Trading ICHIMUKU...!

This is going to be my re- post of this system i posted on BMT...

For a start, ichimoku is multi time frame "pure price action" system constructed with 5 lines, each giving a clue on the present price action with relation to its historical price movement. The combination of these 5 lines together give the total picture.

I have seen some good post on ichi but somehow the core concept of the system is lost in looking for signals on when to buy / sell. Objective look at a very subjective market needs clear understanding on how the system is constructed and how it derives its signals.

I personally like to add 2 oscillator, stochastic for identifying the cycle and RSI for divergence / continuation pattern.

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ChiKou Span :

The most important and often least understood indicator is the CS (ChiKou Span) which is a simple line chart shifted n-number of bars to the Left.

Sometimes, a simple line chart can provide us a lot of information about market structure and well known patterns that is not visible on candle sticks.

The main purpose of this indicator is to identify support and resistance and to draw trend lines.

When we look at historical price movement to make an assumption on future price action, we have to define our assumptions. That way when we know market has proven our assumptions wrong, we can safely and gracefully take our exit. I'll cover the assumption chapter later after introducing the 5 lines.

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TENKAN SEN & KIJUN SEN
TENKAN SEN ("turning line")

The tenkan sen is calculated in the following manner:

(HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods

KIJUN SEN ("standard line")

The kijun sen is calculated in the following manner:

(HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods

After much research and backtesting, Goichi Hosoda finally determined that the settings of 9, 26 and 52 were the ideal settings for obtaining optimum results with Ichimoku. He derived the number 26 from what was then the standard Japanese business month (which included Saturdays). The number 9 represents a week and a half and the number 52 represents two months.

But, personally i prefer using the 5,20,40 settings as we have 5 trading days in a week, 20 trading days in a month and bi-monthly has 40 trading days.

1. chart under analysis. A 2 min chart of nifty Index.

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2. plot the highest high (green) and the lowest low (red) of the last 15 bars and the mid point of this 2 line is plotted as yellow line. This yellow line is the center of the 30 min tf bar. Every time a new 2 min bar is formed, a new high / low data is included. If this new bar makes a new high than its last 15 bars, then the yellow line shifts higher. If it forms a new low compared to its last 15 bars, then the yellow line shifts lower.

Every time, a new bar is formed, the last bar of the series of 15 bars is discarded. If the last bar was the lowest low among the 15 bars, then the yellow bar shifts higher as the lowest low of the 15 bars series got a higher low. This is irrespective of the fact that the new bar that is added need not be a new high / low bar.

Overall progress of the midpoint of the 30 min bar can be observed on 2 min time frame interval.

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3. we now plot the 60 bar highest high (green) and lowest low (red) and plot the midpoint as white line. This white line is the midpoint of 2 hour time frame bar and shift of this while line will only occur when
a new high is made which is higher than the last 60 bars or
a new low is made which is lower than the the last 60 bars or
oldest bar that is being discarded was the lowest low of the last 60 bars or
oldest bar that is being discarded was the highest high of the last 60 bars

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4. Now for fun sake, I am going to plot the yellow (TS) and white line (KS) as a cloud to highlight the visual effect of TS above the KS scenario.

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Price is nothing but a transaction between a buyer and a seller who have a opposite view on current value of scrip that is being traded and have agreed upon a price. A series of such transaction gives rise to price movement. Price moves up till the last buyer has filled his inventory and there are no more buyers willing to transact at that price. This gives us our swing high.

Sellers then auction the price down to invite buyers and price moves down till the last seller has sold his inventory and there are no more sellers willing to sell at that price. This gives us our swing low.

When the buyers are more desperate to act, then we have a scenario where we have a higher swing high and a higher swing low. A series of such higher high / higher low on price gives us our up trend.

On a strong up trend, price seldom retrace 50% from the top before buyers are desperate to buy the dips.

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On the 3 min chart of nifty, the high of the last 20 bars is plotted with a green line. The low of the same 20 bars is plotted in red. The 50% retracement from the top, is basically the mid point of this 2 lines, which happens to be our KS.

A rising KS signifies a rising bullish sentiment on the a set of 20 bars of 3 min each, meaning we monitor the progress of 60 min time frame using a 3 min chart.

Now same chart, we plot the midpoint of the last 5 bar's high and low, we now have our TS. TS represents the change in sentiment of 15 min tf on my 3 min chart.

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All i need now is an oscillator, like stochastic to tell me which dip i should buy.

Cloud
Ichi cloud is the most over hyped indicator there is...

It is made up of 2 components

SENKOU SPAN A ("1st leading line")

The senkou span A is calculated in the following manner:

(TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future) 26 periods


SENKOU SPAN B ("2nd leading line")

The senkou span B is calculated in the following manner:

(HIGHEST HIGH + LOWEST LOW)/2 for the past 52 periods time-shifted forwards (into the future)
26 periods


together they give us a feel of :

1. Volatality. : Thickness of the cloud represents the volatality that can be expected.
2. 2x the KS periods movement. i.e. On an eod chart, if KS is set to 20 representing monthly TF's movement, cloud tells us development on the bi monthly time frame, on the eod chart itself.
3. Support / resistance zone. Thick cloud will be harder to penetrate... thin cloud will behave as if it doesnt exist...!

Ichimuku is a lazy way of trading, where the objective is to capture 80% of the trend. It is a pure trend following system and that normally implies that entry will be delayed and that too only after confirmation of the trend. Trade is always in the direction of the trend and there is no provision for counter trend trades.

There is no hurry to exit and idea is to hold a trade till the trend exhausts itself.

CS is the backbone of this system and rest of the 4 lines is used to decode the health of the trend.

1. We start with plotting horizontal line at highest point and the and the lowest point on the CS (sky blue line). This establishes the extremes of our trading range.

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2. We draw a trend line connecting the highest point on the CS to the second highest point on the CS and extend this trendline to the right. The second highest point is the reference level for shorts. This is a valid stoploss for any short trade that is intended to be taken.

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3. Likewise we plot a trend line connecting the lowest point on the CS to the second lowest point. The second lowest point is a reference level for longs. This is a valid stop loss for any longs that is intended to be taken.

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4. We cannot attempt a long or short trade without a valid stoploss or reference point. i.e. We need a confirmed higher low for a long trade and a lower high for a short trade.

If price has broken the lowest point of the range, then there is no provision for a counter trend long trade as, as a rule, we need a valid reference level to attempt a trade. when the lowest point of the range got broken, we cannot draw a trend line.

If a lowest point is intact and the reference level is broken, then we have to interpret it as a weakness on the buyers of the market and price had to auction lower to search for fresh buyers.

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Its only when price is able to climb back above the old trend line

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that we can re-draw a new trend line and place a new reference level on the chart for longs.

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