Applying Ichimoku to TC

Applying the Ichimoku Indicator to TradeCharting

The Ichimoku Kinko Hyo Indicator can be used to assess the best conditions to buy, or go ‘LONG’ on an underlying, or to sell, or go ‘SHORT’. The Ichimoku conditions best suited to both of these conditions are described below:

Ideal ‘LONG’ conditions:

• The Tenkan-sen (blue line)is above the Kijun-sen (pink line)

• Both Tenkan-sen and Kijun-sen lines are above the Cloud

• The Cloud turns to blue.

Ideal ‘SHORT’ conditions:

• The Tenkan-sen (blue line)is below the Kijun-sen (pink line)

• Both Tenkan-sen and Kijun-sen lines are below the Cloud

• The Cloud turns to pink.

No trend: It is important to note that the trend is understood to be flat, or directionless, when price is embedded within the Cloud.

I use these 3 aspects of the Ichimoku Kinko Hyo Indicator, the Cloud, the Tenkan and Kijun lines, in two main ways.

1. Using the Ichimoku Kinko Hyo Indicator to assess the general market direction: I use the Ichimoku Kinko Hyo Indicator on the USD index, the USDX, and the Euro dollar index, the EURX, to assess how each of these indices is trading. The usual correlation is for these indices to trend inversely from each other. That is, if one trends up then the other trends down. I refer to periods when the USDX is trending up as ‘Risk Off’ and when the EURX is trending up as ‘Risk On’. I have written about ‘Risk On and Off’ in more detail elsewhere in this blog.

One look at the Cloud indicator for both Index charts can give a very quick and effective view of the trend on each and, thus, help me to assess whether conditions are more suited to ‘Risk On’ or ‘Risk Off’ trading. Great trend trading opportunities tend to evolve from market conditions when these Indices are trading inversely from each other; as evident on their Cloud charts. Choppy trading conditions tend to evolve across many pairs when the Indices diverge from this usual correlation pattern.

The charts below illustrate this phenomenon more clearly. May 2012 was a great month for ‘Risk Off’ trading. Conditions were optimum during this month for going SHORT on the currencies like the Euro, Aussie etc and for going LONG on the USD. Looking back at the Ichimoku charts for that period it is clear to see that there was a very clear trend to go LONG on the USDX and to go SHORT on the EURX throughout most of May 2012:

Warning: Price embedded in Cloud: April 2012 was another interesting period and one that contributed greatly to my understanding of the sheer value of this single indicator in trend trading analysis. During this month I experienced great frustration with very choppy trading. I received fewer 4hr TC signals than usual and, the few I received, were choppy and inconsistent. Looking back at the Cloud charts for that month though shows how price on both Indices was embedded within the Cloud for much of this time period. Thus, good trends were not to be expected during this time. I now know to expect choppy market conditions and to be be more cautious of my TC signals when I see that price on the indices is embedded within the Cloud.

Warning: Price embedded in woven Tenkan and Kijun lines: Another situation to watch out for on the Cloud charts is for when price becomes embedded in criss-crossing or woven Tenkan and Kijun lines. An example of this can be seen on both charts for the start of August 2012. The general trend had reversed and, thus, the Tenkan and Kijun lines  crossed and price action was caught up in this crossover. Trading results for this period, and others similar to this, were choppy. This is another situation I look out for when assessing the market trends and the likelihood of good conditions for trend trading. 

Most of this learning and understanding of using the Ichimoku Indicator came through trial and error throughout much of 2012. I refer to these learning periods as Epiphanies. I would update my observations and Epiphanies onto my blog. I also summarised these Epiphanies into a more succinct statement about the Ichimoku Indicator.

Ichimoku Epiphany Explained: That when price on the Indices, USDX and EURX, or on the individual currency pair in question is either:

  • trading sideways AND is embedded within the Ichimoku cloud on the daily chart OR
  • caught within, or embedded, in the moving average crosses, that is, the Tenkan-sen and Kijun-sen lines OR,
  • divergent on the 4hr and daily Cloud charts: with respect to position of price either above or below the Cloud then,
  1. 4 hr trend trading is more likely to be choppy and 4 hr TC signals will be less frequent AND
  2. any 4 hr TC trend signal is likely to be less reliable, and, thus, these 4hr trend trades are less likely to be successful and
  3. trend trading is more likely to be successful off shorter time frame 30 min charts during the late London and US trading sessions.

2. Using the Ichimoku Kinko Hyo Indicator to assess individual TC signals: When I receive a TC signal for an individual currency pair I cross check this signal against the Ichimoku Cloud chart for that currency pair, as well as checking the Index charts. My preference is to see ideal LONG conditions supported when I have a TC ‘LONG’ signal and ideal SHORT conditions supported when I have a TC ‘SHORT’ signal. This may seem complex but, as the charts are very visual, it only takes a momentary glance to assess the trading conditions. The two charts below give example of optimum conditions for a LONG and a SHORT trade: