Ichimoku Trading Strategy: Profitable – Trend Based System

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Ichimoku cloud trading system

Ichimoku Cloud Trading Strategy

A Quick Introduction To Ichimoku

Ichimoku trading strategy is one of the most reliable strategies. One glance equilibrium chart or with the original name in Japanese “Ichimoku Kinko Hyo” is my all-time favorite trading strategy.

There is a Japanese saying: “Consult the market about the market.” A lot of times we trade not what we see but what we think about the market. Our opinions about the market stop us from giving the correct trading decisions. We find ourselves quite often on the wrong side of the market.

Then let’s change our mentality for today with the help of a strategy developed by our Japanese friends. Let’s talk about the Ichimoku trading system. The system is groundbreaking, time tested, proven to work in different markets.

Is Ichimoku A Trend Following Strategy?

The Ichimoku trading strategy is a trend based trading system. It simplifies the decision process for the traders by providing a rule-based, easy to follow methodology.

Isn’t It An Indicator As Presented In Charting Softwares?

Many people consider Ichimoku as an indicator, while it is a fully functional complete trading system. It is developed by Gochi Hosada and his assistants after a diligent work of 30 years. This strategy is still commonly used today by the Japanese trading floors.

I don’t know how much it is known by the western trading communities. But it is definitely better than the majority of so-called trading systems popular today.

FX Delta helps you consistently ride the trend. Using FX Delta you can get the ultimate 1-click trade signals based on riding market trends, accompanied by the best risk-reward strategy and accurate timing entry.

The real challenge for a lot of traders today is the lack of discipline while giving trading decisions. Most of the traders losing money in the financial markets. The main reason for that not having a proven to work, unbiased trading system. Ichimoku system helps traders at this point. It defines certain rules to follow by eliminating possible bad trades.

Trend based systems are proven to be profitable. Although Ichimoku is a trend-based trading system, it can also be helpful to detect earlier trends while markets quit consolidation.

How Does Ichimoku Trading Strategy Differ From Other Moving Average Strategies?

Ichimoku system consists of certain moving averages and a cloud that predicts future support and resistance levels. Moving averages of the Ichimoku system is different than your normal moving averages. It is calculated by using the value of center points of the candlesticks. So, what is the difference between using the Ichimoku system rather than using regular moving averages?

Let me answer this question by using a ratio that most markets respect and most traders take account. It is the %50 Fibonacci ratio, which provides powerful support and resistance for the market.

Look at the below image of how the Fibonacci %50 level perfectly aligns with the flat surface of the cloud. Flat surfaces of the cloud provide significant support and resistance you can implement in your trading even if you don’t trade the Ichimoku system.

%50 Fibonacci ratio & ichimoku levels
Fibonacci %50 level usually well aligns with Ichimoku Cloud flat surface.

Of course, this is an example from the Forex market. It works perfectly fine for the stock market and cryptocurrency market as well.

Let’s break the Ichimoku system into bite-size components. Because my goal is to make sure that you understand this system.

Components of The Ichimoku Trading System

Essential components of ichimoku system
Components of Ichimoku trading system

Kijunsen (Baseline or Kijun line)

The baseline is nothing but the 26-period simple moving average. The difference is simple moving average is calculated by using the closing price of the candlestick. Whereas the Ichimoku Kijun line uses the average price of the open&closing prices.

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Tenkan Sen (Conversion line or Tenkan line)

The conversion line is a 9-period simple moving average that is calculated with the same calculation technique of Kijunsen. Markets that are in a powerful trend tend to stay above the Tenkan line. It is the very first support/resistance line in a trend.

Chikou Span (Lagging span or Lagging Line )

The lagging line is a 26-period simple moving average calculated the same as Kijun and Tenkan lines but shifted 26 periods back than the current price. This component of the system often overlooked by many traders. It is extremely important though.

This be may sound confusing but there is some good merit in it. Gochi Hosada spent many years to develop this great system.

Senkou Span A & Senkou Span B

Senkou span A and Senkou Span B lines are the lines of the Cloud. These are the projection of 52 days high and low prices projected 26 days in the future. The cross of these 2 lines is called Kumo Twist and counted as an important change in the market.

Having talked about the components of the Ichimoku system, let’s try to understand the logic of projecting moving averages to the past and into the future.

Chikou span follows the current price from 26 period past. It is accepted that if nothing intervenes the route of the chikou span, the market will continue its trend freely.

chikou span (lagging span)
Chikou span is below the price and nothing stops it

Most Common Ichimoku Trading Strategies

Ichimoku system provides us abundant different strategies we can use.

  • Tenkansen Bounce Strategy
  • Kumo Breakout Strategy
  • Kijunsen Bounce Strategy
  • Kijunsen Breakout Strategy
  • Kumo Twist Strategy
  • Senkou Span B Strategy
  • Using Ichimoku with the other trading indicators.

These are the most common Ichimoku Strategies. A lot of people using Ichimoku prefer using other indicators to spot divergences or oversold and overbought levels. Everyone’s personality, trading style and, the risk appetite are different.

Indicators commonly combined with the Ichimoku system

  • RSI (Relative Strength Indicator)
  • MACD(Moving Average Convergence Divergence)
  • Williams %R (Williams Percent Range)
  • Ultimate Oscillator
  • Fibonacci Levels

I personally like using Ultimate Oscillator and Fibonacci levels with the Ichimoku trading strategy. Ultimate Oscillator with no doubt best Oscillator to spot divergences and market reversals. The reason it uses multi timeframe in its calculation. But if you like RSI or other indicators that would also be fine.

Another important decision while using the Ichimoku strategy if you want to trail your trades or defining certain profit targets to close the trade. I never liked the idea of trailing stops, rather define a profit target when I enter a trade.

I am a little lazy to sit in front of the computer and follow the candlesticks. Personally, I would rather spend that time on something more valuable than babysit a trade.

What timeframe is best to use Ichimoku System?

Ichimoku system works fine on all timeframes. However, markets work more technical levels on higher timeframes. I trade Ichimoku usually on 4-hour and daily timeframes. Smaller time frames can be intervened with the market noise and the whipsaws.

Also, market liquidity is another important factor to consider while choosing the appropriate timeframe. Forex market is much more liquid than Cryptocurrency market and 4-hour timeframe and even maybe 1-hour timeframe can be ok. If you trade crypto stick to daily charts.

Should I trade Ichimoku during the times market consolidate?

In general trend trading systems don’t work well during market consolidation. However, markets move in cycles. Trends followed by consolidation periods and the vice versa is also true. I don’t trade with Ichimoku if I see a long consolidation period. It wouldn’t make any sense if I would so.

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There is a saying that all trends start with a Kumo Breakout, which is entirely true. Finally, at some point, the consolidation period finishes and the market starts trending. There is no indicator in the world that can spot the starting of a new trend with %100 accuracy. But there are ways to estimate for a trend change.

My secret trading ingredient while trading with Ichimoku is using divergences. Divergences are not reliable to jump onto a reversal trade, which I believe we should always trade with the trend. But divergences can help us to figure out the weakening of the existing trend.

divergence trading with ichimoku
Divergences occur when price and the oscillator don’t agree with each other.

Indicators such as RSI, Stochastic or Ultimate Oscillator inform us about the market momentum. When price doesn’t agree with the indicator, this can be an early sign of weakening a trend or possible reversal. I emphasize here again we don’t use indicators to go in reversal trades, but rather to measure trend strength of the instrument.

General Rules That Ichimoku System Recommends

Ichimoku as we discussed earlier a rule-based system. There are certain rules we should definitely comply if we want to trade with it properly.

Ichimoku Rule – 1: Don’t take long trades while the price is above the cloud and don’t take short trades while the price is under the cloud.

Ichimoku Rule – 2: Price should be over the cloud, together with Tenkan and Kijun lines for the long trade entries. It should also be below the cloud, in addition to Tenkan and Kijun lines for the short trade entries.

Ichimoku Rule – 3: (Tenkan-sen & Kijun-sen cross)

Tenkan line(fast-moving average) should cross above the Kijun line(slow-moving average) for long trades, and the opposite should happen for the short trades. For long trades golden cross, for short trades death cross should happen.

For Long Trade:

  • The cross happens in the bullish area (above the cloud) signal is considered strong.
  • The cross happens below the cloud, signal considered as weak.
  • The cross happens in the cloud, then the signal is taken as neutral.
TK crossover & Kumo Twist
Bullish Tenkan & Kijun Crossover
Bullish Kumo Twist

For Short Trade:

  • The cross happens in the bearish area (below the cloud) signal is considered strong.
  • The cross happens in the bullish area, the signal is considered as weak.
  • The cross happens in the cloud, then the signal is read as neutral.
Neutral TK cross & bearish kumo twist
Neutral Tenkan & Kijun Crossover
Bearish Kumo Twist

Are Minimum Entry Rules Well Enough To Take A Trade?

These are the minimum entry rules applied while trading with the Ichimoku system. But, it is not sufficient to profitably trade with this system. I will explain further what other considerations necessary to consider.

We described the Ichimoku system as one glance equilibrium chart. You may wonder where is the equilibrium part of this system. The system can show us overbought and oversold conditions of the market without needing another indicator. We need a good level to trade with Ichimoku. All 3 rules above listed should be satisfied in addition to our level to be present to take a trade.

A good level for entry means the price is not really far from Kijunsen and Tenkansen. If the price went too far from this balance we can market is in disequilibrium. When the market is in an inbalance state, it is likely to change its direction.

We have already mentioned that Ichimoku can show of overbought and oversold levels. Disequilibrium happens when the market moves too far from its equilibrium state.

Bullish TK cross
Optimum entry for a Bullish trade
all conditions are met.

Above you can see an optimum scenario to take a Bullish trade with Ichimoku. We want price to be as close as Kijun while it is above the Kijun. Ichimoku trading strategy has its own trailing stop, and most often Kijun line is used as the trailing stop.

Ichimoku C Clamp Formation

A lot of time distance between Kijunsen and Tenkansen lines gets far apart. Ichimoku traders call it “C Clamp formation”. Also, the price gets too far from Kijunsen. All these are the signs of market disequilibrium. We can expect a correction if not a reversal.

"C Clamp" formation of Tenkan and Kijun lines
Tenkansen & Kijunsen are in disequilibrium
The market may be in an overbought state.

The market condition that is represented in the above image satisfies all the minimum requirements for entry.

However, it could be a terrible mistake to take trade in that market. We need a better level to be presented by the market for us. It is desirable for the price to approach to the Kijun line as much possible. Also, the price should lose its downward momentum. We may look for a pin bar candle as an entry signal.

Once price consolidates on the Kijunsen line, there appear for us 2 approaches for an entry. The first one is taking the trade right away. Another other one is placing a stop buy order on the market a little higher than the pin bar candle.

This gives us a chance of taking the trade with a lower risk. Because once you go long, the price will have already bullish momentum.

Thanks for reading. I wish you have found this content useful. Please share it with your friends to support my blog. Have a Great Day!