The Ichimoku indicator is made up of five indicator lines and a cloud. Trading signals are generated according the position of price movements relative to the Ichimoku lines and the cloud as well as when Ichimoku lines crosses over each other. It may appear to be a bit complicated at the start but once you have a grasp of it, you will be able to identify trading opportunities even as they are just starting to appear.
To help you out understand better the implications of the Ichimoku indicators to your forex trading adventure, here is a graphical summary of the various Ichimoku signals and the underlying market sentiment they represent.
|Ichimoku Line||Reference/ Cross over||Indication|
|Kumo (the cloud)||Price||
|Tenkan-sen||kijun sen line||
Given the above knowledge a typical trading strategy using the Ichimoku Indicator will look something like this:
- Enter the market long if 1) the price clears the top of the cloud and closes above it; 2) The Tenkan-sen crosses atop the Kijun-sen line; 3) Chikou span is trending upwards and is over the price line; 4) Senkou span A crosses above Senkou span B.
- Enter the market short if 1) the price clears the bottom of the cloud and closes below it; 2) The tankan sen line crosses the Kijun sen line from above; 3) The Chikou span trends downwards and under the price line; 4) The Senkou span A crosses below Senkou span B from above.
- An exit strategy can be set using a pre determined trailing stop or determined by the crossover of the Kijun-sen and Tenkan-sen in the opposite direction.
You need to keep in mind that the Chikou span, basically, is a momentum indicator. Use it therefore to your advantage by determining the market direction it points to and favoring a trading bias in the same direction.