Ichimoku Trading System

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41

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.

42

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 [U]most important thing[/U] 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.

43

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!

44

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.

45

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.

46

Please remove the WHOLE quote of the my post, not very visually pleasing :slight_smile:

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.

47

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?

48

lol, my bad, I mean it’s okay to quote, but not the whole post as it will waste bandwidth. I normally delete out and leave only the portion that I want to discuss. Anyway…

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…

49

So, you don’t use ichimoku anymore on the daily charts?
It probably works in trending markets but not ranging?

50

I’ve been reading up on ichimoku because I wanted to find out what this mess of noodles actually was.

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.

51

I’ve been reading up on ichimoku on various sites.

How did you specifically trade using it? I ask because the way presented here is only one of many different ways to use it.

52

It’s really a long term investors thing…or that’s what is was designed for anyway. I might consider using this if I couldn’t day trade.

53

Check out kumo trader dot com. Main Page - IchiWiki - The Definitive Reference to the Ichimoku Kinko Hyo Charting System

They have a forum devoted to it as well. Apparently it works best on daily and weekly, but many of the sub methods work very well on lower time frames.

I’m looking at using the Kujun sen cross on hourly charts, some minor backtesting look promising thus far.

54

Thanks for that, I’m going to try and see if I can test it in Access/SQL too; I’ll post the results if I get them…

55

If you use the Kijun sen as the stop loss line on the hourly charts, it seems that the losing trades wouldn’t be big losers. You have to note this is a trend following method. For example, bring up a EURUSD chart, the Ichimoku is all over the place on the hourly charts and work not work well. The Ichi has the same setting as the MACD but you have extra info from the cloud and the Chinkou span.
I’d like to demo this out on the hourly charts but a trend following method is really just a bunch of MAs that we’re following.

56

I’ve never really looked at Ichimoku before, but I’ve been reading the kumotrader.com site for about the last hour or so…

There are no MA’s in the Ichimoku! I assumed they were MA’s too, until I looked at the formulas.

The tenkan and kijun lines are computed using the recent swing high and swing lows, they’re nothing remotely close to moving averages. :slight_smile:

I’ve always dismissed Ichimoku as another worthless lagging indicator, but I’m starting to change my mind. If someone held a gun to my head and forced me to trade off an indicator, Ichimoku would probably be it. :smiley:

57

Ya, just pick some of the sub strategies and back test them for a few hours. It shows real promise.

I brought up the indicator before, but within any instruction for it, I was like, “wtf is all this spagetti?”

58

You still need to be careful of ranging markets.
Bring up a 1hr of EURUSD, not pretty, whipsaws all over the place.

59

Ya, reading up on kumo trader, it’s not supposed to be, “this is the best entry system.” It’s supposed to be taken as a whole picture, with weak/neutral/stong signals.

60

I agree, but from what I’ve read it’s not designed to be used on a 1H chart. It’s made for daily or weekly charts.

Also, you have to know how the read the whole indicator, not just the crossing of the two lines. Like Phoenix said, if used correctly it’s showing you how strong an entry is. It’s not just a “enter when x crosses y” thing.

The more I read the more I like it. I’m going to do some backtesting and might just demo trade this thing for a while. :slight_smile: