How to Trade the

“One Glance” Indicator,

Ichimoku
By Tyler Yell, CMT -Currency Analyst and Trading Instructor

[email protected] & http://www.Twitter.com/ForexYell

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Ichimoku: The “One-Glance” Trend Following

Indicator
Talking Points:
• Understanding Ichimoku
• Using Ichimoku to follow trends well
• Using Ichimoku to spot reversals
• Trading with Ichimoku on multiple time frames

Trading is difficult. Often, price action looks erratic and trying to make sense of every bar can do more
harm than benefit. However, one truth that traders over the years have respected and honed to
support their trading is that markets tend to trend and trend for extended periods of time. A price
trend is often recognized as a series of higher highs over a significant period of time known as an
uptrend or a series of lower lows over a significant period of time known as a downtrend.

Many traders have turned to indicators to help provide information about the state or condition of
price action to make an informed trading decision. Some indicators are helpful for defining, and
trading trends like Ichimoku and others are helpful for finding mean reversion opportunities like
Stochastics and other oscillators. For many reasons soon to be described, Ichimoku has stood the test
of time.

Ichimoku Cloud Applied To Weekly GBP/USD Chart

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Understanding Ichimoku

Ichimoku is a technical or chart indicator that is also a trend trading system in and of itself. The creator
of the indicator, Goichi Hosada, introduced Ichimoku as a “one glance” indicator so that in a few
seconds you are able to determine whether a tradable trend is present or if you should wait for a
better set-up on a specific pair.

Before we break down the components of the indicator in a clear and relatable manner, there are a
few helpful things to understand. Ichimoku can be used in both rising and falling markets and can be
used in all time frames for any liquid trading instrument. The only time to not use Ichimoku is when no
clear trend is present, which is made obvious by the price oscillating on either side of the cloud on the
time frame you’re using to analyze price.

Ichimoku has five lines that make up the indicator. These lines are compared to the current price to
help you as a trader recognize three crucial components:

• The primary trend on the time frame you use for trading
• Future support and resistance
• Likely points to confirm a trend reversal

Meet the five Members of the Ichimoku Family

The five lines provide a simple and consistent construction for the chart that allows you to contrast the
current price with multiple layers of the current and historical trend. The indicator also allows you to
see the strength of the current trend. The shading of the cloud is contained within the area between
Senkou Span A (#3) and Senkou Span B (#4), and depending on the charting package, the color will
likely change in a Bullish or Bearish Environment.

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Always Start With the Cloud

1. Tenkan-Sen / Trigger - 9 period midpoint

o Similar to a 9-period moving average

o Midpoint of most recent 9 bars (including current bar)
o Shortest, and fastest trend line
o Break of Trigger line is the first indication of a correction, trend change

2. Kijun-Sen / Base Line - 26-period midpoint

o Similar to a 26-period moving average

o Midpoint of most recent 26 bars (including current bar)
o Longer, slower trending line than Tenkan-Sen Line
o Break of baseline is additional confirmation of a deeper correction, trend change

3. Senkou Span A / Leading Cloud Line – Midpoint of 1&2 shifted forward 26 bars

o Midpoint between Trigger Line & Base Line projected 26 bars forward
▪ = (Trigger Line + Base Line) / 2
o Forms top of Cloud in rising trend, base of Cloud in declining trend
o More Aggressive/ Faster of the two lines forming the Cloud
▪ Moves faster when both the Trigger and the Base line is moving in the same
direction

4. Senkou Span B / Lagging Cloud Line – 52 bar midpoint, shifted forward 26 bars

o Midpoint of most recent 52 bars, projected 26 bars forward

▪ = (highest high + lowest low) / 2
o Forms base of Cloud in rising trend, top of Cloud in declining trend
o Slower of the two lines forming the Cloud − Based on a 52-bar current range

5. Chikou Span / Lagging Line – Current price shifted back 26 bars

o Often Most Confusing, Very Valuable Indication of Momentum

o Current price plotted 26 periods behind current close
o Only Ichimoku Line to purely reflect price as opposed to mid-point of range
o Helps to compare current price with four Ichimoku line 26-periods earlier
o Helpful tool to add weight to argument for trend reversal
▪ Watch for lagging line to break cloud opposite from prior trend

Using Ichimoku To Follow Trends Well

As a trend following indicator, Ichimoku can be used in any market, in any timeframe. Regardless of
the market, Ichimoku encourages traders to trade in the direction of the trend and not against the
trend. By following trends, and possibly reversing trades when the market trend reverses, Ichimoku
can help you to minimize losses when you enter on the wrong side of where the market is heading and
ideally, maximize profits when you’re fortunate enough to enter on the right side of the long-term
trend.

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As you get comfortable in interpreting the five lines of Ichimoku we just discussed, you may soon use
the different components of the cloud to act as a built-in stop and profit targets.

So how does a trader know whether they should be looking to buy or sell with Ichimoku? Here is a
quick list:

Three Simple Ichimoku Trading Rules:

1) Start with the cloud. Look to buy (sell) if the price is above (below) the cloud.

2) Find markets where the lagging line is above (below) price and the cloud from 26-periods ago.

3) Time your entry to buy (sell) by entering when the trigger line is above (below) the base line

Using Ichimoku To Spot Reversals

As you can likely tell, Ichimoku will not have you competing with High-Frequency Trading Firms.
Instead, Ichimoku looks to a handful of strong trends and provides visual clues through the Cloud,
Momentum, and Average Lines to stay in those strong trends to help you get the most out of the
market. However, Ichimoku is also a helpful tool to help you recognize when a reversal is developing.

The component of Ichimoku that I utilize to recognize a reversal is the lagging line in relation to the
cloud and price. If an uptrend is reversing, or I believe an uptrend to be reversing, I will like for price
confirmation by seeing if the price is trading below the cloud. If Price is below the cloud, I will look to
the lagging line, which is 26-periods behind the current price to see if the lagging line is below price
from 26-periods ago and the cloud from 26-periods ago. If so, I would be looking for opportunities to
enter a short trade.

As a trader, we still must be aware of the significant amount of Type 1 errors or “false positives” we
get with technical analysis. Therefore, it’s helpful to manage risk and place stops. It may serve you well
to be most wary of a true trend change at the beginning, and only allow confidence and possibly trade
size to increase as we collect more data.

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Trading With Ichimoku On Multiple Time Frames

While many of the charts used to explain Ichimoku in this guide utilize the Daily Chart, do not be
deceived. Ichimoku can be used well on the time frame of your preference. Do you like to trade hourly
charts? The rules of Ichimoku Apply just the same.

In short, Ichimoku is looking for strong trends on the time frame you like to analyze and trade.
Ichimoku does this by effectively drawing out support via the Ichimoku Cloud and providing a
momentum visualization with the lagging line. Regardless of the time frame you are trading, if you
have a strong trend and momentum at your back, you’re likely pretty happy if you’re following the
trend. Thankfully, Ichimoku can help you recognize and take advantage when those situations do arise.

Managing a Trend That You Entered Because Of Ichimoku

Once you have used Ichimoku to enter a trade, you need to know whether you have a profit target or
whether you’re looking to ride the trend until Ichimoku that a reversal could be developing. If you have
a price target, you should manage your risk by adjusting your stop as the market moves in your favor
to limit your risk as you wait for your profit target to get hit.

If you are riding the trend until it ends, you would want to stay in the trend until price either hits a
trailing stop or preferably until the lagging line breaks below the cloud, which would show you with a
higher probability that the trend may be reversing. Following trends can be emotionally difficult but
can lead to the best trades.

Ready to put your new knowledge to work?

CREATE A DEMO ACCOUNT WITH IG.

Test these strategies out risk free using a practice account from IG. Utilize the help of resources like
this trading guide, DailyFX.com, DailyFX Plus, and DailyFX live webinars.

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