The history of this indicator dates back to when it was first published by a Japanese reporter, ' Goichi Hosoda. The complete name of this indicator is ' Ichimoku Kinko Hyo ,' and the meaning of this explains a lot about the indicator. So let's break down the words:. In short, the name of the indicator can be translated as 'one look equilibrium chart. Most of the technical traders address this indicator as 'Ichimoku Cloud' to make it sound less complicated. Using this indicator, users can measure the momentum of the trend.
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Ichimoku Cloud also provides dynamic support and resistance levels for intraday traders, while generating reliable trading signals. Let's understand more about the components and working of this indicator. Mainly, the Ichimoku indicator is consists of five lines. Each of these lines has specific calculations to them. Likewise, the 'Kijun Sen' line is the midpoint of the last 26 day's high and low.
Both these lines act as the upper and lower limit of the cloud. There is one more line known as 'Chikou Span,' and it essentially represents the current value of the asset. You don't have to memorize anything about these lines. Just remember the location of both Tenkan Sen and Kijun Sen lines. Typically, below is how the Ichimoku cloud indicator looks on a price chart. At first, when we apply the Ichimoku Cloud on our price charts, it might look a bit complex as this indicator consists of a lot of lines.
This is also the reason why most of the novice traders feel that this is a very complicated indicator to use. But in reality, using Ichimoku Cloud is pretty straight forward and can be easily comprehended if understood correctly. In the advanced Ichimoku Trading strategies below, let's understand the most straightforward way of using this indicator to generate substantial trading opportunities. Also, remember that these strategies do work in all the timeframes and all the types of markets.
Ichimoku Cloud is one such reliable indicators which can be used standalone to generate trading signals. So let's first understand how to trade using this indicator alone, and then let's combined it with other reliable indicators to identify signals with more accuracy.
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Ichimoku cloud indicator works well on a trending market over the ranging market. So make sure to use this indicator in the trending market only. We have applied the Ichimoku Cloud indicator to this price chart. The strategy is simple; we must look for the cloud to go below the price action.
In the below image, we can see the cloud being under the price, which indicates an uptrend. Then, in the encircled region, the crossover between the lines happened, and a buy signal is generated. Now, let's see how our trade has performed. We can enter the trade right after the crossover, but that's an aggressive entry point.
Free trading strategies which can be automated: the Ichimoku Break-out strategy.
If you are a conservative trader, make sure to take an entry after the appearance of a bullish candle. We can see the market blasting to the north and printing a brand new higher high right after the trade entry. We must plan to exit our positions as soon as the cloud goes above the price action. We have placed the stop-loss just below the cloud. The take-profit must be placed according to the momentum of the price. We have set the TP at the higher timeframe's resistance area. The example we showed below is from the last week, and the market didn't give any signal to close our positions yet.
In this advance Ichimoku trading strategy, we have paired the Ichimoku cloud with the RSI indicator to take full advantage of the market's underlying trend. This strategy will help us in identifying potential market reversals.
Ichimoku Strategy #1 – The Ideal Ichimoku Strategy
Primarily, using RSI divergence, we will identify the tops and bottoms in the market, whereas the crossover of the Ichimoku cloud helps us in finding the entry point. This indicator consists of a line graph using which we can identify the overbought and oversold market situations. RSI line oscillates between 70 and 30 levels; the market is considered oversold when the RSI line reaches the level, and it is deemed to be overbought when the line reaches the level. The default period setting of RSI is 14 and in the below example, we have used the default setting only.
If you are a novice trader or if you are using the RSI indicator for the first time, make sure to stick to the default setting. Once you gain some experience, you can tweak the settings according to your trading style. In this strategy, the primary step is to identify the market divergence using the RSI indicator. Divergence is a phenomenon where the price action goes in one direction, but the indicator goes in another. This essentially means that our indicator does not agree with the price behavior, and the market is about to reverse its course.
When we have identified the divergence in an up-trending market, we must anticipate a potential downtrend. In the below chart, the encircled area is where the Tenkan Sen Line crosses the Kijun Sen Line, and that is precisely where we have entered the market. In this advanced Ichimoku trading strategy, we have placed the stop-loss just above the entry point because divergence often provides more reliable signals.
Our take-profit order is placed at the higher time-frame's major support area, as you can see below. The advanced Ichimoku trading strategies that we have shared above works well on all the trading timeframes. But this one is specially designed for the higher timeframe investors and traders only. In this strategy, we are using period Moving Average to trade the market cycles.
A sell signal forms when the Chikou line green line crosses below the price action. It is not a simple moving average over the prior 9 periods as some contend.
The philosophy behind the Tenkan Sen measurement is that the average of closing prices over a period is less valuable than the average of price extremes. By following this method, the concept of equilibrium is introduced to technical chartists when using Ichimoku. When you compare the Tenkan Sen to the simple moving average with the same periodicity, the Tenkan Sen shows the midpoints and flattens often, which represents non-trending price action during the previous 9 periods.
The Tenkan Sen can act as support and resistance too as you can see. While the price action breaks below the simple moving average, creating false triggers, the Tenkan Sen displays better support levels. To spot momentum, you can examine the angle of ascent or descent. A sharp angle of ascent signals strong momentum to the upside while a steep angle of descent displays strong momentum to the downside.
Well, because it is a shorter time period indicator, it tends to be less accurate than the Kijun Sen, which features 26 periods. But it does provide a first glimpse that a trend may be on the verge of changing. Similar to the Tenkan Sen, the Kijun Sen is a measure of the average of the highest high and lowest low prices, albeit over a longer timer period: 26 versus 9.
It is generally regarded as being more accurate because of the longer time span. To figure out which way the trend is moving, simply look to the direction of the Kijun Sen. When the price rises above the last highest high or falls below the last lowest low, the Kijun Sen will move up or down respectively to signal a bullish or bearish trend.
Defining the Indicators
It can also act as a level of support on the downside and resistance on the upside. Some traders view the Kijun Sen as being like a magnet so when the price rises above or below the line rapidly, the price is often attracted back to the line.
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To make buy and sell decisions, traders look to Kijun Sen as a gauge.