Ichimoku Cloud Strategies For Intraday Forex Trading

Ichimoku Cloud Strategies For Intraday Forex Trading – The Ichimoku Kinko Hyo chart isolates higher probability trades in the forex market. Also called the equilibrium chart, it is new to the mainstream but has increased in popularity among novice and experienced traders. Known for its applications in futures and equities, the Ichimoku shows more data points, providing more reliable price action.

The application offers multiple tests and combines three indicators in one chart. This allows the trader to make the most informed decisions about his investments. Learn how Ichimoku works and how it can be applied to a trading strategy.

Ichimoku Cloud Strategies For Intraday Forex Trading

Ichimoku Cloud Strategies For Intraday Forex Trading

A basic understanding of the components that make up the Ichimoku chart needs to be established before a trader can effectively execute on the chart.

Ichimoku Kinko Hyo With Atr Ratio

The Ichimoku was created and revealed in 1968 in a different way than most other technical indicators and charting applications. While the applications were generally formulated by statisticians or mathematicians in the industry, the indicator was constructed by a Tokyo newspaper writer named Goichi Hosoda and a small number of assistants who run multiple calculations.

This indicator is now used by many Japanese traders because it offers multiple tests on price action, creating higher probability trades. Although many traders are intimidated by the abundance of lines drawn when the chart is actually applied, the components can be easily translated into more commonly accepted indicators.

The application is made up of four main components and offers the trader key insights into the price action of the forex (FX) market.

First, we take a look at the Tenkan and Kijun Sens lines. The lines are used as a moving average crossover and can be applied as simple translations of the 20 and 50 day moving averages, albeit with slightly different timeframes.

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What the trader needs to do here is use the crossover to initiate the position – similar to a moving average crossover. Looking at our example in Figure 1, we see a clear crossover of the Tenkan Sen (yellow line) and Kijun Sen (orange line). This decline simply means that near-term prices are falling below the long-term price trend, indicating a downtrend or lower movement.

Now let’s take a look at the most important component, the Ichimoku cloud, which represents current and historical price action. It behaves in the same way as simple support and resistance by creating formative barriers.

Once drawn on the chart, the area between the two lines is called a Kumo or cloud. Comparatively thicker than typical support and resistance lines, the cloud offers the trader a thorough filter. The thicker cloud tends to account for the volatility of currency markets instead of giving the trader a visually thin price level for support and resistance. A break out of the cloud and subsequent movement above or below it will suggest a better and more likely trade. Let’s take a look at the comparison in Figure 2.

Ichimoku Cloud Strategies For Intraday Forex Trading

We take our United States. dollar / Canadian dollar (USD / CAD) example, we see a comparable difference between the two currencies. Although we see clear support at 1.1522 in our standard chart (Figure 2), we subsequently see a retest of the level. At this point, some trades will probably be stopped as price action pulls back against the level, which is somewhat of a concern for even the most advanced trader.

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But in our Ichimoku example (Figure 3), the cloud serves as an excellent filter. The cloud suggests a better trading opportunity on a break of the 1.1450 figure considering the volatility and apparent pullback. Here, the price action does not trade back, keeping the trade in the overall downtrend momentum.

The last piece of the Ichimoku is the Chikou Span. Considered simply as market sentiment, the Chikou is calculated using the most recent closing price and is drawn 26 periods behind the price action. This feature suggests market sentiment by showing the prevailing trend as it relates to current price momentum. The interpretation is simple: as sellers dominate the market, the Chikou range will pass below the price trend while the opposite occurs on the buying side. When a pair remains attractive in the market or is bought, the range rises and rises above the price action.

There is no better substitute for learning how to trade the Ichimoku chart than the application. Let’s break down the best trading method of the Ichimoku cloud technique.

Taking our example of the US dollar / Japanese yen (USD/JPY) in Figure 4, the scenario in Figure 5 will focus on the currency pair that varies in a range between 116 and 119 digits. Here, the cloud is a product of the range-bound scenario during the first four months and stands as a significant barrier of support and resistance. With that established, we look at the Tenkan and Kijun Sen.

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As mentioned above, these two indicators act as a moving average crossover, with the Tenkan representing a short-term moving average and the Kijun acting as the baseline. As a result, the Tenkan falls below the Kijun, indicating a reduction in price action. However, with the crossover occurring within the cloud in Figure 5, the signal remains unclear and will need to be far from the cloud before an entry can be considered.

We can also confirm the bearish sentiment through Chikou Span, which at this point remains below the price action. If the Chikou was above the price action, it confirms bullish sentiment. Putting everything together, we are now looking for a short position in our USD/JPY currency pair.

Figure 6: Place the entry slightly into the cloud barrier. Image by Sabrina Jiang ©  2021

Ichimoku Cloud Strategies For Intraday Forex Trading

We will want to see a close of the session below the cloud before we initiate any type of short selling position because we are considering the cloud for a support/resistance barrier. Here, we have a confirmed break of the clouds as the price action stops above a support level at 114.56. The trader can now either choose to place an entry at the support figure of 114.56 or place the order one point below the low of the session. Placing the order a point below would act as a confirmation that the momentum is still in place for another move lower.

How To Use The Ichimoku Cloud To Identify Trading Opportunities

Next, we place the stop just above the height of the candle within the cloud formation. In this example, it would be at 116.65. Price action should not trade above this price if the momentum remains. Therefore, we have an entry at 114.22 and a corresponding break at 116.65, leaving our risk out at 243 pips.

In keeping with good money management, trading will require a minimum of a 1:1 risk/reward ratio with a preferable 2:1 risk/reward for legitimate opportunities. In our example, we will maintain a risk/reward ratio of 2:1 as the price moves lower to hit the low of 108.96 before pulling back. This equates to roughly 500 pips and 2:1 risk to reward—a profitable opportunity.

One key note to remember: Notice how the Ichimoku is applied to longer time periods, as this instance shows daily figures. The application will not work well with many technical indicators as the volatility is in shorter time periods.

The Ichimoku chart is a tool used primarily by technical traders. It uses historical data and provides multiple data points plotted throughout the chat. The application provides traders with various tests and combines three indicators in one chart. The best time period depends on the type of trader who uses it. For example, day traders are better off using it for shorter time periods of up to six hours while those with a long-term trading perspective can use it for daily or weekly trades.

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The Ichimoku chart is a technical indicator. Like other tools in technical analysis, it is based on historical performance and data. As such, it should be taken with a grain of salt because it is not a sure predictor of future results.

The Ichimoku chart is well known among technical analysts for its use in equities, futures, and forex trading. As such, it can be used in any market and during any time period. This chart is often considered quite reliable (in terms of price action) because it provides more data points plotted. Traders are better able to make their investment decisions since the chart application provides multiple tests and pulls together three indicators in one chart.

The Ichimoku chart indicator is intimidating at first, but once broken; every businessman will find the application useful. The chart combines three indicators into one and offers a filtered approach to price action for the currency trader. Moreover, this approach will not only increase the probability of trading in the FX markets but will help in isolating the true momentum. Ichimoku provides an alternative to riskier trades, where the position has a chance to trade back previous profits.

Ichimoku Cloud Strategies For Intraday Forex Trading

Does not provide tax, investment, or financial services and advice. The information is presented without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Investing involves risk, including the possible loss of capital.

Rmo With Ichimoku

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