Forex Strategies

Talking Points:

• The Head and Shoulders is bearish reversal pattern consisting of a higher swing high with lower swing highs on either side.
• A rising trend line drawn along the bottom of the pattern can be used as a sell zone
• Measuring the distance in pips from the top of the pattern to the neckline give a conservative profit projection.

According to Thomas Bulkowski, author of The Encyclopedia of Chart Patterns, the Forex head and shoulders price pattern is tied for the number 1 spot for best performing chart patterns alongside the Forex bull flag pattern. As with all most patterns, they give Forex traders valuable clues in determining future price direction and act as road signs along the trend highway. There are rules that must be observed when this pattern is recognized. Knowing where to enter, where to exit for profit and knowing where to exit if this pattern fails are the three things that traders need to get from this pattern.



First of all the bearish head and shoulders pattern can occur in an uptrend as well as a downtrend. It consists of an initial price surge upward followed by a sharp pullback forming the first shoulder. Bargain hunters usually pile in push price higher to form a new high peak establishing the head. Prices pull back completing the head and forming a second trough or “armpit”. A rising trend line called a “neckline” can be drawn connecting the two “armpits” or troughs. Traders are now looking for a higher high to confirm an uptrend, however price fails to make a new high and makes a lower high instead and returns back to the neckline. This lower high forms the right shoulder and signals traders that the trend is about to change. Price needs to close below the neckline for this pattern to be valid. Once price close below the neckline, a protective stop can be placed a few pips above the right shoulder. By measuring the distance from the top of the “head” to the “neckline”, Forex traders can determine, with some precision, a profit objective. Whipsaws are possible so if price were to close below the neckline and then move back above the right shoulder, this would be regarded as pattern failure.

The Trade Setup

The Aussie US dollar pair has been in a down trend has rallied form the 12/18 lows of 0.9923 to a high just above the 0.8959 area. AUDUSD’s inability to hold onto the 0.8900 handle only reinforces the bearish sentiment surrounding this pair. On 12/19 the left should was put in with a high of 0.8885, and the head’s peak was put in at 0.8957 on 12/23 and the peak of the right shoulder was made at 0.8927. By connecting the troughs 0.8854 on 12/20 and 0.8874 on 12/26 a neckline trend line can be created.



A close below the neckline will be our trigger to enter this trade at or around 0.8877 with a stop placed above the right shoulder at 0.8936. A profit objective of 0.8782 could be set. Forex traders can benefit from being able to recognize this easy to trade pattern. See how many more you can find!

--- Written by Gregory McLeod, Trading Instructor

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Talking Points:

• This is an archived webinar from the Live Classroom of DailyFX PLUS, in which I trade my scalping strategy in live conditions
• This webinar was recorded on December 17, 2013; the day before the FOMC Taper announcement
• After showing the strategy, and how I trigger positions; we look at how a profitable position can be managed as the market moves in the ideal direction.

--- Written by James Stanley

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Talking Points:
-Equal Alternating Wave Pattern suggests USD/JPY new lows towards 101.61
-Elliot Wave Ending Diagonal pattern suggests USD/JPY new lows towards 101.61
-105.89 and 104.60 are key levels to watch for pattern validation

The Japanese Yen trade for 2013 has been spectacular. The Yen has weakened over 20% in the past 12 months which is a tremendous move for a currency. This means the USD/JPY exchange rate has rocketed higher to levels not seen in the past 5 years.

Strong trends need time correct and catch their breath. With such a strong move higher in the USDJPY, the pair needs a healthy correction before taking on the next larger move.

When analyzing the forex charts for the USDJPY, we are seeing signs of an exhausted move that is prone to a deeper correction. The pair appears to be carving two patterns which both point to price levels below 101.61. These patterns provide us insight on how to manage our exposure should the patterns play out.

Equal Alternating Wave Pattern

The first clue to a deeper correction coming is an equal alternating wave pattern from early December. An equal wave pattern implies a corrective nature of the market and that the whole pattern is likely to get retraced at some time in the future.

Forex Education: USD/JPY Equal Wave Pattern




The equal wave pattern began on December 5, 2013 with the low of 101.61. Pink ‘c’ equals the length of pink ‘a’ at 103.92. You can see that pink wave ‘c’ finished at 103.91.

However, this pattern doesn’t tell us the timing of when a move might take place. Therefore, to help strengthen our trading around the equal wave pattern, we’ll look for other patterns to confirm our bias.
Wedge or Elliot Wave Ending Diagonal Pattern

The USD/JPY also appears to be forming a wedge or otherwise called an ending diagonal pattern. (For more on trading diagonals, see 4 Steps to Trade the Diagonal Pattern.)

Forex Education: Elliot Wave Ending Diagonal Pattern




The upward trend has been relentless for the USD/JPY. When you see converging trend lines, it can be a clue that a wedge or ending diagonal is forming. When you think about the sentiment behind the formation, price keeps moving higher creating a series of higher highs, but the oscillators (note the CCI oscillator above) post lower highs. This type of action generally occurs near the end of the immediate trend as traders who are late buy in during the trend’s last moments.

From an Elliott wave perspective, ending diagonals form through a series of 5 overlapping waves where wave 4 overlaps the high of wave 1 (blue labels above). Also, waves 1, 3, and 5 subsequently get smaller. For example, wave 3 is typically smaller than wave 1, and wave 5 is typically smaller than wave 3. That is how you get the converging trend lines to form the wedge.

Since we know there is a cap to the length of wave 5 as described above, we can identify specific price points where this pattern becomes invalid.

In the picture above, current wave lengths are:
Wave 1 = 230 pips
Wave 3 = 213 pips

Therefore, according to the pattern guideline of wave 5 being less than wave 3, that means wave 5 should be no more than 213 pips.

When we add 213 pips to the end of wave 4, we get a maximum target of wave 5 at 105.89.

Conclusion

The USD/JPY market is showing signs of exhaustion and there are two patterns suggesting lower prices in the coming days. Those who have followed the trend higher may want to consider reducing exposure through their trade size or tightening their stop loss.

There is horizontal support for the pair near 104.60 (purple dotted line). A break below the purple line increases the probability the short term high is in place. If this line is broken, there is an increased probability that we’ll see 101.61 in weeks following the break.

Similar to the equal wave, the diagonal pattern tends to retrace the whole formation back to the start. In some cases, the retracement can be very swift. The start of this diagonal began on December 5 at 101.61 so that price is the point where we can consider exposing ourselves to long positions again.


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A lot refers to a bundle of units in trade. It essentially refers to the size of the trade that you are making.
Some examples of lots that you may be familiar with is at the grocery store. If you buy a 6-Pack of your favorite beverage you are essentially buying 1 lot. You see, you can’t buy 3 cans of the beverage; you have to purchase them as a full pack.

You can buy more than 6, by purchasing more ‘packs’, but you can only purchase them in multiples of 6. The 6-Pack is an example of a LOT.In Foreign Exchange, lots comprise how many units of currency in the trade.
The smallest lot available is a micro lot which is a bundle of 1,000 units of currency (often times referred to as 1k). This means the smallest trade size you can make is in multiples of 1k. You can trade 1k, 2k, 3k, or 138k just so long as it is in multiples of 1k. Each 1k is referred to as a lot.




In the example above, the trader would be placing an order for 15 lots since the trade size is 15k or 15,000 units of currency. Essentially, by placing this order, the trader is stating “I want to buy 15 lots of US Dollars while selling the equivalent size in Japanese Yen.” You may also hear terms like mini lots or standard lots. These are older FX terms that refer to larger trade sizes. Years ago, FX trading was conducted with a minimum trade size of 100k which was considered a standard lot. Then, as the big banks became better at processing the plethora of electronic trades from retail brokers, they were able to offer a mini lot which was 10k units of currency.

Eventually, the minimum trade size was lowered to 1k which is called a lot or micro lot.
FX trading has been around a long time and the big banks would exchange currencies in a special sized lot called “yard”. A yard of currency is 1 billion units.

Naturally, the more lots you trade, the greater risk you are taking on. Newer traders need to realize the impact their trade size has on their account equity. Too often, I’ve seen newer traders try to reduce risk on the trade by decreasing the distance of their stop loss. In many cases, the best way to reduce risk is to reduce the number of lots traded.


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Talking Points
- GBPAUD has been in a strong uptrend since April of 2013
- A Forex bullish engulfing pattern at the 61.8% Fibo near 1.8412 signals the end of correction.
- Fibonacci expansion targets can be set to determine profit targets.

Strong underlying economic fundamentals have made GBP a juggernaut against its rival currencies. Improving GDP, reduction in the unemployment rate and better than expected growth across the services, manufacturing and construction contrast with some of the structural challenges the economy faces like low levels of infrastructure investment. Though not perfect, the economy is like the best house in, an otherwise, rundown neighborhood of lack luster economic growth. Slowing economic growth and decline in the global demand for iron-ore have worked to pull Aussie lower. Forex traders have had much success riding the uptrends in GBP versus AUD and JPY in particular. By pairing a strong currency like GBP with a weaker AUD, Forex traders can be assured of being in a strongly trending market.

The recent rise in GBPAUD from a 4-hour low of 1.8268 to a monthly high of 1.8647 was hit by a rush of Aussie strength and GBP/AUD profit-taking has brought this pair down to a low of 1.8416. This 232 pip decline is not random as it is just three pips above the 38.2% of that swing.

Learn Forex: GBPAUD Bullish Engulfing Rebound


The bullish engulfing candle that has just recently formed confirms the validity of this Fibonacci support area. Forex traders can now expect a new high to be made. Using the Fibonacci expansion tool with the 78.6% level highlighted, traders can look to take profit in this area. The 78.6% level is not a common Fibonacci retracement area, but price expansion targets happen here frequently. The magenta lines are what I personally use in my trading by taking the Fib retracement tool and starting at the high and moving back to the low to create expansion lines. When using the expansion tool from the Market Scope charts menu, highlight the 78.6% level closely approximates the levels shown in the chart above.

By placing a protective stop below the last swing low and next Fibonacci level, forex traders look to give the trade enough “wiggle” room to work its way higher while avoiding being stopped out prematurely. The 1.8750 to 1.8900 area would be the take profit zone and traders may want to take partial profits on half of a position in this area and bring the stop to breakeven on the remaining part. This enables traders to lock in profits while also taking advantage of a possible move higher. Economic fundamentals can tell traders which currencies to trade. But something else is needed to pinpoint entries in light of a clear fundamental picture. The bullish engulfing pattern at a Fibonacci level gives Forex traders confidence that the uptrend is resuming.

Fibonacci expansions can help traders determine potential profit while retracements show where to place a stop.

---Written by Gregory McLeod Trading Instructor

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Talking Points:

• CCI uses overbought and oversold levels to signal buy/sell entries.
• Only taking signals after a more extreme CCI reading could produce more reliable trades.

As traders, we should always be investigating ways to find a new edge or to increase the edge that we already have in our strategies. When I first began trading, this meant attempting to combine multiple indicators together, adjusting parameters for each one, and creating new, more complicated indicators in hopes of turning a profit. But after my first two years of trading, I discovered that often times the simplest strategies are the ones that give me the results I am looking for.

Looking for simpler strategies is what led me to an idea about using the CCI in a way that I have never personally researched before. Please note that to gain full value from this article, it requires that you know the basics of reading the CCI (buying when CCI crosses above -100, selling when CCI crosses below +100).

Attempting to Increase Reliability

The CCI bases its signals on prices that reach extreme highs or extreme lows, and looks to take advantage of the inevitable pullback that occurs afterwards. No move will last forever, so CCI helps guide us on when the move will turn back around.

We traditionally look to enter trades when the CCI crosses under +100 or above -100, but what if we also took into account how large the CCI became before crossing the +/-100 level? For example, sometimes the CCI will barely get beyond +/-100 before crossing back. But what about the times when CCI reaches 150, 200 or even 300? Shouldn't that create a more reliable signal for us? Because after all, the more extreme the initial move, the more extreme the pullback could be. The image below shows a CCI oscillator with CCI reaching levels beyond +/-100.

Learn Forex: CCI With Additional Levels




Testing Our Theory

To test this train of thought, we could go to the charts and manually see if there is a correlation between how far the CCI reaches and how successful each trade would have been, but that would take a very long time. Ideally, we want to look at hundreds of trades as efficiently and as quickly as possible.


Learn Forex: Backtesting the CCI Strategy on the Trading Station Desktop



Here is a summary of all the parameters used in my backtests.

• Test account started with $1,000 and traded 1 microlot (1k) at a time.
• Tested 24 months of price data (Jan. 1st 2011 thru Dec. 31st 2012)
• Tested on EURUSD and AUDJPY.
• CCI based on 4-hour chart data
• No stops or limits. Each trade was closed when an opposing signal was given, opening a trade in the opposite direction.
• The trades were triggered when crossing below +100 or above -100, but were required to reach the Overbought/Oversold Confirmation Level before the trade triggered or else a trade would not be placed. (So in the image above, it required CCI to reach at least +/-150 before crossing back over the +/- 100 for the trade to be placed. With these settings applied, if the CCI only reached +135 and then crossed below the +100, a trade would not be placed.)
• Ran multiple backtests with Confirmation levels starting at the traditional +/- 100 as my base, and increased the Confirmation level used in increments of 10 for each additional backtest (so +/-110, +/-120, +/-130, +/-140, etc, up to +/-300).
• This gave me 21 data points to analyze.

After each backtest, I focused on Final Balance and the Amount of Trades placed. This way I can see if the use of a higher confirmation level benefits the strategy and estimate how reliable the results are by taking into account the number of trades in each backtest.

The Results

Using Microsoft Excel, I graphed the results of each Confirmation level tested so I could see if there was any correlation between Confirmation levels and overall profitability. Let's first look at the EURUSD results

Learn Forex: CCI Confirmation Backtesting on EURUSD



While a traditional CCI (+/- 100) turned a $1,000 account into a $1,114 account, we can clearly see that using a confirmation level of 170 yielded much greater results, posting an ending balance of $1,362. But, requiring larger confirmation levels led to diminishing returns, rendering the strategy unprofitable above a confirmation level of 270. You will also notice that as the confirmation level was increased, the strategy placed less trades overall. This is logical sense the higher levels of CCI are much more rare.

These results indicate that using a CCI confirmation level before placing a trade on a CCI cross could be a viable trading strategy to further research. Now, let's turn to the AUDJPY results. (I chose AUDJPY since it has very low correlation to the EURUSD)

Learn Forex: CCI Confirmation Backtesting on AUDJPY



The traditional CCI turned a $1,000 account into $734. This was a much poorer result than what we saw on the EURUSD. But once again, we saw that the results on average were much higher when we filtered based on a higher Confirmation level. While the 170-180 level was an improvement, better still was using a higher Confirmation between 230-260. At those levels, this strategy would have turned a profit of 10-20% from our initial $1,000 account.

One thing to consider though is the small amount of trades placed when we have a confirmation level set that high. While the traditional CCI of +/- 100 placed over 140 trades in the two years tested, Confirmation levels 230 - 260 placed between 10-25 trades.

These results also indicate that using a CCI confirmation level before placing a trade on a CCI cross could be a viable trading strategy, but we would need much more testing due to the small number of trades placed at the most profitable levels.

Looking Forward After a Backtest

Historical performance is not indicative of future results. This is something we should all be aware of, but the tests shown today could help lead us to some new ideas that might yield better results as we move into the new year. I plan to do more research about this specific topic in the future, most likely including more pairs and more time frames.

Good trading and Happy New Year!

---Written by Rob Pasche

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Talking Points:
-USD near trend defining 200 SMA on 4 hour charts
-USD is currently in a 3 week consolidation, awaiting the next move
-Buy US Dollar Currency Basket (enroll for demo account at the same link) on a break higher

January is typically one of the stronger months for the USDOLLAR. For example, in 2013, the lows experienced by the Greenback in January held for several months through the 2013 calendar year. However, we don’t want to use seasonal tendencies in a vacuum.

Applying forex technical analysis, we can see the US Dollar is near the 200 period Simple Moving Average on a 4 hour chart relative to the EUR, NZD, CAD, and CHF. If the USDOLLAR can strengthen to 4 month highs above 10,732, then we will look to buy the USD against a basket of currencies.

Forex Strategy: Matching Strong versus Weak

Currency	Up Arrows	Down Arrows	Change From Last Report
GBP	7		Higher 1 ranking
EUR	5	1	Higher 1 ranking
USD	2	1	Higher 2 rankings
NZD	3	2	No Change
CHF	2	2	Lower 4 rankings
CAD	2	3	No Change
AUD	1	6	No Change
JPY		7	No Change

According to our Strong/Weak chart above, the Greenback has been holding steady in the top half for the past several weeks. With the EURUSD, USDCHF, NZDUSD, and USDCAD 4 hour charts each showing prices near the 200 period Simple Moving Average. Therefore, the Dollar’s positioning in the Strong/Weak chart above could swing dramatically to the downside upon further weakening.

As a result, before initiating a position in the USD Buy Basket, we would like to see the Greenback move forcefully towards strength first. That type of strength would indicate the market is ready to trade to levels not seen in several months.

Forex Education: USDOLLAR Congestion Zone




When analyzing the USDOLLAR chart above, we can see the price is stuck in the tan congestion zone. These types of ranges can provide important clues to the market. For example, is the pause preceding a reversal or continuation? Once the market answers the question, we can position ourselves accordingly.

In this instance, the USD is firmly off its lows from late October 2013. Therefore, if the USD breaks above this current congestion, that would signal a continuation of the 2 month trend toward higher prices.

Executing the Trade

Since we anticipate the USD may continue its broad based rally, we will take a diversified approach and buy the single currency against a basket of currencies. There are several advantages to trading a currency rather than a pair with the largest benefit being diversification.

Therefore, if the USDOLLAR index breaks above 10,732, then we’ll look to initiate a USD Buy Basket trade through the Mirror platform. You can even try this out in a practice account at the same link above.
We will look to risk 1.5% on the trade for a minimum profit objective of 3%.

Good luck with your trading!

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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Talking Points

• Foreign exchange rates are quoted in pairs
• The Majors, refer to actively traded Forex currencies
• Major Pairs reference major currencies coupled with the USD

By now you probably know that foreign exchange rates are quoted in pairs. While this is important, it is also imperative to know exactly which currencies are being referenced in these pairs. Whether you are preparing to place your first trade or are a seasoned pro analyzing extensive research having a firm grasp on which currency is which will ultimately influence your decisions.

To help today we will review the Forex market Major Currencies and Pairs.

The Majors

When trading Forex, it is inevitable that traders will run across currencies known as “The Majors”. This term is in reference to the most frequently traded currencies in the world, with the list normally including the Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Great British Pound (GBP), Australian Dollar (AUD), and Swiss Franc (CHF). See the graph below, and you will find a list of the Major currencies along with their associated country and ISO symbol.

The Symbol is how you will know exactly which currency you are trading when referencing a Forex Bid/Ask quote. However, it is also important to review each currencies nickname. These names will often come up in research and will be handy when communicating with other Forex traders.



Major Currency Pairs

Next we will take a look at currencies pairs that are considered “Major Pairs”. The Major Pairs are a reference to any of the major currencies listed above when paired with the USD. For example, the EURO is considered a major currency, but when paired with the USD (EUR/USD) the quote becomes a reference to a major pair.



---Written by Walker England, Trading Instructor


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Talking Points:

• Where To Buy Is A Small Part Of the Puzzle
• Learn How To Take Small Losses Early Is Key
• Focus On Good Decisions More So Than Right / Wrong

“Accepting losses is the most important single investment devise to insure safety of capital”
-Gerald Loeb

It’s natural for you to look profitable FX traders to see what type of trading methodology you should take on. Because, you figure, if James Stanley is making money on the Finger Trap strategy, then that’s obviously the way to go right? But if he’s doing well with such a short-term methodology, why is Jeremy Wagner knocking out big moves with Elliott Wave & Donchian Channels? The answer to this question is that the truth about trading lies less is where to buy and more in deciding where you’re wrong and should get out of the trade.

Where to Buy Is a Small Part of the Puzzle

Of course, you should have an idea where is a good time to enter into a trade. I consider this an edge, when your entry has a better chance or probability of profit than a random entry. The most common of edges that you’ll hear us address at DailyFX is trading with the trend and when reasonable fading the crowd bias with our Speculative Sentiment Index or SSI. More importantly, it’s best to write down the key things that build your edge so that before you can objectify your edge and not be swayed by emotions before jumping in a trade.

Learn Forex: My Checklist for Entering a Trade





With my objective edge checklist displayed on the AUDUSD chart above it’s important that you understand that it doesn’t hold the path to riches but it is important. The importance lies in that you’re not being pulled by the latest news headline or largest candle on the chart which could just be a few large orders going through that doesn’t break the overall trend. In fact, a great investor of the 20th century, Sir John Templeton, used to keep a list of investments he’d make if a price got to a certain price and give it to an associate to enter orders so that he would not be dismayed by the news around that time and in effect keeping his buying objective when it was easier to be subjective.
The Bottom Line: You need to have an objective way of identifying the edge but getting into the trade isn’t nearly as important as getting out of the trade at appropriate points.

Learn How to Take Small Losses Early Is Key

If you decided to set out and learn the investing secrets of the top traders in the world, you’d likely end up more confused than when you started. The reason for the confusion is that you may read the great Paul Tudor Jones, who stated, “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms."That could easily get you excited about learning how to read market turns but just as quickly, you may read Bernard Baruch stating, “Don't try to buy at the bottom and sell at the top. It can't be done except by liars.” or “I made my money by selling too soon,” which was in context of catching the meat of a move.

Learn Forex: Decide Where Your Trade Is Wrong before Deciding Where You’re Right





You’ll notice in the chart above that I don’t know if EURUSD will go to 1.3200, 1.2400, or lower but I know if EURUSD breaks above 1.3900 which is the trendline resistance that I do not belong in a short trade. Deciding and honoring your exit point is a very tough but critical point in trading and why two traders can be very successful but have completely different ways of entering into a trade. In other words, if one guy is doing great picking tops and bottoms and another is doing great catching the meat of the move then the common denominator of these professional traders is their ability to decide when they are wrong on the trade as per their analysis for getting in in the first place.

The Bottom Line: There are many roads that lead to trading well but there is only one highway to trading poorly and that is letting the market trade past your conviction point for getting into a trade. Make sure you know at what price you should no longer have your capital at risk or else you’re just gambling.

Focus on Good Decisions More Than If You’re Right / Wrong

It’s easy to close a profitable trade and think that you were right on your call or close out a losing trade and say you were wrong on the trade but that can be a harmful way of thinking. The harm comes from the fact that when you entered the trade, you may have an objective edge as we discussed earlier but you obviously didn’t know whether you’re trade would close at a profit or loss (or else, you’d never enter a losing trade again). What’s a more appropriate way to look at any trade is making sure that it’s based on good and methodical decisions because a decision is based on collecting the present data and putting the best foot (buy, sell, flat) forward, which is a fair definition of trading.

As you can imagine, in all of life, we’re always making decisions. When you’ve made a bad decision, in trading as in most of life, you’re best served in recognizing when the decision did not turn out as you hoped and changing your course of action as soon as possible. What can be harmful, is when you tied every decision you make to your ego so that you wait for the circumstances to hopefully turn so that you’re hopefully proven right and your ego is protected. This hope has cost many traders their career and I hope this article prevents anyone from repeating this mental error in 2014.

Closing Thoughts

Adjust your thinking on trading so that you see loss control and objective decision making that protects your capital as the cornerstone of your trading while see an entry price in less esteem as you may have earlier in your career. That is the truth of trading.
---Written by Tyler Yell, Trading Instructor

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Talking Points

• Price & Cloud Relationships
• Price Bouncing Off Cloud Shows You A Well-Supported Trend
• An Example Ichimoku Trade with USDJPY

As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right, because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the “action of the market does not give you any cause to worry”, have the courage of your convictions and stay with it.
-Jesse Livermore, Reminiscences of a Stock Operator

Ichimoku is a trend following indicator that almost anyone can learn to use with ease. When trading with Ichimoku, you’re often advised to start with the cloud to get a feel for whether or not price is trending up or down to past points on the chart. However, to get a better feel for the strength of the trend, it is better to see how price is reacting to the cloud rather than only looking where price is in relation to the cloud at any point in time.

Price & Cloud Interactions

Learn Forex: USDJPY Has Demonstrated a Strong Trend Due To Multiple Cloud Bounces




The cloud is a dynamic indicator that takes into consideration two aspects of a currency pair. In an uptrend, the top line of the cloud, traditionally known as Senkou Span A is composed of the mid-point between the 9 & 26 moving average based on mid-prices, or Tenkan-Sen & Kijun-Sen, and pushed forward 26-periods in order to give you a reference for the strength of a move. If current price is above the cloud, then current price is stronger than the mid-point of the 9 & 26 moving average from 26-periods ago, identifying the strength of the current trend.

The cloud’s bottom line in an uptrend, traditionally known as Senkou Span B, is composed of the mid-point over the last 52-periods on the chart and is also pushed forward 26-periods just like the top line. Therefore, if the current candle is above the cloud, which was created from 26-periods ago, then you can see that price is above both the mid-point of the 9 & 26 moving average as well as the mid-point over the last 52-sessions.

Because Ichimoku is a dynamic indicator, the order of the lines is reversed in a downtrend. Therefore, Senkou Span A becomes the lower of the 2-lines with Senkou Span B on top. In the picture above, you can see the cloud has turned from blue to orange showing you that the AUDNZD trend is currently pushing to the downside and the cloud is now acting as resistance where it was acting as support on USDJPY above.

Price Bouncing Off Cloud Shows You a Well-Supported Trend

The key point of this article is that it’s not enough to simply know where price is in relation to the cloud to have a strong trend based trade. What you need to do is see if price is consistently on one side of the cloud or if price flips on either side of the cloud showing a very weak or non-existent trend. If there is no consistency with price and is consistently bouncing higher off the cloud proving the cloud as support and that the uptrend is strong, then it is best to take Ichimoku off your charts as Ichimoku doesn’t work well in ranges and will likely only clog up the charts if there is no clear trend.

Learn Forex: Ichimoku Only Helps When There Is Consistency Of Price & Cloud Relationship




A Cloud & Price Example Trade with USDJPY


Entry to Buy: 105.00 (Breakout through resistance)
Stop: 103.70 (recent price action low and below May 2013 High – Pivotal Support)
Limit: 107.50 (Monthly R2 Pivot)

If this is your first reading of the Ichimoku report, here is a definitive guide on the versatile indicator:
-Full Candle Bodies above the Kumo Cloud
-The trigger line (black) is above the base line (light blue) or is crossing below
-Lagging line is above price action from 26 periods ago (Bright green line)
-Kumo ahead of price is bullish and rising (blue cloud = bullish Kumo)

Happy Trading!
---Written by Tyler Yell, Trading Instructor

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