Friday, 12 October 2018

Ichimoku Kinko Hyo Cloud

Ichimoku Cloud Trading Strategy

(Clouds are for trending markets)

Traditionally, the Ichimoku Cloud is known for its ability to pick up trends and keep traders in them until they are over.  Ichimoku Kinko charting is about the two halves of the market, plus time.

Moving averages (Tenkan-sen & Kijun-sen)

Tenkan-sen (Blue Conversion Line): (9-period high + 9-period low)/2))
  • On a daily chart, this line is the mid-point of the 9-day high-low range, which is almost two weeks.
Kijun-sen (Red Base Line): (26-period high + 26-period low)/2))
  • On a daily chart, this line is the mid-point of the 26-day high-low range, which is almost one month.
This is by far the most popular of the trading methods in the Ichimoku Cloud arsenal.
It is simple, elegant and great at picking up trends and trend reversals. If you like trading trends or momentum trading, the Tenkan/Kijun cross is a great method to use.
The most common usage of the Tenkan and Kijun are the ‘cross’ or what we call the TKx (Tenkan-Kijun Cross).  Similar to how a MACD uses a cross of its two lines, the Ichimoku Cloud does the same.  It is interesting to note that the Ichimoku uses the same periods as the MACD, however it was created over a decade earlier.
As usual, the shorter moving average whips around the longer one, giving points at which positions should be switched from long to short and vice-versa.
  •  These moving average crossovers are giving buy or sell signals.  A position is held until these reverse. 
  • Moving averages as support and resistance levels
  • The degree of slope reflects the strength of the trend or displaying the price momentum
Remember there are many important factors to consider when trading the Tenkan/Kijun cross such as time frame, Kumo shape/configuration, previous moves-series of crosses, angle/shape of the cross, etc.

The Cloud (Senkou Span A & B) - Market's sentiment

Senkou Span A (Leading Span A): (Conversion Line + Base Line)/2))
  • This is the midpoint between the Conversion Line and the Base Line. The Leading Span A forms one of the two Cloud boundaries. It is referred to as “Leading” because it is plotted 26 periods in the future and forms the faster Cloud boundary.
Senkou Span B (Leading Span B): (52-period high + 52-period low)/2))
  • On the daily chart, this line is the mid-point of the 52-day high-low range, which is a little less than 3 months. The default calculation setting is 52 periods, but can be adjusted. This value is plotted 26 periods in the future and forms the slower Cloud boundary.  It’s similar to a 50% retracement level and is the mid-point of the last 52 days.
Kumo's thickness gives, most of the times, valuable clues about the current movement, if the stock is in a correction or, on the contrary, in an impulse. If it is in equilibrium or balance. Trend power and forecast.

On impulsive moves, it has a very narrow band and on the correct ones is narrow or even flat.

So the Tenkan line (which is the momentum line) and the Kijun line (which is the trend line) that are based upon price action are moving. Their valued added together, divided by 2 and sent 26periods ahead is what forms the Senkou Span A or Span A. So the first portion of the Ichimoku Cloud or Kumo is based upon evolving price action lines which are half momentum, half trend monitoring. When you put these two together, you get the Span A which is always changing based upon the acceleration or deceleration of price based upon how they affect the Tenkan/Kijun lines (and in turn, the Senkou Span A).

The second line is the Senkou Span B which is a little different. It’s based solely upon price action, particularly the last 52 candles of whatever time period you are on. If you are working with a daily chart, we are talking about the last 52 days, for a 1hr chart, the last 52 hours of price action. After taking the high and low for the last 52 candle range, it takes their values, divides them in half, and shoots them 26 time periods ahead.

Cloud offers you a good location and method to time a reversal which is one of the hardest things to do in trading.

Because the Kumo will often hold price on one side of it, when price breaks it, such a move can often signal a reversal. There are various factors which will increase the likelihood of a reversal such as:
  • Thickness of the Kumo when broken
  • How long price has been on one side of it
  •  How far price has moved before touching/piercing the Kumo
  • What time frame you are working on
These are all critical when assessing whether a Kumo break is signifying a reversal or not.
The Kumo Break method is one of the key systems used by Ichimoku traders for spotting key reversals, qualifying them and giving traders a unique opportunity to either take profits or reverse positions. It’s great for timing trends, reversals and trading key reversals when they are in play. Because of its unique ability to measure support and resistance, the Ichimoku Cloud and its Kumo construction offer the trader some unique trade opportunities.
Another clue hidden in the Cloud can be the flipping of the Senkou Span A and B which can indicate a reversal but do not always.

The shading in between is called the Cloud or Kumo.
  • The top of the Cloud is the first level of support and the bottom is the second level of support or resistance for a bearish chart.
  • The thickness of the Cloud is important. The thicker the Cloud, the less likely it is that prices will manage a sustained break through it. The thinner the Cloud, and a breakthrough has a much better chance.
  • Thin sections in the Cloud give us an idea of when the market is likely to change trend.  Similarly, if the Cloud is getting fatter and fatter, the chance of a reversal in trend lessens looking out into the future.
  • The crossover point of the Senkou Spans is not important, only the fact that at that point the Cloud is at its thinnest.
  • The distance between the Cloud and the current price is not significant.

Chikou Span (Lagging Span)

  •  It’s today’s closing price plotted 26 days behind the last daily close.
The Chikou Span (Green line, used in combination with today’s candlestick):
  •  if Chikou Span is trading above the candlestick of 26 days ago, then today’s market is said to be in a bullish long term phase; conversely,
  •  if Chikou Span is trading below the candlestick of 26 days ago, then today’s market is in a long term bearish phase.
Same idea for Chikou Span itself and the Clouds: above the Cloud of 26 days ago, then today is bullish - and vice versa.

Bullish, Long signals
1.    Price moves above Kumo, Cloud (trend)
2.    Kumo, Cloud turns from red to green (ebb-flow within trend)
3.    Price moves above the Kijun-, Base Line (momentum)
4.    Tenkan-, Conversion Line moves above the Kijun-, Base Line (momentum)

Bearish, Short signals
1.    Price moves below Kumo, Cloud (trend)
2.    Kumo, Cloud turns from green to red (ebb-flow within trend)
3.    Price moves below the Kijun-, Base Line (momentum)
4.    Tenkan-, Conversion Line moves below the Kijun-, Base Line (momentum)

How To Trade The Ichimoku Kinko Hyo

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