ICHIMOKU TRADING
Contents
Introduction to Ichimoku trading strategies 3
What are Ichimoku trading strategies? 3
History Ichimoku 4
Goichi Hosoda 4
2. It enables you to quickly pick up trading setups ‘at a glance’, including the immediate understanding of
direction of price movement, the sentiment, momentum and the strength of the trend.
3. Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable
price action. This technique combines three indicators into one chart, allowing the trader to make the
most informed decision.
4. Ichimoku is a trend trading charting system. That means it works better in the good trending markets. It
helps you to find the trend of the movement, so you will have good understanding of the direction of
the price movement in general.
5. Take advantage of false breakouts at great prices with Ichimoku helping you to catch moves in the
direction of the trend on the time frame that you’re trading.
Goichi Hosoda
Ichimoku was developed by a Japanese journalist named Goichi Hosoda. Goichi was an extremely talented
yet quiet man who he spent most of his days locked away writing and reporting on the old Japanese rice
trading markets. He understood how price moved and how it would react around certain areas of a chart.
He soon discovered that the price of rice followed certain rules and the “reactions” that were due to what
we now know today as Support and Resistance. Goichi’s aim was to create an ‘all in one indicator’ that would
help him view and analyse the charts in more detail but in less time.
After 20 years of work, he finally published his book in 1968 with the final version of the the ichimoku kinko
hyu charting method and presented his book to the Japanese public. By this time it had been tested and
used successfully to trade currencies, commodities, futures, and stocks. It rapidly became the most frequently
used indicator in all the Japanese trading rooms.
There are 5 major components of 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.
What should we get when setting up the parameter? The default Parameter Settings are 9, 26, 52. This can
be changed to tailor your needs. The higher the parameter setting you 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 combination. So you can use it without any change. It will suit all of different time
frames.
Step 1:
Go to Navigator->Indicator->Ichimoku Kinko Hyo
Step 2:
Now Click on the Indicator from the Navigator Tree and Set the Parameters 9, 26, 52
Step 3:
Now set the colour settings for Ichimoku parameter as shown in the graphs in this book. We are not
interested with the Ichimoku parameters like Tenkan-sen, Kijun-Sen, Chinkou Span so we turn off the colour
by selecting NONE. We are interested only with the parameters Up Kumo (Blue) and Down Kumo (red). Now
Press Ok and your Ichimoku Chart is ready.
Strategy One:
Cloud – Trend confirmation
Buy when price is above the cloud
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 the good
understanding of the market and trend in general.
Strategy two:
Turning (fast) Line and Standard (slow) Line
Once you have bias of trend, you can trade with 2 lines: Fast line and Slow line.
Fast line is calculated based on 9 recent data while the slow line is calculated based 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 colour and the slow line is in the brown colour. The one of the easiest way to locate the
fast line is that when the market is in the sideways, the fast line is always closer to the price (the candle) 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 the 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 crosses
along with the direction of the cloud.
Strategy three:
Lagging line – confirm the entries with lagging line
(a). When the lagging line is above the cloud, only looks for buy signals
(b). When the lagging line is below the cloud, only looks for sell signals
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 any opportunity. They will be patient enough
and wait for Strategy 3 happens. As the picture shows below, even when strategy one (Price Vs Cloud) does
not hold, the strategy three (Lagging line) still hold.
Strategy three:
Lagging line – confirm the entries with lagging line
Support valid
Support failed
Support valid
Exit - When you enter the long trade using strategy 2 (2 lines cross), then you can exit the long position when
these 2 lines cross again but in the opposite direction. If you enter the long position when using strategy 1
or 3, then you can exit the long trade when the price or lagging line crosses the cloud to the other direction.
Stop loss – The fast line, slow line or the cloud can be a potential support or resistance. Once the support
or resistance is broken, the price can have a momentum, so it will may moving towards the next level of
support or resistance. So, you can place the stop loss order at the other side of the cloud, or the other side
of the fast line or slow line. Once the stop level is reached, exit the trade without hesitation. Also, when you
long the pair, the stop loss can be a few pips below the recent low price level. When you short the pair, the
stop loss can be a few pips above the recent high price level.
a. If the price is above the cloud - only looks for a buy signal, then Buy when fast line crosses above
the slow line
b. If the price is below the cloud - only looks for a sell signal, then Sell when fast line cross below
the slow line
3. Profit Target - 1. When fast/slow lines cross or, 2. price break the slow line
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 Japanese language contains the meaning of being able to understand the 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.
Summary
Ichimoku trading system is a sophisticated trading indicator that contains lots of trading strategies. It has 5
members as mentioned earlier. Each of 2 components can be used to compare with each other to generate
a meaningful trading strategy. These three strategies mentioned in this book are commonly used and
understood by lots of successfully traders. However, they are only the tip of 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.
“Give a bowl of rice to a man and you will feed him for a day. Teach him how to grow his own rice and you will
save his life” - Confucius
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