senkou Span B (Leading Span B)
It is calculated using the following formula: [(52-period high + 52-period low) / 2].
The default parameters of the indicator are 9, 26, 52, but traders can configure these parameters according to their preferences. Senkou or leading Span A and B compose a cloud where the difference between the two lines is shaded in. The cloud provides support/resistance levels.
If leading Span A is above B, the cloud will be shaded green. It gives an uptrend signal. On the other hand, if leading Span A is below B, the cloud will be colored red. It gives a downtrend signal. Moreover, when the price is above the cloud, it signals an uptrend. Conversely, when the price is below the cloud, it signals a downtrend. When the price is in the middle of the cloud, it signals the ranging trend.
The cloud also indicates a strong and weak trend. When the cloud is small, the trend is weak. Conversely, when the cloud is big, the trend is strong. Traders can identify the trend by only looking at the color of the cloud.
During the convention line and baseline crossover, if convention line is above the baseline, it also gives a bullish signal. If the convention line is below the baseline, it provides a bearish signal. However, when the price is far away from the Conversion Line or base Line, it signals weak momentum. When the market is ranging, conversion Line, base Line, and Lagging Span will be in a dense cloud.
Ichimoku Trading Strategy: Step by Step
Traders often compare the Ichimoku indicator to the moving average. But the Ichimoku indicator is more dynamic than moving average. It can detect the changes in support and resistance level more sufficiently.
The indicator is useful for both day traders and scalpers. It helps the traders to make quick decisions. Some traders look for crossover to determine trend reversal. And traders also combined the indicator with other technical indicators to get better information about the support and resistance. Now we will show a very simple Ichimoku trading strategy for a beginner.
Step # 1
First, Traders have to wait for the price to break through and close above the cloud. It gives a bullish signal. If the price closes below the cloud, it provides a bearish signal. And the price breaking through the cloud could be potential to start a new trend.
The cloud highlights support and resistance level. When the price breaks the cloud, it gives a potential strong trend signal. But traders have to wait for more layers of confluence before starting a trade.
Step # 2
Secondly, traders have to wait for the Conversion Line and the Base Line crossover above/below the cloud. If the Conversion Line is above the Base Line, it gives a strong bullish signal. If crossover happens below the cloud, it provides a strong bearish signal.
Some traders only use crossover or cloud for the Ichimoku trading strategy. But we use both as an extra factor of confluence before placing a trade. Once the above two conditions are fulfilled, traders can look for a trade. Now, traders can buy/sell an asset at the next candle opening.
Now, traders have to set a stop loss to reduce the loss. An ideal place to put the stop-loss order is below the breakout candlestick. The trader can also use trailing stop loss below the cloud. It can reduce the loss.
Lastly, traders can take profit and exit the trade at the Conversion Line and the Base Line crossover. Alternatively, traders can take profit after the price breakthrough the cloud. But it probably reduces or increases the profit. If it reduces the profit, traders have to prepare for that. To get more, sometimes, traders need to be prepared to lose part of the profit.
Ichimoku Bullish Rules
- Price above the cloud.
- Conversion Line over base Line.
- Lagging Span over the candlesticks.
- Green Cloud (Leading Span A Above Leading Span B).
Ichimoku Bearish Rules
- Price below the Cloud.
- Conversion Line below base Line.
- Lagging Span below the candlesticks.
- Red Cloud (Leading Span A Below Leading Span B).
In general, the Ichimoku is an excellent, multi-functional indicator that gives a lot of information about the market at once. It is a little different than other technical indicators, but it is easier to find the proper dynamic support and resistance level. The above mentioned trading strategy is also an excellent way to identify trends and make a profit from trading in any market at any time frame.
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