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TABLE OF CONTENTS
Lesson 1) Introduction to the Candlesticks Chart .......................................................... 5
Construction of the Candle Line ........................................................................................ 8
Lesson 2) The Individual Candles ....................................................................................... 10
The Shadows ........................................................................................................................... 21
Lesson 3) Two Candles Patterns ......................................................................................... 30
The Checkmate Principle ................................................................................................... 30
The Bullish Engulfing Pattern .......................................................................................... 32
The Dark Cloud Cover ......................................................................................................... 41
Piercing Pattern ..................................................................................................................... 45
The Harami .............................................................................................................................. 50
Lesson 4) Three-Candle Patterns........................................................................................ 53
The Morning Star .................................................................................................................. 53
The Evening Star ................................................................................................................... 56
Lesson 5) Principles of Trading ........................................................................................... 59
Risk-Reward ............................................................................................................................ 59
Stops ........................................................................................................................................... 64
Lesson 6) Indicators ................................................................................................................. 65
Confluence................................................................................................................................ 65
Change of Polarity................................................................................................................. 66
Internal Trend Line .............................................................................................................. 66
Head and Shoulders ............................................................................................................. 67
Oscillators................................................................................................................................. 68
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4
Divergence ............................................................................................................................... 71
Bollinger Bands...................................................................................................................... 73
Fibonacci Retracements ..................................................................................................... 75
Lesson 7) The Ichimoku System.......................................................................................... 78
The Tenkan-Sen ..................................................................................................................... 79
The Kijun-Sen ......................................................................................................................... 80
The Chikou Span .................................................................................................................... 83
The Ichimoku Cloud ............................................................................................................. 84
Calibration................................................................................................................................ 86
Lesson 8) How to Use the Ichimoku .................................................................................. 88
The Kumo ................................................................................................................................. 88
The most important trading strategy! ......................................................................... 97
Lesson 9) The Advanced Trading Strategies................................................................ 101
The Relative Tenkan/Kijun Cross ................................................................................ 101
The Kumo Breakout ........................................................................................................... 106
The Kijun-Sen Cross ........................................................................................................... 109
Lesson 10) Money-Management and the Kelly Criterion ....................................... 121
But realize that the real bodies are in constant change, and as they grow
wider the prior trend is gaining strength, and as they get smaller, the prior
trend is losing strength.
The limit for the length of the real bodies is the Doji, or the small
crosses. As they get a little bit bigger, we find the Spinning
For instance, see in the example below how when the market started
losing its momentum, the candles got smaller and smaller. All you could see
was spinning tops or Doji. Whenever I take screenshots from my software,
you will see colored candle lines. I do this so you can get accustomed to both
color sets, white and black or green and red.
Can you see that even though the market had a negative trend, its trend
began to lose strength? You could even see some strong bull real bodies out
there. The bears control of the market is getting weaker and weaker. Look at
the rounding bottom of the candle lines in the chart, I would definitely buy in
this position because I also have a clear stop-loss, the smile.
Now lets take a look at Doji. A Doji is when the opening and close is the
same, and they are very good at showing trend reversals. It is often a turning
point, because Doji means that the market is tired.
A lot of people make the mistake of thinking that when the market is
Bull, and a Doji appears, you have to short it. Thats completely wrong. The
Doji doesnt mean that the market is dead, it just means that the market is
tired and could be taking a breath before continuing its run.
Dont make this mistake. Heres an example of that mistake:
See? If you had shorted when you saw the Doji you would lose a lot of
money. Just take the Doji as a signal that the market may be changing its
trend, not that the market is DEAD or BULL. Take it as if the market is turning
neutral.
With all technical analysis, we are thinking of the probability set of each
event occurring: a trend-reversal, a big run-up, etc. You have to realize that all
the Doji is telling us is that the probability of the market going in the other
direction increased a little bit. Thats it.
And in there is a point Id like to make here: In the Forex market, you
are not going to be seeing perfect Dojis like the one I just showed you. You will
most likely be seeing very thin bodies. Consider that as a Doji, for the
purposes of your technical analysis.
First Lesson: Not every Doji means a trend reversal. See B and D.
Second Lesson: Sometimes a really thin body gives the same signal than
a Doji. See C.
Third Lesson: Look at the Long Shadow in B. What does this means? It
means that the market is still not sure about the new lower levels, the market
is not strong enough.
Fourth Lesson: Look at the Long Shadow in A. The market rejected
higher levels, again.
I am showing you this so you can realize that in Technical Analysis, price
is king. Even if you had the perfect analysis, it doesnt matter unless you have
correctly predicted the market. And the Doji is not the best indicator of a
reversal, it is a good one, but alone it doesnt carry a lot of strength.
Here you can see that the Doji is confirming the resistance lines. It is
useful to realize that the candlestick lines can be confirmation for other
technical indicators, including support and resistance analysis.
And how do you use the Doji as resistance? Unless the Doji closes above
the highest high near it, it is unlikely that the market has strength. But that
doesnt mean that because the Doji closed below the resistance, that the
market is weak. It just means that the market has lost its steam. I will repeat
this over and over until you have this tattooed to your mind, because I dont
want you making the same mistakes as most candlestick chartists.
Let me give you an example of resistance change because of the Doji:
Create resistances as you always do it: the highest high is the new
resistance. And remember, let the market prove to us that the bulls are in
control of the market: if after a Doji, in the next session the market closes
above it, it is a very good signal that a breakout is happening.
And before we go further, please understand that you should always
take a look at two characteristics when analyzing a candlestick chart: always
look at both the shape of the candle, and the trend preceding it.
Lets take a look at an example illustrating this principle.
Lets take a look at the first situation, as you can clearly see, the market
was neutral right before it. When I mean preceding trend, I mean the 3-4 ticks
before the Doji. So when the Doji happened, it didnt tell us much.
At the second situation, look to the preceding bear trend and how in the
session preceding the Doji, the market tried to go deeper but didnt find the
strength to do it. Then, the Doji had a higher low than that preceding session,
which showed us that the market was tired of getting bear. The next tick what
happened? The market had a slight up-tick.
And what about the third case? The market was clearly on an uptrend,
and it lost strength as we can see by the Doji. Then the bears controlled the
market for a couple of ticks, before the uptrend continued.
Remember to always see the candles in the context of the session. Dont
look at a Doji and automatically short it. Or automatically buy the trade. Look
at the whole, instead of looking at only these little signals.
THE SHADOWS
The Japanese would say that the longer the shadow in relation to the real
body, the weaker the signal.
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As you can see, the second candles are worse than the first ones, always.
They are always sending a weaker signal than the first ones. Why? Well,
because the market didnt have the strength to close at its high (or low).
The shadow is measuring the psychology of the markets and their
strength, just like the real bodies.
The upper shadow suppresses the rally.
They become important whenever they are confirming a support or
resistance area. If a lot of long upper shadows are near the same resistance
area, but they are not able to close at the high, this means that the market may
not be ready to break that resistance. The market is rejecting higher levels.
Lets take a look at how the shadows would influence our analysis of a
trend. Take a look at the example below:
Both trends had the same open and the same close. The second,
however, has a bigger shadow.
Which one do you think is the most trustworthy trend? The first one, of
course. In the second case, the market didnt have the strength to go higher
and just came back in. This means that the bulls still do not have a lot of
strength in the market, therefore, it is riskier than the first case.
So a bearish shadow, is a whenever there is a cluster of big upper
shadows. Heres an example:
In the first case, you can clearly see the bunch of upper shadows and
you can even create a resistance line over there. In the second situation, you
can clearly see that the bottom shadows have a bullish trend, and they are
huge too. That is a bullish sign.
Lets take a look now at how the bearish cross creates the resistance,
heres an example of that:
As you can see, the resistance is always at the highest high, it doesnt
matter what the other shadows are saying.
Even though I said that single shadows are not important, as always,
every rule has an exception. In shadows, this means that you see either a
Hammer or its bear counterpart, a Shooting Star. And this is the same in Forex
and Non-Forex
Heres how a hammer looks:
What you should do is, if you buy this hammer your best stop loss would
be on that support line that I just drew.
And what about the shooting star? Heres an example of the shooting
star, and you will see that it looks pretty much like an inverted hammer. It can
also have a small lower shadow by the way. The color of the real body, again,
doesnt matter.
That is just a small example of what a Shooting Star looks like. And it
usually signals that the rally might be losing its strength. Not surprisingly, the
Shooting Star is a resistance area.
So, if there is an extremely long shooting star and by the time it is
formed, and you have a bad risk-reward, dont do the trade.
Remember how to ignore a trade? You ignore it if it has a bad riskreward.
So what would you do? Well, put an alert on the resistance and if the
prices ever go near the resistance but dont have the strength to breakout, you
can short the trade.
Now lets talk about High Wave Candles.
The high wave candle is a combination of the Hammer and the Shooting
Star, what you get is this:
They have very long shadows both above and below a small real body,
and the color doesnt matter.
What does it mean? It means that the market rallies, but by the end of
the session it pulls back. The market is really confused, and doesnt know
what it wants to do.
So what we do is compare the High Wave Candle with the prior candle.
For instance:
Did the market have a sense of direction prior to the High Wave Candle?
Sure it did. The candle before had a long real bullish body. What does it mean?
It means that the trade went from a bullish, to a neutral. Use the top as its
resistance area, as usual.
These are the last single candles that we are going to study. Lets move
forward now, towards the patterns.
As you can see, we were had a long white candle, followed by a small
black candle, then another big white candle followed by a big black candle,
followed again by a big white candle and so on As you can see, this is a
bearish checkmate.
What happened is, the market began losing strength. Lets take a look at
a bullish checkmate now:
As you can see from both areas, the bears had the market but started
losing control. This is a bullish checkmate.
What are you supposed to do when you see a checkmate? I dont mean
just a single bar in a different color, bu this alternation of bars going on and
on
You should cut back on your bear position, and in the first case, you
should cut back on your bull position.
Making money is also a matter of managing risk, and it just got riskier
and riskier as the market was being checkmated.
Lets take a look now at the first pattern, the Bullish Engulfing Pattern.
This is the Bullish Engulfing Pattern. As you can see, the second white
candles real body completely engulfs the first candles black real body. This is
why it is called the Bullish Engulfing Pattern.
Even if it is just a pip or two of a difference, it is already a Bullish
Engulfing Pattern. Heres an example taken from a real trading session:
But how do you trade with it? You measure the risk-reward. If you put
in a stop right below the support, you have a pretty good risk-reward ratio.
Heres how I am looking at it:
Here you can see two bullish engulfing patterns in a row, and both first
candles were High Wave Candles. What does this teach us? It teaches us that
the bear market is losing strength and it gives more strength to the pattern.
Now what about the Bearish Engulfing Pattern? Well, as you can see it
doesnt change much:
But now, the market was in a bullish trend and the bearish engulfing
pattern occurred. Remember that for every pattern, you must see the
preceding trend too. Here, the bulls have been taken over by the bears, at least
momentarily.
Lets take a look now at a real example from a trading session, and see
how the analysis would proceed:
As you can see, the first candle of the Bearish Engulfing Pattern was
again a very high wave candle. Again, this signals to us that the trend is losing
strength, giving strength to our theory that the market will turn bear.
How can we add even more strength to a Bearish Engulfing Pattern?
Take a look at this case:
First, look at the number of candles that the Bearish Engulfing Pattern is
eating up. 3 whole candles, and almost a fourth one. That is a very strong
signal. Now take a look at the previous candles, all of them have very long
shadows, giving us the signal that the trend may be losing its strength.
Just because the bearish engulfing pattern is this strong, it doesnt mean
that the sky is falling down. But the chances of we making money with the
trade just increased by a lot.
Dont think that because the black candle in the bearish engulfing
pattern has engulfed 3 candles, it means that the market is 100% certain to go
down. Think that the probability of the market turning has increased, and
more than if the black real body had engulfed just a single candle.
And remember that the trend preceding the bearish engulfing pattern
has to be bullish, and conversely, the trend preceding the bullish engulfing
pattern has to be bearish.
Lets see an example of one of the many mistakes that rookie traders
make:
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As you can see, it looks exactly like a bearish engulfing pattern. Except
that, there is no definite preceding trend. The market is slightly checkmated,
and doesnt know where to go for at least the past 9 candles. Dont short
unless the preceding trend is clear.
Heres an example of both Engulfing Patterns:
The Dark Cloud Cover is characterized by the fact that the second candle
in a bullish trend opens at the same level as the prior candle, but the black real
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As you can see, the market was bullish but then the Dark Cloud Cover
occurred. Remember that you can only take in consideration any signal or
pattern, if you have the correct preceding trend.
The dark cloud cover is a sign of uneasiness at a high price, as the
Japanese would say. The high of the dark cloud cover should be a resistance,
as you can see here:
Lets see another trading example of the Dark Cloud Cover and its use as
a resistance area:
As you can see, there is no trend at all in any of these dark cloud covers.
You have to remember that the preceding trend is as important as the pattern
itself.
Heres an example of where the trend is right, but the size of the real
bodies is wrong:
As you can see, both real bodies are relatively small, and the market is
trendless. This is not a dark cloud cover, because there is no definite trend and
the first real body is not long. The market didnt shift psychology, it didnt
change the way it thought. What we want to see is real shift in psychology.
Lets see now the bullish counterpart of the Dark Cloud Cover, the
Piercing Pattern.
PIERCING PATTERN
Heres the Piercing Pattern:
As you can see the piercing pattern occurs, when in a downtrend, the
white real body of the candle is bigger than half the black real body of the
preceding candle.
Lets take a look at a trading example:
And as you can see, you should always use the low of the piercing
pattern as the support.
Lets take a look at a couple of complete examples now, and I will point
out everything you have learned so far.
First we can see a clear Piercing Pattern and in the second situation we
can see the market breaking through the support line of the Piercing Pattern
with a hammer, followed by a bullish engulfing pattern.
Heres another example with a couple of patterns you have already
learned to spot:
As you can see, you can already spot a lot of patterns in any given
trading situation. Right next to the shooting star, there is a pattern that looks
like a piercing pattern. However, the market was in an uptrend.
What about the support levels in the situation above, and the riskreward analysis?
It is simple, and you have learned how to do this too.
THE HARAMI
The Harami has a very specific definition: it is a very small real body
following a very long real body. The second real body has to be with the
opposite color, and can be a spinning top or a doji. The Harami usually means
that there is a change in the flow of the market like most two candle patterns,
so you must always be aware of the Harami. Heres how it looks:
You can also see in this case that the second candle was also a high wave
candle, followed by another high wave candle and a doji. This is definitely a
signal that the preceding trend is losing strength.
Consider the strength of resistance as going down, from the Engulfing
Pattern to the harami. You shouldnt even use the harami as a resistance area,
it is not needed.
After learning about single candle patterns, and two candle patterns,
lets move on to three candlestick patterns now.
The important thing is that the second candle must be deep in the first
black real body. The Morning Star can be seen as a Bullish Engulfing Pattern
that is also a part of a delayed Piercing Pattern.
Heres how the ideal morning star looks in a trading session:
Is the third candle deep into the first candles black real body? Yes.
Is it preceded by a spinning top or a doji? Yes.
Is it preceded by a bearish trend? Yes.
So we have a Morning Star. Now lets take a look at how the morning
star can confirm a support area for us:
As you can see, we now have a pretty well defined support area to trade.
If the prices go down to that levels again we can confidently trade them.
You should always use the lowest low of the candlestick patterns in
order to create your support area.
Now lets take a look at the next pattern, the Evening Star.
It is the exact reflection of the Morning Star. Lets see a real Forex
Market example for it:
RISK-REWARD
Okay, how do we find the risk-reward ratio and how exactly do we make
decisions based on our analysis?
Well, we first find our support areas, then we find our resistance areas
and then we analyze if the trade makes sense or not.
I would say that you should always assume a probability of the trade
working at around 60%, just to make sure that you get at least a good riskreward ratio whenever getting into a trade
To analyze the risk-reward, you will need to use everything you have
learned so far, in order to create the support and resistance areas.
Lets take a look at 4 examples, before we move on to other matters.
As I pointed out in the picture, again, the risk-reward profile looks very
good. Look how little we have to lose if we buy the Piercing Pattern. It
confirmed an old support level, and we have a shooting star giving our
resistance levels.
We can clearly see that in between, the market was slightly checkmated
with no real trend whatsoever. Lots of dojis and high wave candles.
This is what you should aim for: very little risk, to a high reward in case
the trade works out.
But what about some examples of trades that do not have a very good
risk-reward profile?
Lets take a look at a couple of examples of that now.
As you can see, the risk-reward profile in this case is not good at all.
Even though we had a very good morning star, take a look at the downside.
And take a look at the reward you are getting.
This is a losing proposition, because even if you make a right call, over
the long-term you will be losing money with these kinds of bets.
Which is why I want you to always remember this concept of riskreward when trading.
Suppose I gave you the worst possible signal available, and after some
thought you realized that the chance of you making money on that trade was
10%. However, imagine that the risk is 1% of your money, while the reward
can be up to 2000%. Would you take it? Of course you would. Because even if
you lost money 1, 2 even 3 times, on the long run you would be making a
killing on that trade.
This is why you should always do risk-reward analysis.
Lets take a look now at another example of a bad trade.
STOPS
You should always use stops. Even though I am sitting in my trading
station all day long, I always set up my stops in the resistance or support areas
before my trade. I always give it a little bit of room too, around 4-10 pips.
But why do I set stops?
I know that most intraday traders want to pull the trigger and exit the
trade themselves. The ideal stop is you, of course. The best traders dont put in
stops, they want to exit the trade at the exact moment they choose to.
But most of us are not capable of that. We get too attached to some
trades, we freeze, and we are prone to psychological mistakes. We cant just
say Im wrong, Im getting out of this trade easily and without attachment.
This is why you should always set your stops, because this way, you are
sure to exit the trade at a point you have specified beforehand. Imagine the
stop as your cars airbag. If you make a mistake, it will be there to help you
out.
Always place your stop (in your mind) before you put in the trade.
Always know where it is before you put in the trade, dont put in the trade and
then think about where the stop is going to be.
The good thing about setting a stop, is also because you can clearly
manage your risk-reward ratio. Before you enter the trade, you must set your
stop to know your risk.
And where do you put the stops? Well, we learned this already. Just use
the support and resistance areas we have already learned about. There is no
mystery to it.
Lets take a look now at the indicators.
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65 Lesson 6) Indicators
LESSON 6) INDICATORS
Well, as you have already learned everything you should about the
basics of trading with candlesticks and how to measure your risk reward, it is
time to learn about the indicators that you will be using the most in your life.
First, you have to learn that the more indicators, the better. If you learn
how to use 15 of the right indicators with great aptitude, is better than learn
how to use 2 indicators with the same level of aptitude.
And it is the combination of candles and western techniques that will
bring you to great trading ability.
This will be a very dense chapter, with a lot of examples. Please bear in
mind that I will be as brief as I can, without going on and on about a simple
point. I just want you to understand this quickly, because in next chapter you
will learn exactly how to use the best system around, and we wont use a lot of
this.
CONFLUENCE
This is whenever we have one candlestick line confirming another.
For instance:
As you can see, we had a morning star that was confirmed by a couple of
dojis.
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66 Lesson 6) Indicators
CHANGE OF POLARITY
Change of polarity is a term invented by Steve Nison, and it means that
that the old support turned into the resistance.
For instance:
67 Lesson 6) Indicators
I dont use it much, but if you like it you can use it to manage your
resistance and support areas too.
68 Lesson 6) Indicators
If the market goes below the neckline, you should sell it. Conversely, we
have the inverted head and shoulders, which works pretty much the same.
Heres how it looks, now without the lines so you can try to see it clearly:
As I said, it looks exactly like the last one except it is inverted. And
remember that now, the position of the neckline is above the pattern.
OSCILLATORS
Oscillators are mathematically derived from the prices, this way, they
are completely objective. This includes Stochastics, MACD, RSI, etc.
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69 Lesson 6) Indicators
When youre trading, you should be using independent information, to
make sure you dont get confused. For instance, you can use MACD, or RSI. But
not both, because they are not giving you any extra information and they
would be just confusing you.
I will talk a lot about RSI in the next chapters, so lets just talk a little bit
about the applications of oscillators.
Essentially, an oscillator is measuring the momentum of the trend. It is
trying to gauge if the market is overbought or oversold.
Im sorry about the size of the pictures in this chapter, however, to show
you everything this is the only way I can do it.
Heres an example of a Piercing Pattern together with the MACD
oscillator:
70 Lesson 6) Indicators
As you can see, the MACD confirmed what the Piercing Pattern was
telling us: it is confirming that the market is oversold. Is the market
vulnerable? Yes, it appears to be.
Now lets take a look at another candlestick line trade in conjunction
with an oscillator so we can gauge the power of the trade.
71 Lesson 6) Indicators
As you can see, in the first situation the market appeared to be oversold,
and the piercing pattern worked perfectly. However, on the second trade it
also worked perfectly but the oscillator didnt work that well.
Why?
Well, as you can see, the slight downturn of the market was only two
ticks long, and the oscillator didnt give too much strength to that signal. This
means that the momentum is also measured by the oscillator.
DIVERGENCE
Divergence is whenever the market makes a new low, but the oscillator
doesnt makes a new low. Or, conversely, if the market makes a new high but
the oscillator doesnt show it as a new high. For instance, heres how a
negative divergence would look like:
As you can see from the trading example below, there is a clear
divergence between the oscillator and the price movement. The oscillator
already had turned positive, while the price movement was still making lows.
This is exactly what positive divergence means.
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72 Lesson 6) Indicators
73 Lesson 6) Indicators
BOLLINGER BANDS
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74 Lesson 6) Indicators
Bollinger bands, as you probably know, are lines two standard
deviations above and below from the moving average. As the market gets less
volatile, the bands shrink and as it gets more volatile it expands.
It is another way to gauge overbought and oversold, but this is a
separate tool from oscillators, so you can use it in conjunction with them.
They work very well as overbought and oversold indicators, because we know
exactly when the market is getting a little bit overextended. Heres how it
looks, and a simple case study about it:
What is the pattern that happened in the first arrow when the prices
touched the Bollinger Band? A piercing pattern. Look now at the second one, it
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75 Lesson 6) Indicators
is a Bearish Engulfing Pattern. Look at the third one, it is another piercing
pattern.
Even before the arrows, you can see a shooting star crossing the
Bollinger band.
What is going on there?
It is showing us that the market is overextended in all cases. But how do
you trade with it?
Do you need more signals?
NO! You have to think about the Risk-Reward of the trade. Always think
of it even before you think about entering a trade.
FIBONACCI RETRACEMENTS
Another very useful technique used in the markets are the Fibonacci
retracements. It is very simple, it basically plots lines correspondent to 38.2%,
50% and 61.8% from the top price. For instance:
76 Lesson 6) Indicators
77
Well, that is a little bit different. You can see a variation of an evening
star, with a doji right in the middle of it, and a shooting star confirming the
Retracement.
That is a better trade than the past one, especially because of the doji,
evening star and shooting star variation. And also look at the Risk-Reward
ratio, we have a solid stop right above the Fibonacci Retracement with the
dojis high.
Okay, now that we have learned a lot of ways to see trades in a different
light, lets go to the meat of the course: the Ichimoku System, and why after
learning it you should forget almost everything you have learned up to here.
Right before the market had a huge run, it gave me the signals I needed
in order to make the big bucks.
Can you see how the cloud was beginning to open up, and suddenly the
price slightly touched the cloud?
At the same time, the purple line (the Tenkan-Sen) crossed the blue line
(the Kijun-Sen) signaling even more strength in the market.
Right after the price touched the cloud, if you bought the trade, you
could have made a boatload of money. This is the system Im going to teach
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THE TENKAN-SEN
The Tenkan-Sen is calculated by the following formula:
(Highest High + Lowest Low)/2 for the last 9 periods.
You may think that it is very similar to the moving average. However, it
is the average between the highest high and the lowest low in the window. So
there is a big difference, in that if the market doesnt know where to go, the
Tenkan-Sen will be completely flat for the period. If it is flat, it is because the
price is in a short-term equilibrium. This is why most other traders lose
Look at the Purple line. That is the Tenkan-Sen. It doesnt know where
to go, because neither does the market. It is a lot less reactive than the simple
moving average, so it is a very good conservative line. It represents a better
estimate of the actual price equilibrium. Do you get it?
The good thing about knowing when the market is in equilibrium
is because we dont want to have any false buys or false sell signals when
trading.
If it is flat, we know that in the past 9 days the market is showing no
trend at all.
THE KIJUN-SEN
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It becomes flat when the market is not doing much, when it is basically
just random-walking without any true trend. Dont do the same mistake that
those broke traders in Wall-Street do all the time: The price may be moving,
but it may be going NOWHERE. Dont try to follow a trend too closely,
sometimes the price will be going nowhere and if you trade, youll lose money.
Lots of it.
Can you see how the Kijun-Sen got very steep? Look at the blue line. It is
usually unreactive, but suddenly it shot up like a rocket.
The Kijun-Sen is a very good indicator of the price equilibrium, even
better than the Tenkan-Sen, because of the longer period. I will explain it to
you later how we may use it to trade, how to find equilibrium points and how
to use it as a stop-loss and as an entry point. And dont trust any other system.
There is another point to the Kijun-Sen. If it becomes flat, it transforms
itself in an attractor to the price. If it stays flat for long enough, the price will
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Even though the trend may seem obvious here, sometimes it wont be
that obvious. So you must use the Chikou Span. It also has other uses, but we
will discuss them later when talking about trading strategies. Youll mostly
use it to confirm your trading calls.
The Senkou Span B, on the other hand, lets you see the longest-term
equilibrium. So you can quickly make more informed decisions about the
trade.
These two lines are not supposed to be used alone. Always remember,
they are only useful together.
The cloud is the heart of this system, and if you master it, youll be able
to make fortunes trading Forex. And it is easy to learn it too.
CALIBRATION
Like every system, this one has to be calibrated according to the market
you are playing. In a faster market, you would want to cut down the periods.
For instance, in times that the market is experiencing unusual external stress.
While if the market is sleeping like a baby, not seeing a lot of changes,
you should extend the periods in order to profit the most from those longerterm trends.
THE KUMO
One of the Kumos most important aspects is the fact that it can provide
you with the best support and resistance system. If you use still use
trendlines, stop.
Look, Ive tried hundreds of methods to find the correct support and
resistance in Forex, and most of the times, I got burned. Even though the
techniques from the Candlesticks were pretty good, I feel it is my duty to tell
you that this system will almost work like a crystal ball, as soon as you begin
to use it.
Just imagine the inside cloud as the only place you have no idea what is
going to happen, it is too cumbersome to try to figure out exactly how the
price is going to react in the middle of the cloud. But you know one thing: If it
breaks the cloud, it will keep on going. And going. And going. Look in the
picture below how the prices ride the cloud, it is absolutely amazing.
And it just blows the traditional chartists out of the water. Youll be
basically cheating your way out of losing trades. By figuring out in advance
whether the market is breaking the support or the resistance.
Some chartists would lose all this money by not figuring out that the
true support was still below the prices.
I dont even know how some people make money without using the
Ichimoku. It is so simple, yet so powerful, that I find it strange that not a lot of
traders use it. Ive made a killing with it.
Another problem that usually makes traditional chartists lose a
boatload of money is when the price is in the middle of the cloud and, because
they cant see it, they go long thinking that the resistance has been broken. But
it hasnt, the price is in the middle of the cloud and it is too risky to go long or
short in this situation.
Just check out the following picture and youll clearly see what I mean,
the traditional chartist would have gone short on the trade, however, he
would have lost everything pretty quickly. He didnt realize that the price
trend was not yet defined. The price touched the Senkou Span B and reacted
faster than any chartist could see.
This is the power of this system. And we are just getting started.
But what about the relationship between the price and the Kumo? Well,
if you havent realized until now: if the price is trading above the Kumo, what
we are seeing is a bull signal, because obviously, the current price is higher
than the historical average.
In the same way, when the price is trading below the Kumo we are in a
bear market. The first step in analyzing any trading situation is to see the
relationship between the price and the Kumo. When you do that, youll have
the necessary market trend information. Something that can be hidden with
other methods. Heres an example of a bear market:
Dont trade unless your trade agrees with the Price-Kumo relationship.
Dont go long if the relationship is bearish. You may make 2 pips, but youll
lose 50. Just go short and ride the trend. It is always better to ride the trend,
than to try to time the market perfectly.
Another very important factor you must take in consideration is the
Kumos depth. It can vary immensely, and you have to know exactly what it
means. If the market is too volatile, the Kumo will open up; conversely, if the
market is not volatile at all, the Kumo will close up.
But why is that?
Remember what the Senkou Span A and the Senkou Span B represent?
The Senkou Span A represents the average between the Tenkan-Sen and the
Kijun-Sen. But the periods for the Tenkan-Sen and the Kijun-Sen are different,
they are respectively 9 and 26 periods. So when you average it, you are
finding the middle point between the longer average and the shorter average.
While the Senkou Span B represents the average of the highest high and the
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In the first situation, the price broke through a thick Kumo and tried to
beat the new resistance. But because the Kumo is too thick, it didnt have the
strength to break through. If you had shorted the trade as soon as the price
came below the Kumo, you would have made a killing. Why would you short
it? Because you know that the Kumo is very strong, and it would be very hard
for it to come back up.
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Dont trade on the Kumos sentiment alone. It is not a good strategy and
youll lose money if you do it. The Kumos sentiment is just another piece of
the puzzle. You should use it only as confirmation, not as the primary driver
for your trades.
There is another aspect of the Kumo that you have to understand in
order to grasp the magnitude of the effectiveness of the Ichimoku. Youll often
see flat tops or flat bottoms on the Kumo.
If you see a flat Senkou Span B, you have to think of it as having the
same effect as the flat Kijun-Sen. It is an attractor to the price that is in its
close proximity. Why? Because the Senkou Span B is the price-equilibrium for
the past 52 periods. The price will always want to go there, if the equilibrium
remains for long enough.
In a bullish trend, the flat Senkou Span B will result in a flat bottom
Kumo, while in a bearish trend it will result in a flat top Kumo.
Bearish Cross
Cross Below
Kumo
Cross Inside
Kumo
Cross Above
Kumo
Below Cross
Means Stronger
Signal
And all I had to do was to buy when I saw the cross, and sell when I saw
another cross. No big deal. The price was above the Kumo, giving me even
stronger bullish signals.
The entry point is when the Tenkan-Sen crosses the Kijun-Sen right?
Entry Point: At Point A, the cross had a weak bullish signal. However,
because the depth of the Kumo is very thin, I went ahead and bought the
trade.
Exit point: At point B our exit strategy was triggered. Now heres what I
have to explain to you; this is our bullish exit strategy:
1
If the RSI falls down less than 10% and when it runs up it doesnt break
the peak-resistance.
If the RSI gains less than 25% and when it goes down it doesnt break the
inverted-peak resistance.
We got in fast and left the trade even faster. This trade alone is worth a
fortune, and it only took us a little bit less than 5 hours to go in and out of it.
As you can see, at point A we had our very strong bearish signal, and it
was below a bearish Kumo. At point B, our exit point was triggered and we
didnt lose a single penny. The perfect kill.
Now Ill show you another example of a very strong bear signal, below
the bearish Kumo:
As you can see with this trade, our strategy worked perfectly again. And
we managed to make 437 pips in less than 7 hours.
This is what I call the perfect storm: a bearish Kumo, triggering a
bearish cross and the thickening of the Kumo right after the trade started.
That looks perfect to me. I hope that by now you can catch all these little
details. Lets take a look at the next strategy now.
Bearish Cross
Cross Below
Kumo
Cross Inside
Kumo
Cross Above
Kumo
Lets see a couple of examples so we can get the hang of it. I will also tell
you why some of the weak trades work, and why some of the good trades
dont work. Get ready to go deep into the Ichimoku.
Heres an example of a strong bullish Kijun-Sen Cross:
Can you see the Kijun-Sen Cross? We made a lot of money in a single
trade that lasted slightly less than 40 minutes.
The Kijun-Sen here has a very good shape. As you can see, the Relative
Strength Index was already pointing out to us that it was going to be a very
good run.
As soon as the prices broke through the flat Kijun-Sen, we had our trade
ready. It is that easy. Our exit point was calculated as usual, with the Relative
Strength Index.
Now lets look at another example:
Heres what I call a weak bear Kijun-Sen Cross. What are the reasons
that made me enter the trade?
Look at the sky falling RSI. Look at the trend in the Tenkan-Sen.
However, sometimes I would pass on trades like these.
I really dont like weak crosses unless I have some good reasons to enter
the trade.
Lets take a look at another Bear example, but a very strong bear
example:
The difference between the last weak bear cross, and this strong cross is
remarkable. At the same time as the prices were crossing through the KijunSen, a Tenkan/Kijun Bearish cross happened, and the prices broke through a
Kumo. The RSI was falling like a kamikaze.
This is a perfect storm.
Whenever you have the opportunity to take a trade like this, do it. The
probability of losing money is greatly reduced.
Lets go back to a bullish example.
I am mixing the examples up, because I hope that by changing the
example type all the time you will learn how to trade the Ichimoku in every
situation possible.
Can you see the strong cross? Easy money. The Kijun-Sen was already
trending upwards, and as the price broke through, I saw this huge spike in the
RSI and I knew that this trade would make me money.
Always look for other indications that the trade will work. In this case, it
was the RSI spike and the Kumo-Cross that had happened just a tick before
the actual trade.
Again, I used our standard exit strategy.
Lets take a look at a weak bullish example now:
Well, as you probably can see now, I only entered the trade because the
RSI was showing me the strength I needed to make a couple of pips, fast. Even
though the Bullish Tenkan/Kijun Cross happened before my exit point, I dont
like to break my own exit rules.
As a guideline, you should never stay longer or go out earlier than your
exit strategy dictates. It will make you lose money in the long run, I guarantee
it.
Lets take a look at a couple of perfect storms now, so you will never
miss one of these. I will use examples I have used before, and comment on
every factor that influenced my decision to take the trade.
Look at this beauty. What a great day. What do we have going on for us?
A) A Tenkan/Kijun Strong Bullish Cross
B) A Kijun-Sen Strong Bullish Cross
C) A Bullish Kumo Sentiment
D) A Spiking RSI
Whenever you take trades like these, you can rest assured that you will
make money. All youll need to do is to ride the trend, and that is it. With the
Ichimoku, you will not have to trade 20 times every minute.
You can take a break, get some tea and go back to work. It wont affect
your profits that much, compared to other systems.
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Before you read my checklist, try to see everything that matters, and try
to think for yourself why this is a great trade.
Go on, dont be scared Ill help you out in a bit.
Got it? Alright, heres everything I see in the trade, and I hope you will
see that too:
A) A Tenkan/Kijun Strong Bearish Cross
B) A Kijun-Sen Strong Bearish Cross
C) A Bearish Kumo
D) A Bearish RSI Trend
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There you go, an example (it was very hard to find one by the way)
where the Kijun-Sen Cross did not work. Neither did the Tenkan/Kijun Cross
Right after the Kijun-Sen Cross. If you took that trade, you would lose 16 pips
until the exit strategy worked.
Why is that? Well, for starters, the Kumo Sentiment was turning Bullish
right with the trade. Secondly, look at the trend of the Kijun-Sen. You were
trading against the trend of a long term average. Thirdly, you were trading
against the Bullish Tenkan/Kijun Strong Cross. Even if the cross was reversing
itself, you would not know at that time.
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Okay, you just lost 31 pips in less than 25 minutes. Why was that?
There are several factors that are giving you a good signal for the trade.
Firstly, there was a Bullish Kumo Breakout. Secondly, the RSI was trending up.
Thirdly, there was a strong bullish Kijun-Sen Cross.
So why didnt it work?
The Kumo Breakout was not strong enough, can you see the bearish
sentiment of the Kumo? Can you also see that the top of the Kumo was flat,
went down a step and continued flat?
Number of Signals
1
2
3
4
5
Weak
1
1
1
2
3
Neutral
1
1
1
3
4
Strong
2
2
1
4
5
Now you just have to plug in the numbers. I made all this Kelly Criterion
money management strategy as easy as I could for you.
What most people would tell you is to simply find out what is the
statistics of your winning percentage and go from there.
But that would send the wrong message: the message that every trade
you get in has the same probability of success.
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By using our table, we can see that we have two strategies at work on
the weak side, but the sentiment of the Kumo is inverted. So we only have 2
signals. By checking our Probability Table, we have a 55% chance of making
money here.
Using the Kelly Criterion, we have that the fraction of our bankroll that
we should invest is 9.75% of our bankroll. But how would that translate in
terms of Forex trading?
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129 Conclusion
CONCLUSION
I hope you utilize all the techniques I have taught you as you progress
into becoming a true Ichimoku Trader.
If you want to know exactly what will make you the most money in the
long run, here is a small list:
The Relative Tenkan/Kijun Cross coupled with Candlestick Patterns
Risk-Reward Analysis
Money Management
That is it.
That is all you need to know in order to make a lot of money with this
system. Now go trade.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN
ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE
TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF
ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL
ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR
TO THOSE SHOWN.
GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THESE METHODS MAY HAVE
WORKED IN THE PAST, PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A
POTENTIAL FOR PROFITS THERE IS ALSO A RISK OF LOSS. A LOSS INCURRED IN CONNECTION WITH TRADING FOREX
CONTRACTS CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS
SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY
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POTENTIAL FOR REWARD TRADING FOREX, THERE IS ALSO SUBSTANTIAL RISK OF LOSS IN ALL TRADING. YOU MUST
DECIDE YOUR OWN SUITABILITY TO TRADE OR NOT. FOREX RESULTS CAN NEVER BE GUARANTEED. THIS IS NOT AN
OFFER TO BUY OR SELL FOREX CONTRACTS.