· This book teaches how to use the Ichimoku Cloud to develop strategies. It uses colored charts with clear indicators and pointers. This small and concise book is a must have manual for those who are interested in IC patterns. This book has no fluff.
·
Ichimoku made its appearance in the West in the
early 2000s. Also referred to as Ichimoku cloud.
·
Full name is Ichimoku Kinko Hyo: Ichimoku = one
glance; Kinko = equilibrium; Hyo = chart
Chapter 1: The Basics of Ichimoku
·
Developed by Goichi Hosada (1898-1982), a
Japanese journalist.
·
Only 2 variables are considered to calculate the
components; the period and the price. Volume is not considered
·
The no. of investment strategies based on this
system is limited. The no. of alerts and signals generated by the system
complicates the use of Ichimoku
·
Hosoda has developed 3 theories related to the
development of IC: wave theory, price target, & time study
·
Consists of 5 indicators represented by curves
·
Six features of IC
o 1.
Illustration of equilibrium zones
o 2.
Illustration of future zones of support
o 3.
Illustration of future zones of resistance
o 4.
Definition of reversal signals
o 5.
Definition of entry and exit points
o 6.
Definition of trend and momentum (strength of trend)
·
IC decreases the risk of getting false breakout,
but the trader must wait for strong signals before entering the market.
Intuition has no place.
·
Equilibrium or Trend:
o IC
allows, at a glance, the past, the present, and the future trend.
o Three
well define areas:
§ 1.
The bullish zone
§ 2.
The bearish zone
§ 3.
The equilibrium zone
o Equilibrium
– price moves within lower and upper bounds of the area
o Trend
– the stock is in trend when the price leaves the equilibrium zone
·
Advantages
o Can
be used in any market: forex, crypto, forex, stocks.
o Can
be used in any timeframe
o Simple
calculations
o Autonomous
– does not need to be supported by other indicators.
o Easy
to identify areas of congestion.
o An
IC chart that shows a lot of distractions, making is unreadable, sends a
message to the trader to stay away from the sidelines and wait for the
opportune moment.
o Alerts
are generated at different power levels
o Simple
strategies – simple signals to take action
o Only
one window unlike other technical indicators which require multiple panes.
Chapter 2: The Basics of Technical Analysis
·
The chapter gives an overview of basics of
technical analysis: evolution of charts, bars, OHLC, candlesticks, time frame
and trend lines, support/resistance, upside/downside breakouts.
·
Trading style
o 1.
Scalp trading – seconds to minutes
o 2.
Day trading – within a day
o 3.
Swing trading – within a few days to weeks
o 4.
Buy-and-hold/position trading – several months to years
·
Breakout confirmation – upside breakout must be
accompanied by increase in volume, by at least 3x to 5x. volume rise not
required in the downside breakout
·
Chart patterns
o Bullish
patterns: head and shoulders bottom, double bottom, ascending triangle, falling
wedge
o Bearish
patterns: head and shoulders top, double top, descending triangle, rising wedge
·
Leading and Lagging indicators
o Trend
indicators: direction and strength. E.g., ADX, EMA, MACD, SMA, Parabolic SAR
o Momentum
indicators: how quickly the price changes. E.g., ADX, Chaikin Money Flow,
Commodity Channel Index, Rate of Roc, RSI, Williams% R
o Volatility
indicators: change in price relative to an average over a period of time. E.g.,
Average True Range, Bollinger bands, Donchain Channels, Keltner Channels
o Volume
indicators: Accumulation/distribution, VWAP
·
Japanese candlestick patterns
o Bullish:
bullish engulfing, hammer, piercing line, morning star, bullish harami,
dragonfly doji
o Bearish:
bearish engulfing, hanging man, dark cloud cover, evening star, bearish harami,
gravestone doji
o Indecision
patterns: doji, long-legged-doji
·
Always validate candlestick patterns with other
indicators
·
Divergences: positive/negative, between price
and indicators.
·
The control of emotions:
Optimism->euphoria->greed->fear->panic->discouragement->relief->optimism
·
Never invest in a financial stock unless you
have done your analysis
Chapter 3: The Components of Ichimoku
·
Composed of 5 indicators(curves), a two-color
cloud, and the price curve.
·
Conversion Line (Tenkan-Sen)
o =
(Last 9-period high + Last 9-p low)/2
o Most
volatile curve in the IC system because it spans only 9 periods
o Show
if the short-term trend is bullish/bearish or in equilibrium
o Alert
signals – Price/Conversion line cross:
§ Bullish
when price crosses above Conversion line
§ Bearish
when price crosses below Conversion line
·
Base Line (Kijun-Sen)
o Medium-term
indicator, related to the present. Serves as medium-term support/resistance
o =
(Last 26-period High + Last 26-period Low)/2
o A
breakout is a confirmation of trend reversal in the medium-term
o Alert
signals – Price/Base line cross:
§ Bullish
when price crosses above Base line
§ Bearish
when price crosses below Base line
o Alert
signals – Conversion Line/Base Line Cross
§ Bullish
when CL crosses above BL in the bottom-up direction
§ Bearish
when BL crosses above CL in the top-down direction
o An
alert Price/BL & an alert CL/BL are often generated at the same time.
·
Leading Span A (Senkou Span A) - GREEN
o Represents
a medium-term support/resistance
o =
(CL + BL)/2; time-shifted forward 26 periods
o A
price breakout is an alert to monitor the market closely
o LSA
is the fastest span. Determines the
amplitude or thickness of the cloud (equilibrium zone)
·
Leading Span B (Senkou Span B) - RED
o Strongest
and slowest curve of the IC system because it is based on 52 periods
o Breakout
of LSB by price confirms the trend reversal for the long term
o =
(Last 52p high + Last 52p low)/2; time-shifted forward 26 periods
o Alert
signals – leading spans cross (change in cloud color or “twist”)
§ Bullish
trend takes place when LSA crosses over the LSB
§ Bearish
trend takes place when LSB crosses over the LSA
·
Lagging Span (Chikou Span)
o Replica
of the closing price that is shifted backwards by 26 periods in the past.
o Makes
it possible to relate current prices, past prices, as well as past indicators.
o Uptrend-when
lagging span crosses over the price, BL, and the cloud, this reinforces the
upward trend of the current price.
o Downtrend-When
lagging span crosses under the price, BL, and the cloud, this reinforces the
downward trend of the current price.
o LS
is a signal confirmation tool.
o Avoid
making a purchase when the LS conflicts with price or with the cloud. It is a
situation of instability where the trend is unpredictable.
o Alert
signal – LS/price cross
§ Bullish
sentiment occurs when LS is above the price 26 periods ago
§ Bearish
sentiment occurs when LS is below the price 26 periods ago
o LS
is the ultimate confirmation tool. Reassures the trader who is afraid to enter
the market too quickly.
o “You
can there; the way is free”
·
Cloud (Kumo)
o Space
between the LSA & LSB
o Reacts
late compared to CL & BL
o Projected
26 periods to the future and reflects the equilibrium zone
o Cloud
is the area where WE SHOULD NOT initiate transactions; it is a zone of
indecision
o Momentum
– high inclination of the cloud means price has excellent momentum. Conversely,
a low-slope cloud indicates a neutral trend
o Thickness
§ Low
volatility generates thin cloud. High volatility think cloud.
§ Considerable
thickness will block access or slow the price
o Alert
signals – Cloud/price cross. Finding the trend with the cloud
§ Upward
trend – when price is above the cloud
§ Downward
trend – when price is below the cloud
§ Flat
– when the price is in the cloud
Chapter 4: Interpretation of the Ichimoku System
·
Low volume, high volatile stocks are not good
candidates for IC.
·
Better to avoid trading when the cloud looks
cluttered.
·
Number theory – Hosoda has developed the numbers
9 (short-term), 26 (medium-term), 52 (long-term) after a lot of research and
iterations. This are the optimal numbers for the IC system. It is better to
stick with this set rather than trying something different.
·
Fibonacci retracements – caused by previous
buyers who have decided to take profits (in an uptrend), putting downward
pressure on prices. Subsequently, new buyers come on the market and push the
stock up.
·
Protection against losses – stop protection
orders should not be too close to the price.
·
The IC system offers the possibility to place
stops using the cloud as support/resistance.
·
It’s always better to invest when the price is
out of the cloud because the inside of the cloud is an area where buyers and
sellers fight.
·
Cloud at the flat top – the breakout can lead to
rapid rise in prices
·
Cloud at the flat bottom – the breakout of this
zone can lead to rapid drop in prices
Chapter 5: Ichimoku Strategies
·
Choice of a strategy depends on the
configuration of the chart
·
It is sufficient to determine if one of the
following situations exist
o Crossing
between indicator and price
o Cloud
breakout by the price
o Crossing
between indicators
·
1/5 – Conversion Line/Base Line cross strategy
o Short/medium-term
o Mandatory
conditions:
§ 1.
Crossing must be over the cloud
§ 2.
Current price is above the cloud
§ 3.
Lagging span is located above the price of the 26th previous period
§ Optional
conditions:
·
the future cloud is green
·
announce of trend reversal has been launched
·
2/5 – Base Line cross strategy
o Simplest
and most popular for swing trading
o Requires
fewer conditions and requires high tolerance for risk
o It
places in opposition price and the BL
o Requirements:
§ 1.
Mandatory condition – the crossing takes place above the cloud
§ 2.
Optional condition – the BL is on the rise
§ Optional
conditions – future cloud is green or lagging span above price.
·
3/5 – Cloud Breakout strategy
o Trend
tracking indicator, can be compared to ADX, MACD, or SMA.
o This
strategy is based on search for major reversal. Long-term investment is
preferred.
o Based
on the idea that the cloud represents a major obstacle to break for the stock
price
o Mandatory
conditions:
§ 1.
The BL is bullish
§ 2.
The color of future cloud has changed to green
§ 3.
Lagging span is located above the price of the 26th previous period
§ Optional
conditions:
·
the future cloud is green
·
announce of trend reversal has been launched
o Signals
generated by the Cloud Breakout strategy allow the trader to enter with
confidence. However, the signals occur with a significant delay.
·
4/5 – Lagging Span/Price Cross strategy
o For
short/medium term
o Requirements:
§ 1.
Mandatory condition – the crossing of the 26th previous period is
over the cloud
§ 2.
Optional condition – the BL is bullish
§ Optional
conditions – future cloud is green.
·
5/5 – Lagging Span/Cloud Cross strategy
o For
short/medium term
o Idea
that the LS is breaking the cloud
o Requirements:
§ 1.
Mandatory condition – the current price is above the cloud
§ 2.
Optional condition – the BL is on the rise
§ Optional
conditions – future cloud is/turns green.
·
Important points
o Cloud
blocks access or slows the price
o During
an uptrend, a large gap between CL & BL suggests that the price will make a
pullback
o During
a downtrend, a large gap between CL & BL suggests that the price will move
forward
Chapter 6: Trigger Signals Faster
·
In some situations, it is noted that IC is
lagging behind other indicators, i.e., it does not react faster when the price
turns quickly.
·
Experts advice changing the setting and
adjusting them to the reality of the current market based on 5-day trading
week. Simply replace 9-26-52 with 7-22-44
·
However, reducing settings increases the risk of
false signals.
·
To get signals faster, one way is to look at the
IC in a shorter time-frame. E.g., 2H vs 1D
·
The rest of the chapter show two examples where
a bullish and a bearish buy/sell signal are generated.
·
The stock market is a question of emotions and
not of mathematics.
Chapter 7: The Triple Screen Technique
·
Developed by Dr. Alexander Elder in the ‘80s.
·
Considers that the market is composed of three
trends: short term, medium, & long.
·
Suggests that the trader uses different time
frames before initiating a trade.
·
Short-term used to take a position; medium-term
becomes a reference unit of time; long-term used to evaluate the long-term
trend.
·
Determining units of the 3 frames
o 1.
Unit of Medium-term time: e.g., 1 trading day 6.5 hours
o 2.
Unit of long-term time: e.g., 1 week = 6.5hours x 5days = 32.5 hours. Ratio of
long/medium = 32.5/6.5 = 5
o 3.
Unit of short-term time: e.g., 6.5h/5 = 1.3h. closest unit of chart time is 1H
·
An example of how to use the triple screen chart
strategy is shown.
Chapter 8: Ichimoku and Classic Indicators
·
This chapter talks about using other indicators,
such as ADX, MACD, EMA, etc., along with IC.
·
EMA13-30 or EMA13-34 combinations can be used to
confirm trend reversals.
·
A trader who likes to enter a low-risk market
should favor EMA13-48
·
One weakness of the IC is that it provides
delayed signals on trend reversal.
Chapter 9: Trading Rules
·
Having a set of trading rule is important to
reduce risk.
·
Preparation before trading
o Check
the trend of the global markets
o Never
invest until quarterly results are announced – avoid trading earnings
announcements
o Understand
the level of fluctuations – nearly 50% volume is during opening and closing. It is useless to spend the entire session in
front of a screen.
o Avoid
equilibrium zones – refraining from trading is part of trading.
o Limit
risk – use stop losses
·
Use weekly chart to get a pulse of the general
trend. Place your trades using daily charts
·
Selling
o Better
to exit the market faster than buying
o If
you have 5 rules to enter, have only 4 rules to exit
o Take
profits when you can and not when you want
·
The chapter shows three examples, one for
buying, one for selling, and another for short-selling. Show the application of
rules to place a trade and validating using weekly chart before placing a
trade.
·
At the end of the chapter, it lists some
pitfalls/mistakes to avoid
Chapter 10: Ichimoku for Every Markets
·
IC can be used on any market, including Forex.
·
Chapter gives three examples in three different
markets: crypto, commodity, and currency.
·
IC is increasing used in currency market.
Chapter 11: The Unexplored Area
·
The chapter points to an example where IC gives
a delayed signal of a trend reversal which is a lost opportunity.
·
To compensate this for this delay, use the triple-screen
strategy and get conformation on the reversal using a smaller time frame like
H1 or H2
·
No IC settings need to be changed when flipping between
daily and hourly.
