In Part One of this series, I explained the mystery of the Ichimoku Cloud, the creation of a Japanese newspaper journalist that has since become the most popular technical indicator in Japanese trading houses. Although many people are initially scared to try to use the Ichimoku, mystified by all the lines and by the Cloud itself, it’s really not all that mysterious, and it’s also a very original and very good technical trading tool. The Ichimoku is the only technical indicator I know of that even attempts to project where the price will be 26 candlesticks into the future; the fact that it’s able to do that with a surprising degree of accuracy is even more impressive. It’s also very versatile—it can be applied to virtually any trading time frame. The best example of this is the fact that in the west it’s most commonly used on either five-minute or one-minute charts, while in the east it’s ordinarily applied to the daily chart time frame. Finally, the Ichimoku is not merely a technical indicator, but more of a complete technical trading system, comprised of several indicators, offering within itself a variety of trading strategies. Here, I’m going to limit myself to discussing the basic, most commonly used Ichimoku trading strategy—but if the Ichimoku catches your interest, I suggest that you seek to learn more about how each of the various indicators it contains can each be used as the basis for a sound technical trading strategy.

The basic trade signal with the Ichimoku Cloud occurs when the Tenkan Sen (red line) crosses over the Kijun Sen (blue line)—buy on a cross to the upside, sell on a crossover to the downside.

The very important trade filter to apply is this: Only take a buy trade if the the price is above the Cloud; only take a sell trade if the the price is below the Cloud. Let’s look at our original chart one more time to clearly see how very important this filter is.

At the point where I’ve written, “weak sell signal,” there is a downside crossover of the Tenkan over the Kijun; however, it occurs above the Cloud level at that point. And although the price does eventually fall dramatically, from the point of that weak sell signal it first turns back to the upside and even makes a new short-term high. Therefore, a trader who took that first, weak sell signal would either have been stopped out for a loss (most likely), or at the very least had to suffer through almost FOUR DAYS’ worth (this is a four-hour chart) of the market moving severely against his position before it finally began to turn in his favor. However, had the trader used the filter of waiting for a downside crossover that occurred below the Cloud (marked on the chart with “strong sell signal”), he would have seen the market move immediately and dramatically in his favor, without ever threatening his position at all! A much safer trade, a trade that went immediately into profit (always nice), and a trade that obviously could have been ridden for a huge gain.

A second critical trade filter to use, kind of the final decider, is the Chinkou Span

For a buy trade, the Chinkou should be well above the price, as indicated by drawing a vertical line through the end point of the Chinkou Span to the corresponding price level; for a sell trade (as in the illustration), it should be well below the price. This is an indicator of strong market momentum in the direction of your trade.
NOTE: In regards to how forward-looking (predictive) and useful the Chinkou can be, note that even as the price temporarily retraces to the upside following the “weak sell signal” point, the Chinkou has already begun to tail off dramatically to the downside. This is a concept that some traders have difficulty grasping, but it’s important to understand. Even though the Chinkou is in one sense the most “lagging” of all the elements of the Ichimoku Cloud (not even plotted out to the right-hand end of the chart), in another sense it is the most predictive of future price movement, often indicating several time periods ahead that the price will be moving higher, lower, or flattening out and becoming a trendless, ranging market.

Do not take trades while the price is in the Cloud—the Cloud is considered a ranging, no-clear-trend area

Wait for at least a candle close that is above or below the Cloud. Thin Clouds will usually provide relatively little resistance; thicker, more sizeable Clouds will provide notably stiffer resistance to the price successfully moving all the way through them. However, when the price is able to successfully cross over to the opposite side of a large Cloud, that is an indicator of significant market strength in that direction.

Here are some other helpful points for trading with the Ichimoku Cloud.

Time Frames to Trade with Ichimoku. One of the best features of Ichimoku is its adaptability across different time frames. It can be profitably used on virtually any time frame, from on-minute charts all the way up to even weekly or monthly charts. In the west, many traders favor using the Ichimoku Cloud with the five-minute chart; however, the Japanese themselves, in a more long-term view, use it most frequently by applying it to daily charts.

Where to Place Stops When Using Ichimoku. This subject is not strongly addressed in Ichimoku Cloud trading strategies, and is usually simply left to the discretion of the individual trader to adapt to his or her personal trading style and money management rules. However, the most commonly used stop levels are the following:
—Reversing (that is, going in the opposite direction of your trade) crossover of the Tenkan Sen over the Kijun Sen.
—The price crossing to the opposite side of the Kijun Sen (as noted previously, the Kijun is often used as a trailing stop level, especially by traders trading on shorter time frames, such as the one-minute charts up to the 30-minute charts). A stop continually adjusted to just a few pips beyond the Kijun will often enable a trader to successfully ride a good, strong trend longer than they would have been able to if they’d been using standard moving average lines to determine stop levels.
—The price re-entering the Cloud (more conservative, less risk).

—The price passing all the way through the Cloud to the opposite side (crossing back over Senkou Span B). This is more aggressive and involves greater risk.

Take Profit Targets with Ichimoku. Again, this is mostly left to the individual trader to determine based on his or her fundamental trading style. But the two primary methods for determining take profit levels are to either take profits at predetermined price targets (based on range, volatility, or significant price levels such as “00” or “50” levels—like .9400 or .9450), or to simply let the trade ride until stopped out.

Additional notes: The Ichimoku Cloud is not necessarily meant to be an exclusive indicator. It is, for example, often combined with Bollinger Bands, or with an additional momentum indicator such as the ADX or RSI, or with major moving average levels such as the 50, 100, or 200 MA. Such additional elements can help you more accurately pinpoint market direction, profit targets, and additional support/resistance areas.
A flat, horizontal line border of the Cloud (either Senkou Span A or Senkou Span B) will nearly always act as a support/resistance level (see this in action on the 15-minute chart that follows the description of Tenkan Sen, where you can see that the price retraces down to the flat-line Cloud border just before a large move up).

Bottom Line

While it may appear somewhat intimidatingly complex at first glance, the Ichimoku Cloud provides a basically very clear and straightforward trading strategy. Ichimoku is nearly unique among technical indicators in its comprehensiveness— an all-in-one package of a handful of lines, it provides not only very clear trade entry signals, but also does an excellent job of identifying support and resistance areas and of indicating market momentum or trend strength. Additionally, by using built-in trade filters (the Cloud itself and the Chinkou Span), Ichimoku significantly reduces false trade entry signals and helps traders avoid being lured into trading false breakouts.

Summary:

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Trade entry signal is a crossover of the Tenkan (red line) over the Kijun (blue line).

 

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The first trade filter is provided by the Cloud (only take buy trades if the price is above the Cloud; only take sell trades if the price is below the Cloud).

 

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The second trade filter is the momentum indicator—the Chinkou Span—which should be above the price for a buy trade or below the price for a sell trade.

 

You can give yourself a significant trading edge by mastering the Ichimoku Cloud. It manages, with its handful of elements, to give traders excellent trade entry signals that provide protection against jumping into false breakouts while simultaneously doing an outstanding job of projecting probable future price levels. It, therefore, offers a significant advantage over trading with traditional western moving averages, or with less accurate momentum indicators. I urge you to study it and integrate it into your trading arsenal.

Please comment or ask questions below, and share this article with others. As always, we wish you the greatest possible success in your trading. PLEASE take a moment to register with our site here—we will be unveiling lots of new valuable trading tools and services for you in the coming months. You don’t want to miss out!

 

Also, check out the “Daily Profit Forex Trading Strategy” while it is still available for you. This proven strategy is designed to generate a profit every single time you use it!

 

This trading strategy is solely meant for educational purposes. If you decide to apply what you have learned, you do so at your own risk. Trading on margin carries high risk. Your capital may be at risk.

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writer bio

JACK MAVERICK

Jack Maverick has over 20 years of experience in futures and forex trading, first as a broker and then as an independent trader.  He enjoys sharing the trading wisdom and knowledge he has gained from his own trading experience and from other successful traders.

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