How to use Ichimoku for better trades

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Ichimoku forex trading

In our last article on Ichimoku, we learned what Ichimoku is. Now, let’s see how we can use it to increase our trading profits and improve our trading decisions.

How to use Ichimoku for better trades

The Ichimoku indicator allows you to visualise support and resistance levels, to identify current and future trend direction, to gauge momentum and to see buying and selling signals. You can consider this indicator to be a comprehensive analysis system all by itself, as it gives you all the necessary information required to make trading decisions.

Read our previous article to learn more about this versatile indicator: ICHIMOKU TRADING: THE ONLY GUIDE YOU’LL EVER NEED TO READ

We are now going to analyse a currency pair using only this indicator. This is where another important concept will come into play: multi-timeframe analysis. To better understand the way an underlying currency pair is going to trend, you need to look at it using different timeframes.

Read our article: HOW TO USE DIFFERENT TIMEFRAMES TO IDENTIFY FOREX MARKET PHASES

2 examples on several different time frames

  • Example 1: USD/JPY at the end of the week finishing on the 18th of November

Monthly

Whenever you are not familiar with the underlying asset you want to trade, or you want to have a deeper understand of it, it’s best to start with a monthly chart.

usdjpy-monthly

The first thing to look at here is where prices are in comparison to the cloud: they are above – but not far from – a thick green cloud, which is a bullish signal.

Next, let’s focus on the Tenkan (red line) and the Kijun (blue one) lines. This month, prices broke through the Tenkan, but they will soon meet the Kijun, which may act as resistance. Overall though, the way is relatively clear for price action to continue upwards.

Now, let’s have a look at the Lagging Span (fluorescent green line) to see how probable the continuation of this upward movement is, and what its potential may be. A few months ago, we can see that the Lagging Span bounced back from prices and is now above prices, as well as the Tenkan and the Kijun lines – which is bullish.

So, based on this time frame, I have an overall bullish view on this currency pair, even though prices are soon going to have to cross the Kijun line, as well as another resistance level just above the Kijun line (which you can see is tracing the SSB – the red outline of the cloud – at the 112.819 level).

usdjpy-monthly-ssb-resistance

You can also see on the below chart that a 3rd resistance from the SSA line of the cloud in the future also has to be crossed upwards – the 111.787 level.

usdjpy-monthly-ssa-resistance

Let’s now go down to a smaller time frame.

Weekly

usdjpy-weekly

On the weekly chart, we can see that prices are below the red cloud, but they are getting very close to where the cloud isn’t particularly thick – it’s not a “twist”, but cloud resistance may be weak enough that price action breaks through.

Prices are above the Tenkan and Kijun lines, and the Tenkan is on the verge of crossing over the Kijun. The Tenkan line is supposed to give us a hint about the strength of the short-term trend with the inclination of its slope. We can see here that the Tenkan is following the price’s steep incline.

The Lagging Span just crossed over the Tenkan and the current price, but the line might easily go back below if prices weaken next week. There is still some space before the Kijun line, but the Lagging Span should overcome it, and then the cloud, for the upward movement to be complete.

There is something very interesting that we can see on the following chart: a very important resistance level that the price will have to break before entering the cloud: this level has acted as both support and resistance for the cloud, as well as the past Kijun line – the 111.363.

usdjpy-weekly-ssassbkijun-merged

With this time frame, even though prices are below the cloud, we have some bullish signs with the recent acceleration of prices, but bullish potential is limited with those important resistances levels below the cloud.

Let’s now go down to the smallest time frame we will use in this example.

Daily

usdjpy-daily-resistances
In the daily chart, we can see that prices are above the cloud, the Tenkan and the Kijun lines, so prices are free from any obstacles to go up, as is the Lagging Span. You can also see 2 important resistance levels coming from past SSB and Kijun lines – 111.05 and 116.288.

USD/JPY

To sum up, the USD/JPY pair is in a clear bullish trend, as shown by the monthly and daily analyses. But we have also noticed some important resistance levels, where market participants may react and stop the current movement: 111.78 with the monthly chart, 111.36 with the weekly chart, and 111.05 with the daily chart. Prices are also below the cloud with the weekly time frame.

Once everything is cleared, prices will have no obstacle to continue rising.

  • Example 2: EUR/AUD at the end of the week finishing the 18th of November

You can also use this methodology with shorter time frames. A short-term trader will start by analysing a 4h chart, a 1h chart, a 15 min chart and a 5 minutes chart to finish.

4h chart

Here, it’s about having a view of the global price’s evolution.

euraud-4h

With a 4h chart, we can see that prices just arrived inside the red cloud. This is supposed to reflect a neutral situation, and we should pay attention to the way prices are going to go out from the cloud. Are they going to head back down, are they going to accelerate up and break through the cloud, or will it trend sideways?

Prices are above the Tenkan and the Kijun lines, and the Lagging Span is above the prices, the cloud and the Tenkan, but still below the Kijun line.

1h chart

euraud-1h

The currency pair is above the green cloud, the Tenkan and Kijun lines, and the Lagging Span is free of any obstacles, as it is above prices, the cloud, the Tenkan and Kijun lines.

As we can see in the following chart, the SSB’s past levels could be future resistance levels.

euraud-1h-ssb-past-resistance-levels

Here is the interesting thing: if you keep the lower resistance level, but you change the timeframe to 4h, it is now the cloud’s present SSB level. So, this is an important level you should keep in mind.

euraud-1h-ssb-present-resistance-levels

After a somewhat neutral 4h chart, the 1h chart shows a bullish situation, as prices are free to move up. However, the last candle is black and might be heading towards the Tenkan and the Kijun lines – the last of which will play the role of a support level. You can’t ignore the 2 important resistance levels either – 1.4476 and 1.4512.

15min chart

euraud-15min

Prices are above a green cloud, above the Kijun lines, but below the Tenkan. The Lagging Span is above everything, but heading down towards prices, as they broke the upward trend line and are heading towards the Kijun line.

5min chart

euraud-5min

We kept the same parameters in this 5min chart. If you look closely, you can see that prices entered the green cloud, breaking the upward trend line while going below the Tenkan and the Kijun lines, all at the same time (see red circle). The Lagging Span is also below prices, as well as the Tenkan and Kijun lines, but still above the cloud.

EUR/AUD

To sum up, the EUR/AUD pair isn’t giving very clear signs right now. The 4 hour chart shows that the currency pair is in the cloud. Once inside it, the market is considered to be without trend and highly uncertain. This is a sign that the previous trend is trying to change. The side where prices are going to go out from the cloud is crucial information about the future and former trend of the market.

On shorter time frames, we can see that prices are losing momentum, as they can’t form higher highs. Remember that in DOW Theory: “an upward trend is a series of successively higher peaks and higher troughs”.

financial industry - methodology

Which methodology should you apply?

First, you should focus on the current price situation, delayed prices, and their positioning among the Ichimoku system. You should then consider the following:

  • Where are the prices compared to the cloud?
  • How is the cloud evolving?
  • How far/close are prices from important support/resistance levels (from the Tenkan Sen and Kijun Sen lines)?
  • Is the Lagging Span close to running into obstacles or free to move?

Secondly, it’s about finding out which information brings each line to the global understanding of the markets. You should therefore consider the following:

  • How is the Tenkan Sen line compared to the prices?
  • Are prices about to break a resistance/support area – Kijun Sen?
  • How are prices in relation to the cloud? To the SSA or SSB? Knowing that it will be easier for prices to break through an SSA than a SSB.
  • Is the cloud thick or can I see a twist nearby? Remember that it’s always easier for prices to break through a thin twist than a thick cloud.
  • Is the Lagging Span confirming the price’s movement?
  • What are the obstacles that can slow the Lagging Span’s progression?

Finally, it’s important to have the big picture in mind, regardless of your trading horizon. It’s better to monitor the evolution of each line on different timeframes. You should keep in mind the following:

  • A longer timeframe is used to determine the trend: uptrend, downtrend or a range
  • Shorter timeframes are mostly used to determine entry and exit points: finding opportunities to enter the market

Some rules to follow

You are now aware of the importance of looking at charts with a multi-time frame approach, which will help you better understand the evolution of the underlying assets, and better time your trading entries and exits.

Using 3 different timeframes in your trading platform allows you to sharpen your entry and exit levels, to better place your stop-loss and take-profit according to your money management strategy. You can also react faster if there is a change in your objectives.

With this concept of time, here are 3 rules you should always follow while trading based on Ichimoku:

  1. You need to know how to switch between timeframes to be able to select the 3 most important to keep in front of your eyes while trading
  2. Do not anticipate the moment you will enter the market you absolutely need to wait for a signal confirmation before you open your position – even if that means that you are “losing” a few PIPs at first.
  3. Wait for the closing value of the current candle on the time frame you are using – especially on small time frames. This 3rd point is linked to the 2nd


1 strategy with Ichimoku: using the cloud and Kijun’s breakout

There are several strategies you can use with the Ichimoku indicator. Some traders will use all the lines of the indicator, but others like to base their strategies on some of the Ichimoku lines while ignoring others. We will focus here on a trading strategy using the cloud and the Kijun line, with prices’ breakouts.

Reminder: analysing prices in comparison to the cloud help you visualize the current trend. There is an uptrend if prices are above the cloud, and a downtrend if prices are below. In this strategy, we will use it as such to enter the market with the following rules:

  • If prices > cloud, then we are only looking for buying opportunities
  • If prices < cloud, then we are only looking for selling opportunities
  • If prices are inside the cloud, then we are waiting for prices to exit the cloud to decide. If it’s exiting above the cloud, then we are only looking for buying opportunities. If it’s exiting below the cloud, then we are only looking for selling opportunities.

eurchf-daily-cloud-break

As we can see on this chart, using the cloud by itself can provide you with great trading opportunities associated with big movements (see rectangles), but you can also see different situations where the “cloud break” isn’t clear and reversal movements can happen. This strategy works best with high volatility assets, but it’s hard to predict when volatility is going to increase. You can add the Kijun line to be able to better identify market sentiment and to increase returns with a more precise money management with entry and exit points.

Do not forget that the Kijun is the average point of the prices from the 26 last periods – so when prices do not register new highs or new lows, the Kijun line stays flat and does not provide great signals, as we can see on the following chart.

eurchf-4h-kijun-flat

Here is how you can classify the signals from the Kijun’s breakout:

  • Weak/Unreliable SignalsBuying signal: when prices break above the Kijun line, below the cloudSelling signal: when prices break below the Kijun line, above the cloud

eurchf-1h-weak-signals

  • Neutral signalsBuying signal: when prices break above the Kijun line, inside the cloudSelling signal: when prices break below the Kijun line, inside the cloud

usdjpy-1h-neutral-signal

usdchf-1h-neutral-signal1

  • Strong signalsBuying signal: when prices break above the Kijun line, above the cloudSelling signal: when prices break below the Kijun line, below the cloud

usdjpy-30-min-strong-signals

usdjpy-1h-strong-signals

 

As we said before, this strategy can be very effective with periods of intense volatility. As we can’t really predict volatility, the Kijun’s position in comparison to the cloud will help you to gauge opportunities. Once a position is opened, you can use the Kijun line as a stop-loss.

Conclusion

The Ichimoku indicator allows you to instantaneously visualise the state of equilibrium of the market, regardless of the underlying asset or the time frame. The reading of the different lines together, as well as compared to the prices, reinforce the reliability of the signals provided by this indicator.

You can either combine Ichimoku with the indicators that you currently use, or you can rely on it as your sole analysis tool. Whatever you decide, it will most likely serve you well.

 

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Carolane de Palmas
Carolane de Palmas

After graduating with a Masters in Corporate Finance & Financial Markets, and getting the AMF Certification (Financial Markets Regulator in France), Carolane went to market analysis software company Highwave360 to take part in the European launch of their new market analysis software. She then become an independent trader, investing mostly in European and American stocks and indices, as well as writing market analyses for a number of different brokers. She is the COO of a Canadian fund that specialises in alternative investments.

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