The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a versatile manual trading indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku is also a trading system that works with all time frames on all instruments. Here is an introduction to Ichimoku indicator and 3 Ichimoku trading strategies.
Ichimoku gives a trader good understanding of the markets and assists in discovering high probability forex trading opportunities ‘at a glance’ so that in a few seconds you are able to determine whether a tradable trend is present or if you should wait for a better set-up on a specific currency pair. Ichimoku can be used in both rising and falling markets and can be used in all time frames for any liquid trading instrument. The only time to not use Ichimoku is when no clear trend is present.
Continue reading or start playing in a demo account and see in real-time how Ichimoku Kinko Hyo works.
There are 5 major components of the Ichimoku system, used together to form an integrated ‘whole’ picture of price action. Each part is calculated using certain mathematic models. The calculation itself is not important. You need to concentrate on how to use each part of the system.
Following are the key components, let me introduce them one by one:
Again, please just remember there are 5 components of the Ichimoku system. Please do not panic if you cannot remember how each part is calculated.
This indicator has three parameters:
What should we get when setting up the parameter? The default Ichimoku Kinko Hyo Parameter Settings are 9, 26, 52. This can be changed to tailor your needs. The higher the parameter setting you to change to, the more noise it can filter out. The downside is that while it will clarify a good trading opportunity, it does so later than when using the default Parameter Settings. The founder tested various combinations of the parameters and he believed 9, 26, 52 is one of the best combinations. So you can use it without any change. It will suit all of the different time frames
As the picture below shows, when the price (the candle) penetrates the cloud from the bottom, you can trade the pair long, or buy. If the price penetrates the cloud from the top, you can trade the pair short or sell. When the price (candle) is above the cloud, it means this pair is still in the upward trend and when the price is below the cloud, it means this pair is still in the downward trend. This strategy gives trades a good understanding of the forex market and trend in general.
Once you have a bias of trend, you can trade with 2 lines: Fast line and Slow line.
The fast line is calculated based on 9 recent data while the slow line is calculated based on one recent 26 data. Therefore, when price moves, the fast line moves more quickly than the slow line does. In the picture below, the fast line is in pink color and the slow line is in the brown color. One of the easiest ways to locate the fast line is that when the market is in the sideways, the fast line is always closer to the price (the candlestick) than the slow line is. So the second strategy is that when the fast line crosses above the slow line from the bottom, you can buy this pair. When the fast line crosses below the slow line from the top, you can sell this pair. You can use this strategy 2 separately, however, if you can find an opportunity that strategy one mentioned earlier gives you some indication as strategy 2 gives you, you potentially have a higher probability trade opportunity.
As the picture shows below, all the blue shades show the strategy 2 applies - 2 lines cross along with the direction of the Ichimoku cloud.
The lagging line provides extra confirmation. Lagging line is a magic line as it gives more probability then Strategy one when you only compare the price with the cloud. Lagging line works as an extra confirmation indicator so some traders may only trade when lagging shows there is an opportunity. They will be patient enough and wait for Strategy 3 to happen. As the picture shows below, even when strategy one (Price Vs Cloud) does not hold, the strategy three (Lagging line) still hold.
Ichimoku Kinko Hyo system also has some unique method of how to exit and how to place a stop-loss order to protect your trade.
1. Price Vs Cloud
2. Use the lagging line to confirm the trend
3. Profit Target - 1. When fast/slow lines cross or, 2. price break the slow line
4. Stop Loss - recent low
Let us have some tips so we can use the Ichimoku system with higher performance.
The thicker the cloud, the stronger the support and resistance is. Once you see the cloud is thick, you will tell yourself that the support and resistance might hold. Once you see the cloud is very thin, it might hint that the support and resistance will not hold strongly, so the price can cross the cloud easily.
The further the fast line deviates from Slow lines, the higher the chance that the price will come back to consolidate. Do you chase the trade! If the price has moved away from the slow line or fast line, better to wait for the price to come back and then discern the market again before taking proper action.
The name of Ichimoku in the Japanese language contains the meaning of being able to understand the forex market within ‘a quick glance’. You should see the opportunity in a few seconds. If you tried so hard and not able to find the proper trading opportunity, the do not trade. Go to another pair or timeframe, and you may be able to locate a better opportunity.
The Ichimoku trading system is a sophisticated forex indicator that contains lots of trading strategies. It has 5 members as mentioned earlier. Each of the 2 components can be used to compare with each other to generate a meaningful trading strategy. These three strategies mentioned in this article are commonly used and understood by lots of successful traders. However, they are only the tip of the iceberg.
If you wish to know more about the Ichimoku trading system strategies, you can contact our office, and we will be able to help you.
Understanding how to use Ichimoku Kinko Hyo correctly is important, but if you want some help, download MetaTrader 5 for a useful Ichimoku toolkit and our trainers can provide you the right guidance. Play around in a demo forex account and notice how the Ichimoku indicator can make you serious money.