Friday, September 14, 2018

Trader Notes: the Ichimoku indicator

Among the many indicators used for technical analysis, one of my favorites for its versatility, since it brings together 'all in one': levels of support and resistance, trend of movement (trend direction), acceleration (momentum) of the price (that´s volatility), and trading signals (bull or bear), is the 'Cloud of Ichimoku', or simply Ichimoku, dating from 1969, today has become one of the
most used by traders for its effectiveness. Its development and operation are detailed in the main trading books, and in many internet sites dedicated to teaching, which is not the intention of this blog, but rather to mention it and use its power to make good trades. I suggest, fervently, study the theory of this indicator to better understand the philosophy of Goichi Hosoda, its creator. One of the best online explanation of the Ichimoku Clouds is in the StockCharts web, it explains calculations, signals and strategies. Briefly, the Ichimoku consists of the use of several lines: 

Tenkan: blue line of conversion 

Kijun: red line of base
Chikou: green line, backward
Senkou: A and B, which encloses the cloud between them 
Kumo: the cloud, which defines the trend

The cloud takes its color according to the relative location of these. Thus, Senkou A over B, green color, reinforces the upward trend), acting in turn the cloud as support or resistance. Looking at the graph of the price of a stock or index can be deduced if the trend is bullish/bearish/neutral (price up/ down/within the cloud), or if there is an upward/downward correction to it (cloud going green to red, or vice versa). 


Finally the crossing of the price of the stock with the conversion and base lines, or the crossing between the same blue and red lines, are those that indicate the strategies and signals of purchase/sale, and are reinforced if they are located above or below the cloud , respectively. That is, the Ichimoku makes trading in the direction of trending, never going against it, giving better results in stocks or indexes in trending mode.  So, the trading strategy could be summarized as follows: 


Bull signs for trading:

- Price moves above the cloud
- Cloud turns from red to green
- Price moves above the base line
- Conversion Line (blue) moves above Base Line (red)

Bear signs for trading:

- Price moves below the cloud
- Cloud turns from green to red
- Price moves below the base line
- Conversion Line (blue) moves below Base Line (red)



Nvdia $NVDA chart shows a bull bias for Ichimoku, with price moving yesterday above the Conversion Line. But always remember: a single indicator never guarantees a good trade.





Intraday"Breakout Strategy" using Ichimoku and ADX


This strategy was taken from the web https://www.forexstrategieswork.com/ which have many other forex strategies as this, for use in stocks. Analyzing many of them in the site, I think this one is  simple, inteligent and accurate. As a preamble, the Average Directional Idex ADX is another popular trending indicator, which ranges between 0 and 100 telling you, if its value is above 20 and the slope up, the stock is trending. In the other side, if its below 20 and the slope pointing up, its ranging. The indicator does not say if the stock is in bullish or bearish bias, only the strength of the trend.  


Over the years, one of the strategies I use is this one who combined the Ichimoku cloud and the ADX for intraday purchase of stocks, that is, quick buys that I usually sell the same day or the next. Work only on stocks that are close to having a breakout, ideal if you touch 3 or more times the resistance without exceeding it completely. I have seen that the timeframe that works best is 10 minutes, but also works well with the 5 minutes. As usual, I prefer stocks with Market Cap >1,000M, good volume >500,000 shares and implied volatility less than 80%.


For a BUY trading signal were going to look at key resistance levels.

- Wait for the breakout TO HAPPEN and if both, the ADX and Ichimoku Cloud, give bull signals in that point, you can place a BUY order at the open of the next candle after the breakout candle. 
- The ADX indicator must be above 20 (30 for more security) and with upward SLOPE at the moment the breakout happens and the price candle must have CLOSED ABOVE the cloud.
- Place the stop loss just below the Cloud and follow the trend (trailing up the stop loss if you want) and EXIT the trade only after we have two consecutive candle close below the BLUE conversion line.

For a SELL trading signal were going to look at key support levels. 

- Wait for the breakout TO HAPPEN and if both the ADX and Ichimoku Cloud give bear signals in that point, you can place a SELL order at the open of the preceding candle after the breakout candle. 
- The ADX indicator must be above 20 (30 for more security) and with upward SLOPE at the moment the breakout happens and the price candle must have CLOSED BELOW the cloud. 
- Place the stop loss above the Cloud and follow the trend (trailing down the stop loss if you want) and EXIT the trade only after we have two consecutive candle close above the BLUE conversion line.

The strategy, being intraday, requires constant vigilance and risk management, and is a good method to avoid one of the main causes of losses in stock trading: the false breakouts. Try it first on papermoney mode, because  requires practice. 
Take note that there's no infallible or magic indicator or strategy: all of them give sometimes false signals. Use your favorites indicators in a multiple timeframe (making the strategic decision on the weekly chart and the tactical choices on the daily chart), in conjunction with fundamental analysis for a best trade.


This 10-chart from Comcast $CMCSA show the main features of the BUY strategy Ichimoku + ADX: resistence breakout, candle above the cloud, ADX>30, stop loss place, exit and profit.


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