Trading in the Clouds - The Art of Ichimoku, Part 1

The term Ichimoku, literally means one glance, in Japanese. Ichimoku is considered to be a self-
contained system in the fact that no additional indicators are necessary everything is included that most
traders will need to make trading decisions. How can we use it in our own trading?

One of the most compelling aspects of Technical Analysis is the way that it connects traders around the
world.
The fact that I can be trading at my home in Dallas, TX where I can see, interpret, and act on the same
signal that a trader from Shanghai, or Sydney had also identified - plays directly to the self-fulfilling
prophecy of Technical Analysis. Its almost as if its a language that, once learned, can whisper sweet
potential trade ideas in the traders ear.
However in practice traders will often learn that the benefits of Technical Analysis arent in the secret
messages, that can exist in markets but the fact that it can potentially help tilt the odds in our favor even
if just enough to allow for potential trading profits.
Many traders find a combination of indicators that they feel really strongly about spend hours upon hours
practicing, and manually back-testing (testing the way that the strategy would have worked on charts that
had already taken place) the indicators to ensure their efficacy. Even then principals of trade, risk, and
money management are of the upmost importance. Most traders will find that negligence in any of these
elements is akin to stuffing your money down a garbage disposal, even if trading with a strong technical
strategy.
A system that has recently gained popularity in the United States - and has the pizzazz, of being a potential
self-fulfilling prophecy while at the same time offering a strong technical infrastructure rooted on sound
fundamental trading theory is Ichimoku (pronounced Each-E-Mo-Ku).
Ichimoku is a trading system that was originally developed by Japanese journalist Goichi Hosada as he
was looking to develop the ultimate indicator that could provide a multitude of analysis with a very quick
glance. The term Ichimoku, literally means one glance, in Japanese. Ichimoku is considered to be a self-
contained system in the fact that no additional indicators are necessary everything is included that most
traders will need to make trading decisions.
Ichimoku is widely traded and followed throughout Japanese trading rooms lending many to the idea that
the unique ways of identifying support and resistance can make the system more acclimating for Yen pairs
such as GBP/JPY, EUR/JPY, and USD/JPY.
There are quite a few components of Ichimoku and it can make a chart look quite busy. In this article, we
are going to walk through the core elements of Ichimoku and how traders are using those parts of the
indicator to analyze markets.

Trigger the Base-Line

At the very core of Ichimoku are the Tenkan-Sen and Kijun-Sen lines (referred here-on-out as Tenkan and
Kijun respectively.) These two lines are the center of the Ichimoku system and can be looked at as the
trigger, that denotes bullishness or bearishness.
Tenkan and Kijun are really just moving averages. They differ slightly from standard moving averages in
that they consider the Average price, of each candle versus only the closing price (such as a simple or
exponential moving average generally will). This causes the line to appear jagged (as opposed to the
smoothing effect of a Moving Average calculated on close.)
Tenkan is commonly the first input that the trader will see when applying Ichimoku to a chart. This is a 9
period Moving Average, and we can consider this the Trigger Line, of the system as this is where all of
the action behind Ichimoku is taking place. I make this line Lime Green when applying Ichimoku so that it
stands out and is very clear when a crossover takes place.
Kijun is commonly the second input that is used and this is a 26 period Moving Average (also exponential,
calculated on average price). We can consider this as the base line. When the trigger line crosses up and over
the base line this can be considered a bullish signal. When the trigger crosses down, and through the base
line this can be looked at as a bearish signal.
The rest of the indicators within Ichimoku tell us the strength, that the signal can be interpreted with.
For right now it is important to become familiar with the Trigger/Base Line Crossover. If youre not
comfortable with this crossover yet, lets apply it on the chart and manually back-test a few trades to get
comfortable with the way that this works.
While learning the Trigger/Base Line crossover, it may help to arrange the Ichimoku indicator a easy-to-read
manner so that crossover is very clearly printed on the chart. For the remainder of this article, I will be using
a Green, line for Tenkan, and a Blue, line for Kijun.
Once completed, our charts should look roughly similar to what you see below:
Now that we have Ichimoku completely applied to our charts we can look at the power that the Trigger
Line/Base Line crossover has.
For right now lets ignore everything on the chart other than the Trigger and the Base Line.
Now that we are back in time we can begin testing the Trigger Line/Base Line crossover. We can do this
by simply clicking on the Forward-Arrow, on our keyboards. This will cause Marketscope to go forward
one candle at a time on the chart. We can keep going forward until we see a Trigger Line/Base Line
Crossover. Each time a crossover takes place make note (either by writing down, or just noting mentally)
and go further forward in time watching how a hypothetical trade would have played out.
For example notice on the below chart that we have a Bullish Crossover taking place on 5/11/2009 on
GBP/JPY. Ive highlighted the portion of the chart in which the Trigger Line is crossing over the Base Line
indicating the bullishness that may be entering into the pair.
We can then go forward in time by clicking on the Forward-Arrow, of the keyboard watching the way
that this hypothetical BUY position would have worked out.

After testing the way that this BUY entry would have worked we see that the Bullish crossover of the
Trigger Line over the Base Line immediately preceeded a 1,000+ pip run on the GBP/JPY currency pair.
We can then move onto the next crossover which if you look at the chart above will notice that the
bearish crossover (Trigger Line fell down, and through the Base Line) took place shortly after the high
around 162.50 was hit. We can now chart this SELL entry to see the way that it would have hypothetically
worked out for us.
In the chart below Ive highlighted this SELL entry as the Trigger Line has crossed down and through the
Base Line. Notice that this entry would not have been as profitable as the previous bullish entry that we had
taken but after the signal took place GBP/JPY went down over 700 pips.
The goal of manually back-testing these entries is so that we can internalize what happens when the Trigger
Line crosses the Base Line.
These are two of the most important elements of Ichimoku and are the very core of the system. Everything
else in Ichimoku helps us interpret these BUY and SELL signals indicating how strong they may have
been. In future articles we will discuss these elements and how they can help us interpret the Trigger
Line/Base Line crossover.
Manually back-test until you feel comfortable with the Trigger Line/Base Line crossover, and comfort with
this signal is of the upmost importance when trading Ichimoku. If you have a difficult time remembering
which line is which, try to think of it as Tenkan = Trigger, and Base Line = Blue.

Trading in the Clouds - The Art of Ichimoku, Part 2

The part of Ichimoku that just absolutely jumps out at us when we apply it to our charts is the area known as
The Cloud, or called Kumo, in Japanese. Its one of the areas of this indicator that makes the field of
study so interesting. Its constantly changing in area and in width.
Kumo actually just consists of two lines. The area in between the two lines is shaded and its considered to
be a moving range of support during uptrends; and resistance during downtrends. Many traders will look to
Kumo when setting stops on trades that were initiated by the Trigger/Base Line Crossover.
One of the more important tasks that Kumo can help traders with lies in its ability to denote the trend of the
currency pair. When a pair is trending up, making higher highs and higher lows Kumo will function as
support sitting underneath price as the currency pair trades higher.

And when a pair is trending down, making lower highs and lower lows Kumo will function as resistance
residing above price as the currency pair heads lower. These periods will show Kumo printed as RED on the
chart by default (please see below).
One of the more unique aspects about Kumo is that its built for 26 periods in advance. If you observe
current price on any chart while Ichimoku is applied you will notice that for 26 periods ahead Kumo is
already plotted and waiting for price. However keep in mind that this has absolutely no forecasting value
whatsoever.

How to Interpret Kumo

Now that we know what Kumo is lets discuss how traders are using it.
One of the more valuable functions of Kumo is its ability to show traders the potential strength, of the
Trigger/Base Line crossover. When this crossover occurs, traders will notice its location in regards to
Kumo and grade the strength of the signal accordingly. Lets walk through an example together.
On the GBP/USD chart below there are 3 BULLISH crossovers taking place, all of which are circled in
RED. Lets walk through each of the signals to see the way that traders would generally interpret these
crossovers.
During BULL CROSS 1 notice that both price, and the BULLISH crossover are below Kumo.

When this crossover takes place, it is at the end of a downtrend that was previously bearish. Traders are
unsure as to whether the trend is going to change to the upside; or if the bearish trend is going to prevail.
For this reason traders will often consider this to be a weak signal. If the reversal does take place, the
potential reward could be handsome; but reversals will not always take place. Observance of risk by setting
a stop is extremely important for these signals.
During the BULL CROSS 2 the crossover, and price are residing in Kumo as the Trigger crosses the Base
Line.
Traders will generally consider these Trigger/Base crossovers taking place in between Kumo to be of
moderate, strength.
When BULL CROSS 3 takes place, with price and the Trigger/Base crossover residing above Kumo
Traders will generally look upon this signal as being very strong.

The reason that traders will generally consider BULL CROSS 3 to be strong is because of AGREEMENT.
Remember, if price is above Kumo traders look at the pair as being BULLISH. When the Trigger line
crosses up and over the Base line (which is a bullish signal) AND price is above Kumo (a bullish
environment) Traders will enter into LONG positions considering the Trigger/Base Crossover Signal to be
very strong.
The exact opposite is true for SHORT signals. BEARISH crossovers taking place below Kumo are generally
considered to be very strong, because once again we have that agreement. Pricing below Kumo
indicates BEARISHNESS, and a BEARISH crossover will offer the agreement that a trader would want to
consider the signal very strong. BEARISH crossovers taking place ABOVE Kumo would be looked at as
weak.
How to Use Signal Strength
Now that we know how to integrate Kumo when we receive a Trigger/Base crossover, lets talk about one of
the more popular ways that traders look to benefit from the strength, of the signals produced by Ichimoku.
One very popular method of doing so involves the trade size that traders use.
When a weak signal is generated, traders can potentially look to open a position for 1 lot.
When a moderate signal is generated, traders can look to open a trade for 2 lots.
When strong, signals take place traders can enter a position for 3 lots.
With this method traders would be taking on larger trade sizes for signals that they felt were stronger.
Other traders may choose to take only the very strong, signals that offer agreement (BULLISH crossovers
ABOVE Kumo, or BEARISH crossovers BELOW Kumo).
Now that we know how to incorporate signal strength, we can manually back-test in the same manner we
had done on the previous lesson. Scrolling back in time, and scrolling forward one candle at a time to
observe the way that the currency pair traded after receiving each of the signals outlined above.
Next week well talk about Chinkou Span and begin delving a little deeper into risk management while
trading Ichimoku.

Trading in the Clouds - The Art of Ichimoku, Part 2

The part of Ichimoku that just absolutely jumps out at us when we apply it to our charts is the area known as
The Cloud, or called Kumo, in Japanese. Its one of the areas of this indicator that makes the field of
study so interesting. Its constantly changing in area and in width.
Kumo actually just consists of two lines. The area in between the two lines is shaded and its considered to
be a moving range of support during uptrends; and resistance during downtrends. Many traders will look to
Kumo when setting stops on trades that were initiated by the Trigger/Base Line Crossover.
One of the more important tasks that Kumo can help traders with lies in its ability to denote the trend of the
currency pair. When a pair is trending up, making higher highs and higher lows Kumo will function as
support sitting underneath price as the currency pair trades higher.
And when a pair is trending down, making lower highs and lower lows Kumo will function as resistance
residing above price as the currency pair heads lower. These periods will show Kumo printed as RED on the
chart by default (please see below).

One of the more unique aspects about Kumo is that its built for 26 periods in advance. If you observe
current price on any chart while Ichimoku is applied you will notice that for 26 periods ahead Kumo is
already plotted and waiting for price. However keep in mind that this has absolutely no forecasting value
whatsoever.
How to Interpret Kumo
Now that we know what Kumo is lets discuss how traders are using it.
One of the more valuable functions of Kumo is its ability to show traders the potential strength, of the
Trigger/Base Line crossover. When this crossover occurs, traders will notice its location in regards to
Kumo and grade the strength of the signal accordingly. Lets walk through an example together.
On the GBP/USD chart below there are 3 BULLISH crossovers taking place, all of which are circled in
RED. Lets walk through each of the signals to see the way that traders would generally interpret these
crossovers.

During BULL CROSS 1 notice that both price, and the BULLISH crossover are below Kumo.

When this crossover takes place, it is at the end of a downtrend that was previously bearish. Traders are
unsure as to whether the trend is going to change to the upside; or if the bearish trend is going to prevail.
For this reason traders will often consider this to be a weak signal. If the reversal does take place, the
potential reward could be handsome; but reversals will not always take place. Observance of risk by setting
a stop is extremely important for these signals.
During the BULL CROSS 2 the crossover, and price are residing in Kumo as the Trigger crosses the Base
Line.
Traders will generally consider these Trigger/Base crossovers taking place in between Kumo to be of
moderate, strength.
When BULL CROSS 3 takes place, with price and the Trigger/Base crossover residing above Kumo
Traders will generally look upon this signal as being very strong.

The reason that traders will generally consider BULL CROSS 3 to be strong is because of AGREEMENT.
Remember, if price is above Kumo traders look at the pair as being BULLISH. When the Trigger line
crosses up and over the Base line (which is a bullish signal) AND price is above Kumo (a bullish
environment) Traders will enter into LONG positions considering the Trigger/Base Crossover Signal to be
very strong.
The exact opposite is true for SHORT signals. BEARISH crossovers taking place below Kumo are generally
considered to be very strong, because once again we have that agreement. Pricing below Kumo
indicates BEARISHNESS, and a BEARISH crossover will offer the agreement that a trader would want to
consider the signal very strong. BEARISH crossovers taking place ABOVE Kumo would be looked at as
weak.
How to Use Signal Strength
Now that we know how to integrate Kumo when we receive a Trigger/Base crossover, lets talk about one of
the more popular ways that traders look to benefit from the strength, of the signals produced by Ichimoku.
One very popular method of doing so involves the trade size that traders use.
When a weak signal is generated, traders can potentially look to open a position for 1 lot.
When a moderate signal is generated, traders can look to open a trade for 2 lots.
When strong, signals take place traders can enter a position for 3 lots.
With this method traders would be taking on larger trade sizes for signals that they felt were stronger.
Other traders may choose to take only the very strong, signals that offer agreement (BULLISH crossovers
ABOVE Kumo, or BEARISH crossovers BELOW Kumo).
Now that we know how to incorporate signal strength, we can manually back-test in the same manner we
had done on the previous lesson. Scrolling back in time, and scrolling forward one candle at a time to
observe the way that the currency pair traded after receiving each of the signals outlined above.
Next week well talk about Chinkou Span and begin delving a little deeper into risk management while
trading Ichimoku.

Fibonacci
Traders are constantly confounded by the conundrum of when to enter a position during a trending market.
Enter too early and run the risk of your stop getting hit before the trend continues its movement in your
favor.
Enter too late and you risk missing the move altogether; opening the position as the currency pair
accelerates further only to find that by the time you entered price was due to make another retracement.
Much like trying to catch a train after it had already left the station, the results can be disastrous.
This article will discuss one of the more popular ways that traders look to identify comfortable entry points
when trading a trend. This procedure can help traders buy up-trends cheaply, and sell down-trends expensive
and it is all based on the mathematical study of Fibonacci.

How to Apply Fibonacci

Traders looking to apply Fibonacci want to first locate the trend that they are looking to trade. As is the case
with many other permutations of technical analysis, the longer time frames will generally offer a greater
degree of efficacy due to the larger sample sizes, and the fact that more traders may be making similar
observations. So, the first step in applying Fibonacci is to identify the most recent major move with which a
trader is looking to trade. The chart below will show how traders might look to do this with a recent
EURUSD Daily chart:
Now that the trend the trader wants to trade has been identified, the Fibonacci retracement can be added to
the chart with the traders charting software.
The picture below will illustrate how Fibonacci could be drawn on the above chart. Notice the green-edged
box from above; the below picture will show this portion of the chart in much greater detail:
Fibonacci Retracement Levels
The prominent feature of Fibonacci is the series of retracement levels that are offered as potential support
and/or resistance.
Once applied, intervals will be applied to the chart and traders could look to these prices to function as
resistance (for down-trends) or support (for up-trends).
The most popular Fibonacci interval speaks directly to the study of Fibonacci, and is linked to the golden
ratio, of .618. This interval is often interpreted as 61.8%; so from the trend that was just drawn 61.8% up
the trend-line will offer this price as a potential resistance level.
From the 61.8% retracement levels, traders have taken the reciprocal of the golden ratio (1-.618) to find the
next common Fibonacci retracement level of 38.2%.
The next two common levels are 76.4% and the reciprocal of this number 23.6%.
Traders will also commonly plot the 50% level although that is not a true Fibonacci number. The picture
below will outline these levels:

Each of these levels are relative to the prior trend. If a trader is looking to enter at the 38.2% retracement,
they are looking to trade in the direction of the original trend when 38.2% of that trend has been retraced.
The 76.4% retracement the deepest of the levels outlined above would come into play when more than
of the original trend has been given back.
Trading Fibonacci
Now that the trader has prices with which they can look to the re-ignition of the previous trend, the next step
is to wait for price to hit these levels. When these levels get touched by price, that is when traders can look
to enter trades in the direction of the original trend; once again looking to buy up-trend cheaply or to sell
down-trends expensive.
In the EURUSD example above in which Fibonacci has been applied, traders can look to sell if resistance
forms at any of the pre-defined levels. The chart below will illustrate further:
Not All Levels are Created Equal
One of the first things traders will notice when trading with Fibonacci is that not all levels will furnish
support and/or resistance at the pre-defined prices and intervals.
Because of this, it is advisable for traders to wait until support and/or resistance forms at these levels before
trading them.
Once support or resistance forms, traders can look to trade in the direction of the original trend with a
stop-loss order just above resistance (or below support in the case of up-trends).

Traders are constantly confounded by the conundrum of when to enter a position during a trending market.
Enter too early and run the risk of your stop getting hit before the trend continues its movement in your
favor.
Enter too late and you risk missing the move altogether; opening the position as the currency pair
accelerates further only to find that by the time you entered price was due to make another retracement.
Much like trying to catch a train after it had already left the station, the results can be disastrous.
This article will discuss one of the more popular ways that traders look to identify comfortable entry points
when trading a trend. This procedure can help traders buy up-trends cheaply, and sell down-trends expensive
and it is all based on the mathematical study of Fibonacci.
How to Apply Fibonacci
Traders looking to apply Fibonacci want to first locate the trend that they are looking to trade. As is the case
with many other permutations of technical analysis, the longer time frames will generally offer a greater
degree of efficacy due to the larger sample sizes, and the fact that more traders may be making similar
observations. So, the first step in applying Fibonacci is to identify the most recent major move with which a
trader is looking to trade. The chart below will show how traders might look to do this with a recent
EURUSD Daily chart:

Now that the trend the trader wants to trade has been identified, the Fibonacci retracement can be added to
the chart with the traders charting software.
The picture below will illustrate how Fibonacci could be drawn on the above chart. Notice the green-edged
box from above; the below picture will show this portion of the chart in much greater detail:
Fibonacci Retracement Levels
The prominent feature of Fibonacci is the series of retracement levels that are offered as potential support
and/or resistance.
Once applied, intervals will be applied to the chart and traders could look to these prices to function as
resistance (for down-trends) or support (for up-trends).
The most popular Fibonacci interval speaks directly to the study of Fibonacci, and is linked to the golden
ratio, of .618. This interval is often interpreted as 61.8%; so from the trend that was just drawn 61.8% up
the trend-line will offer this price as a potential resistance level.
From the 61.8% retracement levels, traders have taken the reciprocal of the golden ratio (1-.618) to find the
next common Fibonacci retracement level of 38.2%.
The next two common levels are 76.4% and the reciprocal of this number 23.6%.
Traders will also commonly plot the 50% level although that is not a true Fibonacci number. The picture
below will outline these levels:
Each of these levels are relative to the prior trend. If a trader is looking to enter at the 38.2% retracement,
they are looking to trade in the direction of the original trend when 38.2% of that trend has been retraced.
The 76.4% retracement the deepest of the levels outlined above would come into play when more than
of the original trend has been given back.
Trading Fibonacci
Now that the trader has prices with which they can look to the re-ignition of the previous trend, the next step
is to wait for price to hit these levels. When these levels get touched by price, that is when traders can look
to enter trades in the direction of the original trend; once again looking to buy up-trend cheaply or to sell
down-trends expensive.
In the EURUSD example above in which Fibonacci has been applied, traders can look to sell if resistance
forms at any of the pre-defined levels. The chart below will illustrate further:
Not All Levels are Created Equal
One of the first things traders will notice when trading with Fibonacci is that not all levels will furnish
support and/or resistance at the pre-defined prices and intervals.
Because of this, it is advisable for traders to wait until support and/or resistance forms at these levels before
trading them.
Once support or resistance forms, traders can look to trade in the direction of the original trend with a
stop-loss order just above resistance (or below support in the case of up-trends).

In an earlier article about employing the Fibonacci Tool in your trading, the basics of its use were covered.
In this follow-up, I would like to go into more detail about what to look for as the pair stalls at one of the
Fib levels.
For this article, lets use the current 1 hour chart of the GBPJPY currency pair below.

Since this pair is in an uptrend on the daily chart and on the 4 hour chart as well, I know that I only want to
buy the pair and I am merely looking for a technical reason to do so. Bringing up the 1 hour chart and
noticing that the pair is stalling at a support level around 125.76, I draw a Fib line from a recent Swing
Low (noted on the chart) to the Swing High of the movealso noted on the chart. After having done that, it
becomes apparent that price is stalling at the 50% Fib level. Looking at how the candles are aligning
themselves along that Fib line (see the smaller box on the chart above), there are a couple of things that
catch my eye.
There are several wicks that are protruding below this Fib level. This indicates that price has tested the 50%
level several time but has not been able to close below it. Based on this we know it is a formidable support
level on this 1 hour chart.
Also, looking at the candles themselves we see that there are several Dojis and a Spinning Top. Each of
these candles show indecision and potential change in direction.
Putting all this together, an uptrend, a pullback/consolidation at a Fib level and candlesticks that signal a
possible change in direction would provide the technical reason that a trader might need to take a long
position on the pair.
Using the Fibonacci Tool, a trader could place their stop below the 61.8% Fib level and use a simple 1:2
Risk Reward Ratio for setting their limit on the trade.