Make Money Using Ichimoku Kinko Hyo

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Ichimoku Kinko Hyo + Volume

Today I am going to explain you what is Ichimoku Kinko Hyo and how to trade it. Moreover, I will show you how I trade a combination of Ichimoku Kinko Hyo with volume spread analysis as I said in my previous articles. Ichimoku is an indicator and there is in every platform. So, just look for it in the indicator’s list and drop it to your chart. First of all, take a look in the first screen shot about how this indicator look like.

This chart is from EURUSD currency pair and I use only the Ichimoku and the Better Volume Indicator. I am working in a 5min chart. The first thing you will notice it’s obviously the cloud. This is Kumo. The upper line of Kumo is senkou span A and the other one the senkou span B. The blue line which look like a moving average is the Kijun and the red one the tankan. Last, the green one is the chinkou. So, the whole thing is the “Ichimoku Kinko Hyo”. Maybe you are confused right now but I am going to explain how this complicated thing is a very strong tool for the technical analysis.

There are many theories and trading systems around this indicator and I will tell you the basics and how I use this with volume and price action. First of all, you should know that Ichimoku works better in trending markets and If you are able to catch a trend from the beginning in financial products like Spread Bets, Spot Forex you will earn good money. You can also use it in Binary Options but I recommend longer expiries.

If the price is above the Kumo there is a bullish activity in the market and an up-trend. If the price is below the Kumo there is a bearish activity in the market and a down- trend. Some traders are waiting for a Kumo’s break. Maybe, it will be the beginning of a new trend. Take a look.

In the first blue box the price broke the Kumo and we have an up- trend. In the second blue box the price broke the Kumo (senkou B) and we have a mini- down trend.

Another theory for the Ichimoku is about the Tenkan- Kijun Crossovers. When the tankan(the red) is above the Kijun(the blue) we have a bullish market. On the other hand when Kijun is above Tenkan there is a bearish market. So, with a crossover of these two we can take long or short signals.

In this screen shot you can see a crossover and after it the Kijun is above so we have a short signal.

Some traders use Ichimoku to identify supports and resistances. Many of them use the chinkou as a S&R. Notice the above chart, some minutes before the blue box. The price is moving down and the chinkou(the green one) acts as a support. Other traders, use the Kumo lines (senkou A and B) as S&R especially when the price fails to break the kumo the first time and it creates a S&R inside the Kumo.

I’m around in the forum so any questions hit me up there!

Ichimoku Kinko Hyo Strategy

Ichimoku Kinko Hyo Strategy or Ichimoku for short is a complete trading system developed by the Japanese. In English, the term Ichimoku Kinko Hyo refers to price in equilibrium. The Ichimoku trading indicator is a complete trading system in itself and has been widely used since its discovery decades ago. At the outset, the Ichimoku trading system is a trend following strategy and therefore works best in trending markets. However, since its discovery, traders have come up with various methods to trade the Ichimoku trading system.

In this article on Ichimoku Kinko Hyo, we revisit the original trading rules as the system was supposed to be traded. For best results, it is ideal to make use of the Ichimoku Kinko Hyo Strategy on a daily chart and higher, but even H4 works best. It is not recommended to trade the Ichimoku system on lower time frames especially when the markets are ranging sideways and there is no clear trend established.

As obvious by now, the Ichimoku trading system requires a lot of patience and is suitable for swing trading, when applied according to the original rules. It is therefore not recommended for all traders and definitely not for intraday scalpers.

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What is the Ichimoku trading system made up of?

The Ichimoku trading system or indicator comprises of the following indicators:

Chikou Span: This is nothing but price projected 26 bars ago as a line and is used to indicate if current price is above or below price 26 bars ago

Tenken Sen: The Tenken Sen is a 9 period moving average. It is calculated as a 9 period average between the highest high and the lowest low.

Kinun Sen: The Kijun Sen is a 26 period moving average calculated by the highest high and the lowest high of the period

Cloud: The most obvious visual depiction of the Ichimoku trading system is the Cloud, also known as the Kumo. The cloud is made up of Senkou Span A which is the average of the price difference between the Tenken and the Kijun Sen. Senkou Span B is the difference between the highest high and the lowest low of the look back period divided by 2. Together, Span A and B form the Kumo. This is often referred to as the Support/Resistance on the Ichimoku trading system. The Cloud is also projected 26 periods into the future and signifies potential future support/resistance levels. The more wider the Cloud is, the more stronger the support or resistance zone is likely to be, while a thin or a flat Kumo usually signifies weak levels of support and resistance.

Once the Ichimoku trading system is applied to the chart, it should look as shown below Ichimoku Kinko Hyo Strategy

Ichimoku Buy Signals

For the Ichimoku buy signals, all the following criteria need to be met.

  1. Price must trade above the Cloud, where Span A is > Span B
  2. Tenken Sen must give a bullish crossover the Kijun Sen
  3. Chikou Span must be above price

When all the above conditions are met a long signal is initiated. Initial stops can be set to the nearest low and once price starts to move in the intended direction, traders can either book profits when the market starts to show signs of exhaustion to the trend or simply trail stops along the Kijun sen until you get stopped out. The chart below shows an example of the Ichimoku Buy Signal.

Ichimoku Kinko Hyo Strategy – Buy Signal

Ichimoku Sell Signals

For sell signals, the following criteria must be met.

  1. Price must be trading below the Cloud where Span B > Span A
  2. Tenken Sen must give a bearish crossover on the Kijun Sen
  3. Chikou Span must be below price

The chart below illustrates a sell signal based off the Ichimoku trading system.

Ichimoku Kinko Hyo Strategy

Ichimoku Kinko Hyo Strategy – Important to Traders

The Ichimoku trading system as illustrated above is a very simple trading system that can keep you on the right side of the markets and is a trend following system. However, to the downside, traders need to be very patient for the right set ups to form (which is one of the reasons there are many subsystems developed off this classic Ichimoku trading system). With good money management and patience, traders can definitely make some big profits when applying the Ichimoku trading system as outlined.

Ichimoku Trading Guide – How To Use The Ichimoku Indicator

Ichimoku Trading Guide – How To Use The Ichimoku Indicator

The Ichimoku indicator is an all-in-one indicator that provides information about support/ resistance, trend direction and momentum all at the same time. The Ichimoku indicator is a potent trading tool, but many traders feel overwhelmed when looking at all the lines and information that the indicator gives them and then often misinterpret the Ichimoku signals. In this article, we will dissect the tool and show you step by step how to use the Ichimoku indicator to make trading decisions.

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First step: taking the Ichimoku indicator apart

The Ichimoku indicator is made up of 2 different components:

1) The Conversion and Base lines: Those look like moving averages on your charts, but they are not as we will see

2) The Ichimoku Cloud: The Cloud is the most popular aspect of the indicator because it stands out the most.

Please note that I am focusing on the momentum and trend-following aspects of the Ichimoku indicator for this article. The lagging span of the Ichimoku is left out by choice since it does not add much value.

We will now take a look at each component individually and then put it all together to help you find better trade signals.

Conversion and Base Lines

As I said earlier, that the Conversion and Base lines look like moving averages on your charts, but they do something different. The Conversion and the Base lines show the middle of the 9 and the 26 period high and low. This means that they look back 9 and 26 periods (candles), take the highest and the lowest price levels during that period and then plot the line in the middle of that range.

In the screenshot below, the green and the red line are the Ichimoku Base and Conversion lines. For comparison, I also plotted a 9 period moving average in white on the chart; the moving average is very similar to the Conversion line, but does not match it 100%.

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Tenkan Sen / Conversion Line: The middle of the 9-period high and low

Kijun Sen / Base Line: The middle of the 26-period high and low

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Conversion and Base lines signals and meaning

The Conversion and Base lines have two purposes: first, they act as support and resistance during trends, just like moving averages. Secondly, they provide momentum information. When price is trading above the two lines and when the Conversion line is above the Base line, it signals bullish momentum. This is also very similar to moving averages: when the shorter moving average crosses above the longer moving average, it means that momentum is up and rising.

  • Base and Conversion lines act as support and resistance during trends
  • Only take buy trades when price is above the two lines and sell trades when price is below the two lines
  • A cross of the two lines confirms momentum
    • When the shorter line moves above the longer-term line, it means rising bullish momentum (and vice versa)
    • When price moves above the two lines, it confirms the momentum

The Ichimoku Indicator: The Cloud

The Ichimoku Cloud is made up of a lower and an upper boundary and space in between the two lines is then often shaded either green or red. Let’s explore what this means.

The first and faster-moving boundary of the Cloud is the average between the Conversion and the Base lines. The second, slower-moving boundary is the middle between the 52 period high and low. An important characteristic of the Cloud is that it is projected 26 periods into the future.

Again, in the screenshot below we plotted two regular moving averages next to the Cloud and used an offset of 26 (shift the moving averages into the future). You can see that the moving averages are almost identical to the Ichimoku Cloud.

Seknou A – faster-moving boundary: The middle between Conversion and Base Line

Senkou B – slower moving boundary: The middle between the 52-period high and low

Important: The Cloud is shifted 26 periods into the future

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Ichimoku Indicator Cloud signals and meaning

The general idea behind the Cloud is very similar to the Conversion and Base lines since the two boundaries are based on the same premises. First, the Cloud acts as support and resistance and it also provides trend direction and momentum information. But since the Cloud uses a 52 period component (as opposed to 9 and 26), it moves slower than the Conversion and Base lines.

Basically, the Cloud confirms an uptrend when price is above the Cloud and a downtrend when price is below the Cloud. The space within the Cloud is a noise zone and trading here should be avoided. A rally is reinforced when the Cloud is green and a strong downtrend is confirmed by a red Cloud.

The Cloud, thus, is a way to trade with the longer-term trend and we can sum up our findings as follow:

  • Trend-following trading based on which side of the Cloud price is
  • The Cloud acts as support and resistance during trends
  • It’s a noise zone when price is in the Cloud

The Signals – how to use the Ichimoku indicator to find trades

Now that we have a solid understanding of what the individual components do and what their signals and meanings are, we can take a look at how to use the Ichimoku indicator to analyze price charts and produce trading signals.

The Cloud: long term trend, resistance and color

With the help of the Ichimoku Cloud, traders can easily filter between longer-term up and downtrends. When price is below the Cloud, it reinforces the downtrend and vice versa. During strong trends, the Cloud also acts as support and resistance boundaries and you can see from the screenshot below how price kept rejecting the Cloud during the trend waves.

Thus, the Cloud is ideal when it comes to filtering between bullish and bearish market phases. However, as most momentum indicators, the Ichimoku Cloud loses its validity during range markets.

The faster Conversion and Baselines signals

The Conversion and Base lines are the fastest moving component of the Ichimoku indicator and they provide early momentum signals. In the screenshot below we marked different points with the numbers 1 to 4 and we will now go through them to understand how to use the Conversion and Base lines:

1) The Conversion line crosses above the Base line which is a bullish signal. At that time, price was also trading above both lines which confirms the bullishness. Price dipped back into the Cloud for a moment, but found support. This could have been seen as an entry.

2) Price started to violate the Base line (yellow) which is a warning signal of a trend shift. The Conversion and Base lines also crossed into a bearish setup, further confirming the momentum shift. Finally, price entered the Cloud validating the change.

3) Price strongly crossed below the Conversion and Base lines and the Conversion line also crossed the Base line; both are bearish signals. At the same time, price was trading below the Cloud. All those signals confirm a strong downtrend and could have been used as a sell entry.

4) Price started to violate the slower Base line which is an early warning signal. Then, the Conversion and Base lines kept crossing each other, which further confirmed that momentum was shifting. Eventually, momentum died off and price consolidated sideways.

RSI and creating confluence

We are all about generating confluence which means combining different trading tools and concepts to create a more robust trading method. Our preferred indicator is the RSI and it works together with the Ichimoku perfectly.

When using the Ichimoku indicator to ride trends, it’s important to understand when the trend is over and when a potential reversal signals a trade exit. The screenshot below shows that by adding the RSI and looking for RSI divergences, it is possible to identify high probability reversals. If, after a RSI divergence, price crosses the Conversion/Base lines, a reversal is very likely and it can even foreshadow a longer trend reversal into the opposite direction.

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Stop placement and exiting trades

Just as moving averages, the Ichimoku indicator can also be used for your stop placement and trade exits. When exiting a trend-following trade based on the Ichimoku signals, there are a few things you should know:

  • When, during a downtrend, price crosses above the Conversion and Base lines, it can signal a temporary shift in momentum…
  • …but as long as the Cloud holds as resistance, the trend has not yet been broken.
  • When price breaks above the Cloud, the downtrend is finally over.
  • Traders can use the Ichimoku for conservative and aggressive trade exits:

The conservative exit (1): A more conservative trader would exit his trades once the Conversion and Base lines cross into the opposite direction of the ongoing trend. Such a trader usually avoids a lot of the choppiness that exists before reversals happen. On the other hand, he might miss on future trend moves when price reverts back into the original direction; not all Conversion-Base line crosses lead to trend reversals.

The aggressive exit (2): A trader who wants to ride trends for a longer time exits his trade only once price breaks the Cloud into the opposite direction. The advantage is that he can sometimes hold trend trades much longer and is not as vulnerable to temporary retracements. On the other hand, he might exit some of his trades too late and could end up giving back a substantial amount of his profits because the Cloud-cross usually happens very late.

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Conclusion:В The Ichimoku indicator is aВ solid trading framework

Overall, the Ichimoku framework is a very solid, all-in-one indicator that provides a lot of information at once. As we have shown, there is no secret when it comes to using and interpreting the Ichimoku indicator and the individual components are very closely correlated to trading based off of moving averages. Nevertheless, the Ichimoku indicator definitely has its place and traders who decide to follow such a trading strategy can create a robust framework. We also highly encourage to combine the Ichimoku indicator with other tools such as basic support/resistance principles, price action and chart pattern reading and, potentially, other indicators.

To sum it up, here are the most important things you have to know when it comes to trading with the Ichimoku indicator:

  • Use the Cloud to identify the long term trend direction. Only trade in the direction of the Cloud.
  • The Cloud also acts as support and resistance during trends. But when price enters the Cloud, it signals a shift in momentum.
  • When the Conversion line crosses above the Base line, it can signal the shift towards a bullish trend
  • During a trend, the Conversion and Base lines act as support and resistance
  • Only trade in the direction of the Conversion and Base lines
  • A trader can either use the Conversion/Base lines for his exits (conservative), or exit when price breaches the Cloud (conservative)
  • During ranges, the Ichimoku indicator loses its validity
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