Tag Archives: forex indicators

Ichimoku | Reading Ichimoku Charts | Ichimoku Trading Strategies

MT4 Ichimoku IndicatorWhat does Ichimoku mean?

Ichimoku is a Japanese phrase that means “one glance”. Its creator Goichi Hosoda named Ichimoku that way because he wanted it to be one indicator that takes place of everything without the need of other factors or indicators.

What does Ichimoku consist of?

1: Tenkan-Sen: A 9-period Moving Average. This is the first line you have to adjust when you apply Ichimoku to a chart.

2: Kijun-Sen: This is a 26-period Moving Average. It is usually the second line you have to adjust when you apply the Ichimoku to a chart.

3: Chinkou-Span: Current price plotted 26 periods earlier.

4: Cloud: Better known as “Kumo”, which simply a Japanese word for “cloud”, and that is exactly what it is. Kumo tells us the volatility of the market, the wider the Kumo is, the more volatility is in the market. Note that in this article, you will encounter both words “Kumo” and “Cloud”, you don’t have to worry at all, both are the same and there is no difference at all between them. Just use the one that comes to your mind first.

How can I determine my bullish or bearish position using Ichimoku?

This is very easy.

When the Tenkan-Sen crosses up and walks above Kinjun-Sen, this means we have a bullish signal (buying signal). Look at this snapshot:

Reading Ichimoku Charts

When the Tenkan-Sen crosses down Kijun-Sen, this means that we are having a a bearish signal (selling signal). Take a look at this:

Ichimoku Trading Strategies

Trading with Ichimoku Clouds

Kumo means cloud in Japanese language, and the Kumo of Ichimoku is simply a shaded area between two lines, one of them represents the range of resistance during a downtrend and support during uptrend (this is really not important to understand or to memorize).

Ichimoku Cloud

When the trend is moving above the cloud that usually means it is an uptrend and then the Kumo would work as a support for the market. We should look for buying opportunities.

trading with ichimoku clouds

When the trend is moving under the cloud that usually means it is a downtrend and then the cloud would work as a resistance for the market. We should look for selling opportunities.

ichimoku clouds

Can Kumo (Ichimoku’s Cloud) indicate what will happen in the future?

Nobody can tell exactly what will happen in the future, however, still Ichimoku’s Kumo produces 26 periods ahead of time. BUT, this doesn’t necessarily mean that price action will follow Kumo’s direction.

How can I trade with Kumo?

Remember that Kumo, at the end of the day, is just an interpretation of the trend direction. So (as we already learned, that market above Kumo is an uptrend market, and vise versa) if the market is moving above Kumo we should be looking for buying opportunities.

So, if we are looking for an Ichimoku buy signal, there are three circumstances we could face:

1: Tenkan-Sen crosses up Kijun-Sen (remember? this is a buying signal) above the Kumo. This means a VERY strong buying signal, because it simply agrees with the direction of the trend, which is going up (we knew it is going up because it is above the Kumo of course).

2: Tenkan-Sen crosses up Kijun-Sen inside the Kumo, which means an average-strength buying signal.

3: Tenkan-Sen crosses up Kijun-Sen below the Kumo, which is a weak buying signal, because it doesn’t agree with the direction of the trend, which is probably not an uptrend.

Ichimoku buy signal

If we are looking for selling opportunities, we have three chances:

1: Kijun-Sen crosses up Tenkan-Sen (seling signal) below the Kumo. This is a very strong selling signal, because it agrees with the direction of the trend, which is a downtrend.

2: Kijun-Sen crosses up Tenkan-Sen inside the Kumo. This is considered to be an average-strength selling signal.

3: Kijun-Sen crosses up Tenkan-Sen above the Kumo, which is considered to be a weak selling signal, because it disagrees with the direction of the trend, which is probably an uptrend.

Ichimoku sell signal

What is Ichimoku’s Chinkou-Span?

Chinkou-Span is basically the current price plotted 26 periods earlier.

  • If the current price is (slightly) higher than the lastest piece of Chinkou-Span, this is a bullish signal.
  • If the current price is (slightly) lower than the lastest piece of Chinkou-Span, this is a bearish signal.

SO

To buy with Ichimoku, we should be looking for these circumstances combined:

  • Tenkan-Sen crosses uo (goes above) Kijun-Sen.
  • The crossover happens ABOVE the Kumo (cloud).
  • Chinkou-Sen is lower than the current price.

Note that losing one of those three factors would mean that our buy signal is weaker.

To sell with Ichimoku, we should be looking for:

  • Kijun-Sen crosses up (goes above) Tenkan-Sen.
  • The crossover happens BELOW the Kumo (cloud).
  • Chinkou-Sen is higher than the current price.

Where can I put my Stop Loss when trading with Ichimoku?

There are basically two default places that traders would place their stops at when trading Forex with Ichimoku. Let’s look at them:

For bulls:

Bulls (buying traders) would look to set their stops on one of those:

  • The Kijun-Sen level (usually very short room for price to move in)
  • Level of last lowest support (more risk)

However, for strong buy signals, traders could be willing to give more room for the price to range in, so they would place their stop on either the upper side or the lower side of the Kumo, depending on how risk-taking they can be.

For bears:

Bears (selling traders)

  • The Kijun-Sen level (usually very short room for price to move in)
  • Level of last highest resistance.

However, for strong sell signals, traders could be willing to give more room for the price to range in, so they would place their stop on either the upper side or the lower side of the Kumo, depending on how risk-taking they can be.

Bollinger Bands

bollinger bandsHow can I add Bollinger Bands to my Forex chart? 

From the main menu on your Forex trading platform (here I am using Meta Trader), go to

Insert > Indicators > Trend > Bollinger Bands

Then a message box will show up with some options to change, leave everything unchanged and click OK. Note that you can change the color and the shape of the bands if you are already using these colors and shapes for other indicators, to prevent confusion.

Check the pictures here:

How to use Bollinger Bands correctly

Using Bollinger Bands

How can I judge the volatility of the market using Bollinger Bands?

The width of the Bollinger band’s (the space between the outter two bands) illustrate exactly the amount of volatility in the market.

  • The wider Bollinger bands are, the more volatility is in the market.
  • The narrower Bollinger bands are, the less volatility in the market.

Bollinger Bands Volatility

How can Bollinger Bands help in placing my trade?

Many traders would wait for a breakout, where the market breaks up or down the Bollinger Bands, and then they place their trade in theBollinger Bands Support and Resistance direction of the breakout.

On the other hand, other traders would use the Bollinger Bands are support and resistance levels, so they would buy when the price kisses the support Bollinger band and sell when the price kisses the resistance Bollinger band.

However, whether you would go for the first method or the second, remember that you can’t be completely dependent on the Bollinger Bands and forge about the other technical analysis methods such as Fibonacci, candlestick formations or other Forex indicators. Always make sure to double and triple check your trade entries.

  • Because Bollinger Bands are volatility indicator, most of the price action (arguably over 95%) should fall beween the bands.
  • To confirm our buying entry using Bollinger Bands, we have to wait for a candle closing with the same bias. (blue candle for buying and red candle for selling). Then we take action.
  • Most common settings for Bollinger Bands are 20 period Moving Average and 2 Deviations.. However, it is best to set the Deviations as 3.
  • The price can, and sometimes does, go above the upper Bollinger band and when it does, it means we have a very strong uptrend.
  • The price can (and sometimes does) go below the lower Bollinger band and when it does, it means we have a very strong downtrend.
  • IN TRENDING MARKETS: Some traders change the Deviations settings to 1. And they buy when they see an uptrend and the price breaks out of the upper Bollinger band. Same traders would sell when they see a downtrend and the price breaks out of the lower Bollinger band.
  • IN RANGING MARKET: Bollinger Bands should help you determine entry locations. It works as support and resistance locator. In this case, it is advised to use 50 period moving average and “2” standard deviations. In this case, to confirm our ranging market, we should have horizontal bands and the price should not try too hard to touch the bands.
  • After having the bands going horizontal and the market is ranging for a while, we should expect the price to start trending again, usually in the same direction as it did before going in range. We should look for support (lower band) to place our trade at (in case the previous trend before the ranging was an uptrend. On the other hand, if the previous market was a downtrend, we should look for our resistance (upper band) and place our trade there and wait for the price to fall down again.

Exponential Moving Average

Exponential Moving AverageWhat is a Moving Average?

Moving average is simply a Forex technical analysis tool that helps you identify the average price of a certain currency during some specific time. Let’s say for example:

We have two currencies A and B, and we want to know the average of the price (exchange rate) of the currency A last week.

  • On Monday, the price of A was 2 B’s. Means if you want to get one A you would have to pay 2 B’s in exchange.
  • On Tuesday, the price of A was 3 B’s. Means if you want to get one A you would have to pay 3 B’s in exchange.
  • On Wednesday, the price of A was 4 B’s.
  • On Thursday, the price of A was 5 B’s
  • On Friday, the price of A was 6 B’s.

To know the average price of this currency last week, what would you do? You simply add all the prices together, then divide them by 6 (number of days we are looking at).

  • 2+3+4+5+6 = 20 (Prices of the 6 days added up together)
  • 20/6 = 3.3  (then divided by 6, which is the number of days)

Then, the average price of A last week was 3.3 B’s. And now what we have done actually is created a 6 day Moving Average!

The good thing is that we do not have to do all that work, we have an indicator called Moving Average, that does all the math and give us a visualized up-to-date answer.

How can I add a Moving Average to my chart?

Very easy. I will guide you on how to do so on both Meta Trader or FXCM platforms, the most two popular Forex trading platforms. Pick the Forex trading software you use and just follow the steps:

To add a Moving Average on Meta Trader:

  • First, log in to your Meta Trader platform and wait till it fully connects.
  • From the menu on the top left of your Meta Trader, choose Insert > Indicators > Trend > Moving Average.
    How to Add Exponential Moving Average
  • You will have a message box asking you for details, just choose the number of days you want your moving average to represent and the color, then choose ok.
    Adding Moving Average

What are the most popular Moving Averages?

You will meet many different Moving Averages, you will see theme everywhere on your Forex trading journey, they are a part of many indicators and Forex trading strategies. However, when we talk about stand-alone Moving Averages, I got to tell you that there are only two or three that the majority of Forex traders use.

100 Day Moving Average

Did you understand the example above? Well, this is the same, just that we put 100 days instead of 6. Let me explain it again.

  • First we take the prices of the last 100 days.
  • We add them all together.
  • We divide the sum by 100.

This 100 Day Moving Average is, as far as I know, the second most popular Moving Average, that comes only after the 200 Day Moving Average…

200 Day Moving Average

This is the most popular Moving Average, and therefore, it is a very strong indicator, because it is displayed on MANY trader’s screens and they consider it when they make their moves, so they give it more and more power when they use it. Here is how the 200 Day Moving Average is calculated:

  • First we take the prices of the last 200 days.
  • We add them all together.
  • We divide the sum by 200.

Moving Average Buying Signals:

  • When the price rises and closes above a moving average.
  • When a short moving average crosses up a long moving average. e.g. 50 day moving average crosses up a 100 day moving average.

Moving Average Selling Signals:

  • Whe the price falls and closes below a moving average
  • When a short moving average crosses down a long moving average. e.g. 50 day moving average crosses down a 100 day moving average.