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Trading With Ichimoku Clouds – Fast And Effective (Part 3)
Education | 18 February 2011
By: jason.liew
Articles (66) Profile

By Glenn Ho

Cloud Calculation

Now that we have learnt how to calculate the Tenkan Sen and Kijun Sen, we can move on to the cloud mathematics. As mentioned, the Kumo is constructed by the Senkou Span A and Senkou span B:

Senkou Span A (“leading span 1″) = (Tenkan Sen + Kijun Sen)/2 time-shifted forward 26 periods (into the future)

Senkou span B (“leading span 2″) = (Highest High + Lowest Low)/2 for the past 52 periods time-shifted forward 26 periods (into the future)

This will create the Kumo 26 periods ahead of current price, therefore giving us direction with regards to future support and resistance.

History of 9, 26, 52

At this point, many of you are probably wondering how the number of periods 9, 26 and 52 came about in the various formula. As this indicator was created before WWII, Japanese financial markets were open for trading on Saturdays, meaning that the trading week was six days long.

9: represents a week and a half of trading

26: represents the number of trading days in a typical month (30 minus four Sundays)

52: represents two months of trading days

Japanese markets today trade only 5 days per week and 22 days in a typical month, so some practitioners of Ichimoku Kinko Hyo suggest revising the parameters to 7 or 8, 22 and 44. Others choose to follow the Fibonacci numbers of 8, 21 and 55. You can try the various parameters but every technical trader knows that indicators have a certain degree of self fulfilling traits, in the sense that if many people are (or have been all this while) looking at a certain indicator set with certain parameters, that indicator setting will work best. And this is the same for the traditional 9, 26 and 52 parameters for Ichimoku Kinko Hyo, based on our experience.

Last But Not Least

We have so far introduced four components of the Ichimoku Kinko Hyo trading system. The last, and some say the most important, is the Chikou Span, also known as the lagging span. Its calculation is simple:

Chikou Span (“lagging line”) = Current closing price time-shifted backwards 26 periods (into the past)

Picture of Bullish Chikou Span

View Full-sized Image

Here you can see that the Chikou Span is simply the current period’s price shifted back 26 periods. When Chikou Span (purple line) is above price (26 periods ago), price action is bullish.

Some traders choose to remove the Chikou Span from their charts because they are able to visualise the Chikou Span without the need for the purple line. The Chikou span is typically used as a final confirmation before entering a trade. In the chart example above, you may have a trade entry signal on a bullish kumo break; at this point many Ichimoku Kinko Hyo traders will use the bullish Chikou Span as a confirmation of a long position.

Picture of Bearish Chikou Span

View Full-sized Image

Here we see Chikou Span below price, a sign of bearish sentiment. In fact, price is in a strong bearish environment as we see a bearish Kumo ahead (Senkou Span A below Senkou Span B), as well as prices below the Kumo. However the bearish trend may soon reverse, as we see Chikou Span threatening to “poke” through the candlesticks, as well as a potential weak bullish Tenkan/ Kijun cross up ahead. This is one way in which the Ichimoku system can identify trend reversals, and also an example of how the five components can work together to give you a picture of price action.

A Dynamic Trend-Following System

The Ichimoku Kinko Hyo is largely a trend-following indicator, with the Tenkan/ Kijun cross as the key trigger for many traders. That being said, the multiple data points of the Ichimoku are to be used together to give the trader a well rounded picture of price action. Other indicators commonly used together with the system are Fibonacci retracements, pivot points, trend lines as well as the 20-day SMA, which is watched over by many institutional traders.

It is also useful to consider multiple timeframes when trading. For example if you trade the daily charts, you may want to visit the weekly and monthly charts to see where you are within the bigger trends. Alignment of shorter and longer period timeframes provides stronger conviction for your trading decisions.

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This article’s author, Glenn Ho, is Director at APF Trading, a trading advisory firm offering clients Managed Forex Accounts and advice on multi-asset trading strategies, signals, trading systems, execution services and trading platforms. The firm also conducts research and technical analysis with a focus on Ichimoku Kinko Hyo and DeMark Indicators. Glenn previously worked at Jefferies & Company, a New York – based Investment Bank, as well as UBS Investment Bank and Citigroup Private Bank. He contributes regularly to AsiaPacFinance.com.


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