Kumo Breaks & Reversals with the Ichimoku Cloud

Using the Ichimoku Cloud to discover Reversals The most unique thing about the Ichimoku cloud is the actual cloud/kumo.  By itself, the kumo was created to represent support/resistance, but seen through the lens of them being evolving or dynamic, and not static like pivot points, Fibonacci lines, support lines or trend lines. The inventor (Hosada) saw that support/resistance was evolving and actually based upon the previous price action. Specifically, Hosada had great concern with the highs and lows (along with the closes and opens) of previous price action which exhibited levels of rejection where the market would not accept price. The prior highs and lows also give traders the range where the market accepts price. The construction of the Cloud/Kumo will illustrate how the Ichimoku Cloud represents support and resistance. Kumo Composition The Kumo is comprised of two key lines referred to as the Senkou Span A and Senkou Span B. Herein, we will refer them to as Span A and Span B respectively. The space enclosed between these two lines is what forms the cloud/Kumo. Span A is generated by finding the average of the Tenkan Line (TL) and the Kijun Line (KL), and placing it 26 periods ahead. The formula is; (TL + KL)/2 plotted 26 periods ahead. Span B is created by finding the average of the highest high (HH) and lowest low (LL) over the last 52 periods and plotting it 26 periods ahead. The formula is; (HH + LL over the last 52 periods)/2 and plotted 26 periods ahead. Before we proceed to the construction of the Kumo, we need to understand the Tenkan and Kijun lines which help in forming the ever changing Span A. The Tenkan Line (TL) or Tenkan Sen (Sen Meaning line in Japanese) is also known as the conversion line or turning line. It is similar to a 9SMA but actually very different. A simple moving average (SMA) smoothens out all the data and makes it equal but the TL takes the highest high and lowest low over the last 9 periods. Hosada felt that price action and its extremes were more important than smoothing any data. The chart below shows the TL being quite different from the 9SMA. The TL reflects price better and is more representative of it, since it uses the price instead of an averaging or closing prices.   The Kijun Line (Kijun Sen) is also known as the datum line, standard line or trend line formed to show the overall trend for the pair. The formula behind it is the same as the TL using price action and the highest high + lowest low with the difference being in the periods only; it does...

Read More

Introduction to the Ichimoku Cloud (or Ichimoku Kinko Hyo)

The Ichimoku Cloud (or Ichimoku Kinko Hyo) was developed by Goichi Hosada in Japan. His research started in the 1930s, but was halted by the world war.  He eventually completed it in 1968 whereby he published a 1000 page, 7 volume body of work. When he did so, he did it under the pen-name Ichimoku Sanjin. The Ichimoku Cloud as a strategy and method for trading all instruments, is still growing in the Western and European regions. Although it was originally built for the Japanese stock markets, it has since spread into the trading world at large, including Commodities, Futures, Options and the Forex markets. The Ichimoku Cloud has been effective in its ability to find trends and reversals before they actual begin, so quite a powerful tool for trading. The Ichimoku Cloud Components The Ichimoku Cloud entails several components which enhances its versatility and uses. There are several main lines (5 in all).  The first two we will discuss will be the Tenkan-Sen (Sen = Line) and the Kijun-Sen. The Tenkan Line/Sen (TL) is also referred to as the conversion line or turning line. It looks similar to a 9SMA, but is actually quite different. A Simple Moving Average (SMA) smoothens out all the data and makes it equal while the TL takes the highest high and the lowest low over the last 9 periods. This means it is based on the price action, but also includes volatility. The chart below shows the TL quite different from the 9SMA. The TL is more representative of the price and reflects it clearly as it uses price instead of an averaging or the closing prices. As you can see below, the TL flattens in small quotas to move with price and its moments of ranging. Another important aspect is the angle of the TL. The sharper the angle, the stronger the trend and momentum is, while the weaker the TL angle, the flatter/lesser the momentum of the move. Often times during a trend, it can act as the first line of defense or support in a trend. The breaking of the TL in the opposite direction of the move is often a sign of the trend weakening. The Kijun Line/sen also known as the datum line, standard line or trend line formed to indicate the overall trend for the instrument or pair. The formula behind the Kijun-Sen is the same as that of the TL, using price action and the highest high + lowest low with the only change being in periods as it does over the last 26 periods. Just as the TL, the angle of the Kijun Line mirrors the overall trend of the market. If the price...

Read More

Using Ichimoku Charts In Forex Trading

The technique of Ichimoku Kinko Hyo is relatively recent among traders, but its use is steadily increasing mostly in the forex market , thanks to the ability to generate a higher probability of winning trades. Its diffusion in the forex market follows the already consolidated one of the stock and futures market and owes its success to the synthesis of various indicators able to formulate clear trading strategies and, above all, with a high probability of success. In one chart, we can see 5 indicators capable of generating precise trading signals, under certain conditions. Let’s see in details how the Ichimoku technique works and how to apply it to a trade. UNDERSTANDING ICHIMOKU Before going into details, here is a brief history of this trading methodology. The Ichimoku system was invented by a Japanese journalist, Goichi Hosoda, who spread in 1968 a rather original trading system (Ichimoku Kinko Hyo) compared to those already known. The success that several Japanese traders got using this technique created the conditions for its spread in the world trading room. Although seemingly complicated due to the presence of many lines and indicators in a single graph, this technique can be easily assimilated with the operational practice, making the interpretation of the graph even easier. Basically, the technique of the Ichimoku cloud is based on the trend of 5 main components and represents a great tool of analysis for a volatile market such as the forex. The first two indicators that we are going to look at, and that should always be monitored together, are the Tenkan Sen and the Kijun Sen. Their interpretation and practical application is the same as a classic crossing of moving averages, but they offer a greater filtering of false signals. Let’s see how these two indicators are created: Tenkan Sen: the sum of high and low, generally concerning the last 9 periods taken into consideration, divided by two; this line is the most reactive one among the indicators of the Ichimoku technique. Kijun Sen: the sum of the high and low, generally concerning the last 26 periods taken into consideration, divided by two. The method of calculation is therefore the same one as the Tenkan, but, obviously, as it considers a longer period of analysis, it has a greater stability. What a trader really needs are clear signals to open a position, and what the movement of Tenkan and Kijun Sen offer is very similar to the signal provided by a crossing of moving averages. Let’s now see a practical example in Figure 1: the daily graph of EURNOK shows a clear cut of the Tenkan Sen (black line ) compared to the Kijun Sen (red line) at point...

Read More