ICHIMOKU cloud trading strategy
For a successful intraday trading,we can never rely on a single indicator. We need to identify the trend and then act upon it with a combination of some indicators like Moving averages,support and resistance or MACD and VWAP etc. No doubt, these all are great choices but what if a single indicator does the task of them all?
Ichimoku cloud chart is an indicator which provides you the indication of short-term, mid-term and long-term trend,moving averages, support and resistance levels , entry point ,exit point and what not.
I would say that Ichimoku cloud indicator bit underrated.Whenever a newbie tries to learn technical analysis, chances are less that he or she will get introduced to ichimoku. The very possible reason seems that all this is due to its complicated appearance.I have made an attempt and tried my best to make you understand Ichimoku cloud and it's advantages in an easy way, and ofcourse we are going to learn the strategies to trade with Ichimoku cloud with a high accuracy.
✍ Intro to Ichimoku cloud
✍ Conversion Line of ichimoku chart
✍ Conversion Line of ichimoku chart
✍ Lagging span
✍ Ichimoku cloud,kumo
✍ Trading strategies with ichimoku cloud
✍ Master trading strategy
✍ special case strategy
✍ pdf to download
Intro to Ichimoku cloudComplete name of Ichimoku cloud is "Ichimoku kinko Hyo", which in english means " one look equilibrium cart " and yes, Ichimoku completely justifies the name it holds.One can identify the S&R levels,trend,moving averages, entry-exit by just looking at the ichimoku cloud.
- Ichimoku cloud is based on the price action fundamentals. You must be knowing this and if you don't ,you must know that trading based on the analysis of price action is better than other forms in technical analysis.
- Best feature of Ichimoku cloud indicator is that it provides us the double verification ( you can verify your trading decision in two different ways ) chance to make our decision unlike most of other indicators which can provide only single verification ( you can verify your decision for a trade only in one way).
- And yes, you can identify the strength of a particular signal too with this god of indicators.
Ichimoku indicator consists of 5 components:
- Conversion line
- Base line
- Lagging span
- Leading span A
- Leading span B
The combination of leading span A and B forms the cloud like shape ,also known as Kumo.
Let us discuss them all and learn how to use them , strategies to use them to make a profitable trade.
1) Conversion Line of ichimoku chart:Also known as the Fast line, or short-term line, conversion line show us the short-term price momentum.It plots the average of highest point and the lowest point in previous 9 candlesticks.
When taking highest and lowest points in previous 9 periods, it does not include the highest point and lowest point in all previous 9 candles.It takes the maximum point and minimum point touched in previous 9 days.
By default, conversion line is of blue color. Swing traders can put the time-period of chart to 1 day while intraday traders can put it anywhere between minutes to min. Upward slope or positive slope of the curve suggests us a short-term upward trend and indicates a possible buying opportunity. A negative slope will obviously now indicate the bearish behaviour in the market and a possible opportunity to short-sell.
Please don't enter into a trade by simply observing conversion or Base lines. Always use a confirmation tool, which in the case of ichimoku cloud,it itself acts the one. We will discuss all this in the later section of this article.
2) Base Line of Ichimoku cloud :Also known as the slow line, Base line is made from the averages of highest and the lowest price over last 26 periods or candlesticks.
Positive slope of base line suggests a mid-term or long-term upward trend. If the current stock prices are below base line, it show us the mid-term downward trends and if the candlesticks are above base line, it is an uptrend.
3)Lagging spanLagging span is a line which is created by plotting the latest closing price, 26 periods before.Let me explain this again:
Suppose each candlestick on our chart represents 1 day data.So, todays closing price would be plotted near the candle made 26 days prior. In this way, we will be able to clearly compare the today's closing price to that of 26 days before ( which nearly counts to a month excluding holidays ). 26 is only the default setting, you may change it if you want to but the default setting is considered to be the best option for Ichimoku cloud . This way, Lagging span allows us to compare and judge the relation between current and previous trends.
If we join the closing price of all candles and shift the pattern formed to 26 days before, we will get our lagging span.
Like to that of conversion line and base line, Lagging span too have a meaning when compared to the current prices.
When the lagging span is below the prices,it represent weakness and a possibly bearish behaviour in the market. When it is above the candlesticks, its generally an indication of strength in the market.
4) Kumo, the cloud:Kumo, the cloud is most attention grabbing part of this indicator and it deserves that. The Ichimoku cloud is a space between the two curves; Leading span A and Leading span B.
Leading span A & B are plotted in 26 periods future as you can see in the image above. Leading spans provides a glimpse of S&R possibilities in the future.
Leading span A (LSA) : Leading span A is used to measure the momentum in market. It is created by plotting the average of conversion line and base line points after 26 candlesticks span in future.
Suppose that in present, conversion line is on Rs.300 while the base line points Rs.330. So, their average comes to be Rs.315 and if we mark highlight this point after a 26 candlesticks span, it will be on Leading span A.
Leading span B (LSB) : This line uses the price action of longer period. It uses the highest and lowest price of previous 52 periods ( these periods can be days, minutes, hours etc.). We divide the sum of highest and lowest price to plot a graph named as Leading span B. The image below makes everything clear.
When LSA is above LSB, the cloud formed inbetween is of green color and represents a bullish behaviour. As we saw that LSA is a short-term curve as compared to LSB, so when Leading span A crossover Leading span B, cloud suggests the positive growth in the stock prices.If LSA is below the LSB, it is an indication for an opportunity to short-sell.
The crossover of LSA and LSB may indicate the reversal of trend too.
Also, if prices are above the cloud formed, its an uptrend and if candlesticks form below the cloud, its a downtrend.But be aware and try to avoid any trade when candlesticks start forming inside the Cloud as it represents a choppy behaviour or a sidetrend.
Cloud does not only about the direction of trend but it also indicates the strength of that trend.
Farther the price action is from the cloud, more the trend is considered to be powerful.One more thing, thicker the cloud becomes, more is the strength of the S&R provided by the leading spans.
Trading strategies with Ichimoku cloud :
Part-1 : Conversion -Base Line crossoverYou can simply use only conversion line and the base line to identify the signal and than verifying it with Lagging span.What you need to do is check the type of crossover between conversion line and the base line. If conversion line is above base line,it is a Bullish crossover which indicates us about a buying opportunity . If conversion line cross below the the base line, than it is a bearish crossover which specifies the bearish behaviour and a downwards trend.Once you identify this, now you need to perform some crosschecks and confirmations to enter the trade.
- Check whether the prices are above the crossover or below it.If prices are above the crossover, than it is a buying signal and if prices are below crossover, it guides you to sell. If crossover suggests the selling but the prices are above the crossover, it is weak signal.
Try to avoid trades where signal contradict with each other. They can be right too, but probability is less as compared to the ones where all check and confirmations are suggesting same thing. These signals can be somewhat hard to find, but you are investing your money, you need to be concious about that otherwise banks and bonds are right choice for you.
Confirmation with lagging span: We have read about it above and must be knowing that Lagging span suggests you to enter a buying trade when it appears above the candles.If it forms below the candles, it is signal for fall in markets and thus a signal to sell or short-sell.
As you know that current prices are distributed 26 periods back in lagging span, so you have to compare the lagging span with the candes below it or above it i.e. which are 26 periods before. Though you can not compare them with present candlesticks either as they are at same level to the latest point of lagging span.
Master strategy with ichimoku cloud ( CL + BL + Cloud)Master strategy is not its official name but it is the best technique and most reliable one that we will discuss here. It is just the extended version of part-1 with the use of cloud also. The main use of ichimoku cloud is to identify the strength of any buying or selling signal.
We compare the position of crossover with respect to our kumo, the cloud. When the crossover takes place above the cloud,it should be a Bullish crossover.If a bearish crossover takes place above the cloud, it is a weak bearish signal and try to not enter such trades.Bearish crossover should take place below the cloud while bullish crossover to be above it.
- Weak Bullish signal : When the bullish crossover appears below the cloud
- Weak Bearish signal : When bearish crossover takes place above the cloud
- Strong Bullish signal : When bullish crossover takes place above the cloud
- Strong Bearish signal : When the bearish crossover appears below the cloud
Cloud breakout strategy of ichimoku cloudThis strategy is a conditional one. This only works when the ichimoku cloud suggests a choppy trend i.e. when the candlesticks are forming in between the cloud. You only need to keep an eye on it till it breaks out of the cloud and check whether it breaks up or down. In this case, it does not matter whether the cloud is green or red, you only need to check whether it breaks up or down. As you know that boundaries of the cloud i.e. LSA & LSB act as the support and resistances, once the candlesticks cross any of them, they act as its S&R and specifies the direction of the direction in which prices will move in the future. If it crosses above the cloud, than leading span lines will act as its support and market will be in the bullish mood.
If the prices breakout below it, it will find the cloud as a resistance to move upwards and market endures bearish behaviour.
The signal provided in this case is very strong but you are always adviced to check it with lagging span or other methods.
Thickness of cloud can also help you here. More is the width of the cloud, stronger is the signal obtained.
Best thing which I liked personally is that this can be a perfect intraday trading strategy, therefore, you can always do margin trading to earn extra cash. I know that there are a lot of articles there on margin trading but no good one in hindi, so i have explained margin trading in hindi.