Ichimoku Cloud Trading Strategy
You can manage your subscriptions by following the link in the footer of each email you will receive. First, the trading bias is bearish when prices are below the highest line of the cloud. Hi Rolf, I have been on and off with this indicator for quite some time now and felt offers few trading choices. The blue line Tenkan-Sen holding above the red Kijun-Sen indicates a strong trend.
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The Leading Span A forms one of the two Cloud boundaries. The default calculation setting is 52 periods, but it can be adjusted. This value is plotted 26 periods in the future and forms the slower Cloud boundary. Chartists use the actual cloud to identify the overall trend and establish a trading bias. Once a trading bias is established, chartists will wait for a correction when prices cross the Base Line red line.
An actual signal triggers when prices cross the Conversion Line blue line to signal an end to the correction. This trading strategy will set three criteria for a bullish signal. First, the trading bias is bullish when prices are above the lowest line of the cloud. In other words, prices are either above the cloud or remain above cloud support.
Second, price moves below the Base Line to signal a pullback and improve the risk-reward ratio for new long positions. Third, a bullish signal triggers when prices reverse and move above the Conversion Line. As you can see, the three criteria will not be met in just one day. There is a pecking order to the process. First, the trend is bullish as defined by the cloud.
Second, the stock pulls back with a move below the Base Line. Third, the stock turns back up with a move above the Conversion Line. There are also three criteria for a bearish signal. First, the trading bias is bearish when prices are below the highest line of the cloud.
This means price is either below the cloud or has yet to break above cloud resistance. Second, price moves above the Base Line to signal a bounce within a bigger downtrend.
In this list of indicators we must also quote the Chikou Span. This indicator is composed by the closing values of the temporal chosen time frame, but usually moved back by 26 periods. This indicator is used to get information on the current trend in a certain moment, in practice it is a momentum indicator. Figure 4 — The momentum of the market defined by Chikou. A graph usually expresses the concepts better than words, and so we can put together our considerations and graphically verify what happened to AUDUSD in the spring of The trend of AUDUSD in spring is a very interesting case to understand and interpret the information that the technique of the Ichimoku cloud provides daily.
The prices were moving sideways preventing the establishment of clear technical signals, whether short or long. What happened in January is quite interesting, when prices moved under the cloud, anticipated in this movement by the downward cutting of the Tenkan Sen against the Kijun Sen. The experienced trader would not open a trade because the Chikou at that time was still positioned inside the cloud thus making the short signal a false one.
This event signaled a still uncertain trend that in fact was confirmed with a new return of AUDUSD on the top part of the trading range. Here is in details the strong signal that emerged a few months later.
So, after fixing the break price at point X, our trade would have been be activated beneath the low of that session at 1. Our most prudent strategy would have rewarded us, as AUDUSD tried an upward reaction that found an impassable resistance in the cloud, now set downward. This was a successful trade which was confirmed by the subsequent history, but never forget by the money management. In this case the candle that had reported the entry opportunity was not very wide, about 60 pips between top and low, with a preferable risk-reward ratio of at least 2 to 1, which indicated pips 1.
A predominantly green cloud indicates a strong up-trend or weak down-trend , while a predominantly red cloud indicates a strong down-trend or weak up-trend. Signals above the Cloud where the latest Cloud color ahead is green are stronger than where the color is red. Signals below the Cloud where the latest Cloud color ahead is red are stronger than where the color is green.
Price above the Cloud indicates an up-trend. The first buy signal is when the blue line Tenkan-Sen crosses above the red Kijun-Sen , after the green Cloud indicates the trend is firmly established.
The second long entry if pyramiding is when Price closes above the red Kijun-Sen line. Again, the green cloud indicates an established trend.
A third entry signal is available when the blue line Tenkan-Sen again crosses above the red Kijun-Sen. Exit if Price closes below the red line Kijun-Sen — or the blue line Tenkan-Sen crosses below the red. Enter long when Price closes above the red Kijun-Sen line. The green cloud indicates an established trend. In a strong trend, short-term traders may find that crosses of the red Kijun-Sen line are few and far between. Consider long entries where Price closes above the blue Tenkan-Sen line and short entries in a down-trend only when Price closes below the line.
The blue line Tenkan-Sen holding above the red Kijun-Sen indicates a strong trend. Enter when Price dips below and then closes back above the blue line. Not used as much, but if the purple line Chikou crosses above Price, that is a long-term buy signal, while a cross below Price is a long-term sell signal.
See Indicator Panel for directions on how to set up an indicator. To alter the default settings - Edit Indicator Settings.