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Did you Know these Trading Strategies with Ichimoku Clouds?

Technical indicators are excellent price action indicators.

In the 1960s, a Japanese journalist named “Ichimoku Sanjin” brought a special technical analysis tool to this trading world.

It is termed as “Ichimoku Clouds”, meaning “One look, glance” in Japanese.

You just have to peek our the indicator once. You will get to know about future price movements easily. Amazing, right?

It provides trend confirmation, and also at times, act as significant resistance & support levels. Yes. It has everything you are looking for.

So, this article will discuss the two must-know trading strategies using Ichimoku Clouds that you must know as a trader.

Let’s quickly go through the components that make the Ichimoku Clouds.

Quick Overview of the Ichimoku Cloud Components

 

The biggest and the significant component of the indicator is - Kumo Cloud.

Kumo Cloud can play the role of resistance or support, depending upon the direction from which the price is approaching the cloud.

Other key components include the baseline (26 days price average) and the conversion line (9 days price average).

And, there are two more average lines that act as the borderline for the Kumo Cloud called - the leading span A and leading span B.

Lastly, there is the lagging span (Chikou Span) that provides hints about the current prevailing trend in your trade.

Here are a few basic interpretations from the Ichimoku charts:

  • Price above the Clouds suggest a bullish trend

  • Price below the Clouds suggest a bearish trend

  • Price inside the Clouds suggest consolidation/ range-bound

Tenkan Sen/Kijun Sen Cross

I know these words weird to pronounce for a native English speaker as this is Japanese.

The conversion line is referred to as “Tenkan Sen” while the baseline is named “Kijun Sen”. In general, the conversion line moving above the baseline generates a bullish crossover.

And, on the contrary, when the conversion line moves below the baseline, you can call it as a bearish crossover.

Signals can then be called strong/weak/neutral depending upon whether the price trades above/below/inside the Kumo Clouds.

However, in the end, before locking your perspective, each strategy must be confirmed with the position of the Chikou Span or the lagging span.

If the lagging span stays above the Kumo Clouds, then that means the prevailing trend is an uptrend and vice versa.

Positions can be exited even if a single criterion falls out of place. Look at this HDFC price chart below.

 

During the end of Oct. 2019, HDFC shares were struggling to make a move from the Kumo Clouds. However, as soon as, the conversion line crossed above the base line, positive sentiment got activated. That can be called as a good entry point.

But, Wait. Do always confirm with the lagging span position. Here, you can notice the lagging span line above the Kumo Clouds. That’s great. Good to go. Now, you can enter the trade fearlessly.

Kumo Breakout

This strategy is mostly used in Daily, Weekly, Monthly time frames.

The funda behind “Kumo trading” or Kumo Breakout Strategy is simple.

When the prices make a breakout from the Kumo Clouds, then that’s a long call. Whereas, when the prices showcase a breakdown from the Kumo Clouds, then that’s a short call.

However, be aware to avoid any “head fakes” that usually occur on the breakout from a flat top/bottom Kumo.

Additionally, have a look for the type of Kumo cloud, whether it is bear cloud or a bull cloud. Observe the respective positions of the leading span A and leading span B that makes the Kumo cloud.

For example, if the leading Kumo is a bear and the Kumo breakout is also a bear, then that scenario depicts a bear breakout. Here, the market sentiment will continue to rule like a king. Excessive volatility won’t affect much.

If things appear differently, like if the leading Kumo is a bear and the Kumo breakout is a bull, then wait for the right one. Simply, avoid trades at that point.

Even here, look for the lagging span position to confirm the call. Below is the price chart of L&T to validate the above strategy.

 

There are two Kumo breakouts here - one in July 2019 and the other in Nov. 2019. In both the cases, the lagging span remained below the Cloud, confirming downside.

However, always keep an eye over the components and its position, to book profits before it reverses.

From your Friends at First Global

 

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