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Trend trading with Ichimoku need not be confusing because the name is unfamiliar.

Many traders prefer to trade with Ichimoku once they learn to see the trend in a new way with Ichimoku. This article is a complete break dow n of the components of the indicator as well as how you can turn this indicator into a trend following system.

Many traders are asked what indicator they would wish to never do without. My answer has never wavered as there is one indicator that clearly illustrates the current trend, helps you time entries, displays support and resistance, clarifies momentum, and shows you when a trend has likely reversed. That indicator is Ichimoku Kinko Hyo or more casually known as Ichimoku. After a Quick Lesson, Ichimoku Clearly Displays Trading Opportunities.

What is the Ichimoku Indicator and how do you use it?

Ichimoku is a technical or chart indicator that is also a trend trading system in and of itself. Before we break down the components of the indicator in a clear and relatable manner, there are a few helpful things to understand.

Ichimoku can be used in both rising and falling markets and can be used in all time frames for any liquid trading instrument. The only time to not use Ichimoku is when no clear trend is present. Would you like to receive my Ichimoku articles? The cloud is composed of two dynamic lines that are meant to serve multiple functions. However, the primary purpose of the cloud is to help you identify the trend of current price in relation to past price action.

Given that protecting your capital is the main battle every trader must face, the cloud helps you to place stops and recognize when you should be bullish or bearish. Many traders will focus on candlesticks or price action analysis around the cloud to see if a decisive reversal or continuation pattern is taking shape.

In the simplest terms, traders who utilize Ichimoku should look for buying entries when price is above the cloud.

When price is below the cloud, traders should be looking for temporary corrections higher to enter a sell order in the direction of the trend. The cloud is the cornerstone of all Ichimoku analysis and as such it is the most vital aspect to the indicator. Once you have built a bias of whether to look for buy or sell signals with the cloud, you can then turn to the two unique moving averages provided by Ichimoku. The fast moving average is a 9 period moving average and the slow moving average is a 26 period moving average by default.

What is unique about these moving averages is that unlike their western counterparts, the calculation is built on mid-prices as opposed to closing prices. I often refer to the fast moving average as the trigger line and the slow moving average as the base line. Look for the Trigger Crossing the Base In Favor of the Trend.

The Ichimoku components are introduced in a specific order because that is how you should analyze or trade the market. If price is above the cloud and the trigger crosses above the base line you have the makings of a buy signal.

If price is below the cloud and the trigger crosses below the base line you have the makings of a sell signal. Confirm Entries with the Mysterious Lagging Line. In addition to the mystery of the cloud, the lagging line often confuses traders. When studying Ichimoku, I found that this line was considered by most traditional Japanese traders who utilize mainly Ichimoku as one of the most important components of the indicator.

Once price has broken above or below the cloud and the trigger line is crossing the base line with the trend, you can look to the lagging line as confirmation. The lagging line can best confirm the trade by breaking either above the cloud in a new uptrend or below the cloud in a developing downtrend.

Looking above, you can see that the trend often gathers steam nicely after the lagging line breaks through the cloud. Now that you know the components of Ichimoku here is a checklist that you can print off or use to keep the main components of this dynamic trend following system: Where is Price in Relation to the Cloud?

Is price consistently on one side of the cloud or is price whipping around on both sides consistently? Which level of the Ichimoku would like to use to place your stop?

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