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03-14-2009, 06:11 AM
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Why Ichimoku works?
I would like to share some insights into the mysterious Ichimoku and why it works. This would be good for some starters as well as for more experience traders to correct me if my thinking is flawed.
For those who want to try this out, I have found the charting software from thinkorswim (a wonderful broker I trade options and forex with) or metatrader suitable. They also have great demo accounts The main power behind the ichimoku is the number 26 and 52 which creates the 'errie' predictability of the support and resistance lines. The other lines such as tekan, kijun are simply moving averages and the chikou is a line chart. I will explain the main power of the 26/52 first before I explain why the other lines are 'useless', unless you know what they mean. Because the creator of ichimoku designed this based on a 30-4 = 26 working month in Japan (they work saturdays), the number 26 was the days he used for charting one month of data, and times two gives you 52 which is the longer 2 months. Hence we are actually trading on 'wrong' data in forex as we are on 24 hours till Friday afternoon, we should be using lets say 5 days (ie 20, 40 clouds). This is for the mathematicians. Unfortunately, since 26/52 becomes a standard and that because of the way ichimoku was calculated, there is not much difference using 26/52 and lets say 24/48 or whatever because most charts use it (it became a self fulling prophecy as everyone is looking at the same chart. Now ichimoku was based on day data, so if you adopt the same chart on an hourly chart, you are actually only using the past 26 hours/52 hours data! and if you zoom into smaller timeframe, lets say 1 minute, you would be dangerously using 26 minuts/52 minutes. That is why the kumo usually works well with daily/4 hourly/1 hourly charts because that is where the data came from. Lets look at the chart below for GBP/JPY and see the errie way the kumo works. Take particular attention to the blue lines (Senkou Span B) which represent the 52 days 'average' price. Look at the blue horizontal lines which are actually the support and resistance lines that are formed in the past. basically, the longer the blue horizontal lines, the stronger is this support/resistance line going to be!  (above chart is GBY/JPY 1 hourly chart on 12 March 2009) So the first step is to ID all the blue horizontal lines and note the vertical distance between them. I will show you a next example of why this distance is important. Last edited by Ideasmiths; 03-14-2009 at 11:36 AM. 
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03-14-2009, 07:15 AM
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This post I will try to expand on the idea of why the kumo are the heart of the ichimoku and the lines are more or less useless.
Remember, the most important thing here is the support and resistance line. These lines are where bulls and bears meet. If one side win, the price action will bounce back away from the line, when this happens, other sidelined traders will see the signal (eg candlesticks patterns) and join in, thus confirming the reversal. If the line breaks, then there will be a mad rush to the next support and resistance line because most traders won't place any buy/stop loss in between. The charts below are the USD/JPY on 13 March 2009 (Singapore Time, 10 am). The top chart is the 1 hourly and the bottom chart is the 1 minute chart (where you really see the momentum in this example). The charts are too small due to the forum/photobucket size limitation. click on the picture and you will go to my google album where you can see bigger pictures. 1 hour action -------------- Note the tenken/kijun/chikou lines are all at the wrong place when the signals are given. These are just moving averages lines.... On the 1 hourly chart, you will see 3 support/resistance line (S+R), one at 98.10 which was quite strong as it held back the past 17 hour bull rush on 7 occasion. The next S+R line is the weak one at 98.20. You can see that it is 'weak' because of the short horizontal length. If you understand how Senkou Span B lines are formed, you will understand why. The 3rd S+R line is the 98.50 line.  1 minute action ----------------- Around 10 am, after the bull rush last nite due to positive retail sales, the traders hover around a range, wondering if the USD is really worth that much. At 10.24 am, someone decides to breach the 98.10 S+R line. When it breaks, the bulls rush up to the next weaker S+R line where some stop losses were placed. It breaks there in 10 minutes and it exploded to the 98.53 where it met strong resistance from the bears.  What this shows you in relation to ichimoku is that you can use the clouds to determine the S+R levels that is 'important' to most traders for the past 52 period. You can even determine the strength of the S+R lines. If you encounter a big vertical gap between the S+R line as shown in this example, you can basically see what happens if the line breaks because there will be no obstacles in the way!. Now, ONCE that S+R line breaks, it became more or less useless, it may hold another charge (see the bounce), but if the line is violated a few more times, it became useless. This is because no traders would be placing their stop/buy orders for the next few trading period, they will most likely look for something else. Next post explains the tenken, kijun, chikou lines and they 'valuable' contribution to S+R line. Last edited by Ideasmiths; 03-14-2009 at 08:43 AM.
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03-14-2009, 07:37 AM
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Tenken, Kijun and the chikou span
The Tenkan sen is basically a moving average that calculates (highest high + lowest low)/2 for the past 9 periods. So if you use a daily chart, it shows you what is the 'average' price traders are paying for the past 9 days.
So you would not see 'much different' form using moving averages as shown. You can use MA based on simple, based on close prices, based on (high+low+close)/3 or any combination, or even variable MA.  The Kijun Line is a moving average for past 26 periods. The Chikou Line is the current price in a line chart format, pushed back 26 days (ie it's not magic). So 'why' would ichimoku trading strategy 'works'. Example for 3 cases, a) if Tenken cross above Kijun (buy), b) if crosses happen above kumo (strong buy), c) if chikou at the same time also above kumo (stronger buy) and so on? That is because basically we are dealing with S+R lines covered in previous two post. Think about it, if tenken cross over Kijun, its like using a exponential moving average of 26 period and then use a 'signal' line of 9. so obviously if the past 9 days price action crosses above the past 26 days, then the market is bullish. OR NOT.....because moving averages are lagging indicator and gives quite a number of false starts. if the crosses happen above the kumo....hello, we are above an important S+R line (52 periods worth), of course it signals more bullish And if the chikou is also above the kumo/above the price, it means that the current price is also above important S+R line AND because it is higher than the past 26 period price, obviously, it is more and more bullish! Last edited by Ideasmiths; 03-14-2009 at 08:45 AM.
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03-14-2009, 07:53 AM
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So how do you use the ichimoku?
Well, basically I would use it to find support and resistance line.
Use it on the daily chart and mark these as super strong lines Then zoom in on 4 hourly and mark as Strong line Then zoom in on 1 hourly and mark as S+R line Then remove the ichimoku and use clean candlesticks, and other indicators to trade appropriately when price action is around the lines.
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05-27-2009, 06:30 PM
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Hello Ideasmith... guess I'm kind of late on this thread....
I understand your support nd resistance explanations, however, you make examples considering flat lines back of the price line. Thus I wonder if flat lines drawn ahead have the same impact, or actually are the ones we should consider on current price action? If this is the effect of Senkou Span B, what is the rationale behind Senkou Span A? Thanks for your explanations. Last edited by cfabian; 05-28-2009 at 01:37 PM.
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05-27-2009, 11:49 PM
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Quote:
 All the 'flat' lines back AND front of the price action can be consider important. The LONGER they remain flat, it means that the bulls and bears fight there for a longer time than other price levels. There is nothing special about Senkou Span A or B, except for the 'period' that are used. It just happens to 'match' japanese work cycle and when it became popular with other traders, it became a self fullfilling prophecy like fibonacci retracements. Anyway, the summary of ANY methods that can find 'flat' period of lines, those price lines will become support and resistance lines. The longer the period the 'lines' stay flat, the stronger they are.
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05-28-2009, 01:45 PM
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Ideasmith,
Thanks for your reply. I've removed the quote of your post. I normally use quoting so other people knows what I'm talking about. As per Span A, it really has no strong use as span B? How you interpret in an uptrend, Span A lowering its slope? Is the crossover of spans, a definite change in trend, bias?
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05-29-2009, 04:53 AM
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Quote:
My experience using ichimoku in forex is that the chart mess up the whole picture, so much so that I stop using it. If you trade JPY pairs, then maybe it would help abit as the Japanese traders are still using it. Hence it is a self fullfilling prophecy when these traders in Japan banks/investment house 'see' what everyone is seeing and act accordingly. Ichi is also a 'lagging' indicator as other indicators that uses moving averages. It just looks sophisticated because it has clouds. But if you plot exponential moving averages using 9, 26 and 52, you get the same thing. If the 26 EMA slop up, does it mean anything? If Span A slops up, doe sit mean anything? No...because we are mathematically plotting a series of data that happened 26 days ago and trying to 'fit' it to what we want to see. If you read Alexander Elders, Van Tharp or other books, data means nothing, AND mathematical charts based on indicators means nothing. If 2 EMA cross, it doesn't gurantee that price is going up. so what to do? Basically just look at the monthly chart, find those areas that prices stay the same a long time (bulls and bears in equilibrium) and plot a line, find those price levels that price bounced off and plot lines. These are as likely good support and resistance lines as you can find in ichimoku. Then repeat the same with weekly and daily chart, you get tons of lines to watch out where prices may bounce, consolidate or rush if breaks. Because in the end, NOBODY knows where the price action will go. Three group do the same things every day, there are bulls and bears and when they meet at these lines drawn above...depending on bounce/break/consolidation, some in the third group will join in the side of the winning UNTIL the price meets the NEXT line. Then this repeat again and again. So in summary, after trading a while using ichimoku, I dropped the idea and just concentrate on plotting those lines using simple logic. On aimless days, use fibonacci retracement lines for intra-day price lines.....
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09-03-2009, 09:00 AM
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Quote:
Shouldn't condition 2 read, "Condition 2: Chikou Span above/below the Price Curve," NOT price Line? Or, "condition 2: chikou span is above/below price 26 periods ago." If the Chickou span is the current closing price projected backwards 26 periods, the very end of the span line will always be at current price. So, the end of the span will never go above below price. The way the OP wrote it, it reads that you are waiting for the chikou span to pass up current price one way or another. Last edited by ThePhoenix; 09-03-2009 at 09:48 AM.
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