Ichimoku Cloud Forex Trading

Strategy

Many trend traders just don’t know when to trade a trend

following strategy and when not to.

They continue using a good, profitable strategy on the wrong

market condition and end up losing money.

But most trend trading strategies just don’t have a mechanism to

tell you when not to trade.

What if there is an indicator that works well with trending market

conditions and has all these filters.

It could tell you trend direction, entry signal and a filter not to
trade if the market is not trending strong enough.
Ichimoku Kinko Hyo – The All in One Trading Indicator

When I first encountered this indicator, I have to admit, I didn’t

give it a shot. It had too many lines that seemed too busy to me.

Little did I know it could have made money for me. It probably is
one of the few standalone indicators that could be profitable
without using other indicators as filter.

So, how does it work.

The Ichimoku Kinko Hyo indicator is composed of several

components, the Cloud (Kumo), Base Line (Kijun-sen),
Conversion Line (Tenkan-sen), and the Lagging Span (Chikou
Span).

This may sound a lot, and it is, but all of it is relevant. These are
basically variations of moving averages.

Some are averages of midpoints, some are shifted, some are

derivatives of the other lines.

First, the Cloud. The Cloud is composed of two lines, Leading

Span A (Senkou Span A) and Leading Span B (Senkou Span B).

This feature of the indicator dictates the trend direction or the

main trend direction filter. There are two ways to identify
trending direction using the Cloud.

Trend direction could be identified using the location of price is

relation to the Cloud. If price is above the Cloud, then we will only
be looking for buy trades, if it is below the Cloud, we will be
looking for sell trades.
Another way to look at it is the crossover of the Leading Span A
and Leading Span B. If Leading Span A is above the Leading Span
B, then the market is said to be bullish, if it is in reverse, then the
market is said to be bearish.

Then we have the Base Line and the Conversion Line. These two
lines work in tandem with each other.

These lines are the signal for entries. It works just like a regular
crossover strategy. The Base Line is the slower line while the
Conversion Line is the faster line.

If the Conversion Line crosses above the Base Line, then we have
a signal to buy. If it crosses below the Base Line, then it is a
signal to sell.

Lastly, we have the Lagging Span. I think is the most important

line that most trend trading strategies are missing.

This is because the Lagging Span is basically a filter that should

tell us if the market’s trend is about to end. It does this by
shifting the plot of the current price action by several candles.

The idea behind this is that if the Lagging Span starts to intersect
with price, then the market’s trending environment might
already be weakening because price is already catching up with
it.

It serves as a filter before the entry, but it could also serve as an

early exit.

Indicator: Ichimoku Kinko Hyo (default FREE indicator on MT4

and MT5)

Timeframe: any
Currency Pair: any

Trading Session: Tokyo, London and New York

Buy (Long) Trade Setup

Entry

 The lines should all be fanning out with the cloud at the
bottom, Base Line and Conversion Line at the middle and
Lagging Span at the top
 Price shouldn’t be touching the Lagging Span
 Wait for price to retrace near the cloud
 Enter a buy market order as soon as the Conversion Line
crosses above the Base Line

Stop Loss

 Set the stop loss at the swing low below the entry candle

Exit

 Close the trade as soon as price starts to touch the Lagging

Span
Sell (Short) Trade Setup

Entry
  The lines should all be fanning out with the Cloud at the top,
Base Line and Conversion Line at the middle and Lagging
Span at the bottom
 Price shouldn’t be touching the Lagging Span
 Wait for price to retrace near the cloud
 Enter a sell market order as soon as the Conversion Line
crosses below the Base Line

Stop Loss

 Set the stop loss at the swing high above the entry candle

Exit

 Close the trade as soon as price starts to touch the Lagging

Span
Conclusion

The Ichimoku Cloud tends to be a bit messy as an indicator.

However, that is the point of this indicator.

If as soon as you open a chart, you see a messy crisscross of lines,

then leave it.

That is not the chart that you should be trading at. On a trending
market environment, the chart should have some order.

If you stumble on that kind of chart, then wait for the entry.
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