Today I want to show you a technical indicator that is guaranteed to impress. Tell people you’re using this, and they’ll bow down to your advanced technical know-how.
Show them your charts and they’ll squint a bit, and probably worship you as some kind of trading demi-god.
What I’m trying to say is that they look and sound bloody cool. But do they make money?
Ichimoku in five minutes…
The indicator I’m talking about is the Ichimoku cloud. Even the name of it sounds like it should be accompanied by a strum on the Japanese harp, and someone bowing to me!
What puts most people off using Ichimoku is that it looks so complicated. But, I’m going to show how simple it is – in fact, I’m setting myself the challenge of turning you into an Ichimoku trader in just five minutes.
Here goes…
Ichimoku in five minutes
Okay, take a look at that chart above. Here are the things you need to know…
- The cloud (that’s the area shaded in red or green) – if the price is above the cloud, we’re looking for an uptrend and are taking buy signals; if it’s below the cloud, we’re anticipating a downtrend and are looking for sell signals.
- There are two special Ichimoku moving averages on this chart – the fast one is the red line, which follows close to the price. The slow one is the blue. We’re looking for a basic moving average crossover from these. If the fast one crosses below the slow one, we sell. If the fast one crosses above the slow one, we buy.
- One more filter on this… see that purple line? (I’ll tell you more about this line in a minute…)
Let’s look at some signals…
The first signal here comes when the price breaks below the cloud, and the red moving average is below the blue moving average. This is a sell. The signal to close this comes at A, when the moving averages cross again (I’ll explain in a moment how the purple line can signal a close too).
The second signal is a buy, where the price breaks above the cloud and, shortly afterwards, the red moving average crosses above the blue moving average. This trade is then signalled to close at B, where the moving averages cross back. (Again, there’s another close signal from the purple line – I’m getting to that bit…)
So far, pretty simple – it’s just a moving average crossover strategy, with the cloud acting as an extra filter.
Now I’ll explain how we use that purple line…
The chart above is an historical one, which makes reading the purple line tricky. Here I’ll show you what the purple line looks like on a live chart…
As you can see, we’ve got a signal to buy at A, where the price breaks above the cloud, and the fast moving average is above the slow moving average.
Note that the purple line is lagging behind the current price level. This is because the purple line plots nothing more complicated than the current price, but 26 candlesticks back.
So, by following this line, we can see where the current price is in relation to where it was 26 candles ago.
In a buy trade, we want to keep that purple line above the current price.
In a sell trade, we want to keep that purple line below the current price.
So, in the example above, our buy trade can stay open until the moving averages cross back again, or until the purple line crosses below the candlesticks.
Okay, so here’s a summary of our Ichimoku method…
- We get a signal to buy if the fast moving average (red) crosses above the slow moving average (blue). We get a signal to sell if the fast moving average (red) crosses below the slow moving average (blue).
- We will only take a buy trade is the price is above the cloud. We will only take a sell trade if the price is below the cloud.
- We will only take a buy trade if the purple lagging line is above the current price. We will only take a sell trade if the purple lagging line is below the current price.
- We will close a trade when the moving averages cross back over, or if one of the other filter criteria negates our trade (i.e. if the price moves into the cloud, or the purple lagging line crosses the price).
And that’s it – Ichimoku on a plate!
Now for some more stuff about Ichimoku…
Depending on the charting software you’re using (the images I’ve taken here are from IG’s charts, which just allow you to drop in Ichimoku indicators), the colours of the line may be different.
Here I’ve just used ‘moving average’ and ‘lagging’ to describe them, because I find it easier to understand them in a language I understand, but they’ve all got proper Japanese names which, admittedly, sound a lot more impressive:
- The fast moving average (red on my chart) is called ‘Tenkan Sen’.
- The slow moving average (blue on my chart) is called ‘Kijun Sen’.
- And the lagging line (purple on my chart) is called ‘Chikou Span’.
The Ichimoku system is not (I’m sorry to say) an ancient Japanese art – it was actually developed in the 1930s by a Tokyo journalist. However, it was quickly adopted by many Japanese trading rooms because of the sophisticated price tests it offers – indicating support and resistance, identifying trends, etc – in such an easy-to-read format.
Many traders are completely intimidated by Ichimoku charts, but I hope I’ve showed here that there’s nothing to be scared of! And there’s plenty of sound trading information to be gleaned from them.
If you’ve had any experience of trading Ichimoku yourself, I’d love to hear about it.
