Two of the best known technical trading setups are the “crosses,” or the Golden Cross and the Death Cross.

They are used to signal the potential start and end of long-term uptrends and downtrends. This technical analysis method is usually used on the daily chart.

A Golden Cross and a Death Cross are opposite signals and occur when the shorter term moving average crosses over the longer term moving average.

The most commonly used moving averages are the 50-period Simple Moving Average (50 SMA) and the 200-period Simple Moving Average (200 SMA).

Keep reading and you'll learn the specifics of each crossover and see examples of each cross in different markets.

You'll learn how to get Golden Cross and Death Cross alerts on your computer or smartphone.

Most importantly, you'll also learn how to backtest these crosses to see if they actually work in the markets you trade (no coding needed).

Golden Cross Explained

A Golden Cross occurs when the 50 SMA crosses above the 200 SMA. 

This suggests that the market is entering a long-term uptrend.

Examples of Golden Crosses

Here's an example of a Golden Cross in Bitcoin.

After the cross, the market went on a big run.

This is another example on the AT&T chart.

It's very easy to spot a Golden Cross, once you know what to look for.

Death Cross Explained

Conversely, a Death Cross occurs when the 50 SMA crosses below the 200 SMA. 

This is a clue that the market could be entering a long-term downtrend.

Examples of Death Crosses

Here's a Death Cross in the Nasdaq, which signaled the beginning of a bear market.

Another chart showing a bearish cross on a AUDUSD chart.

Now that you know what these crosses look like, the next question is…

Do These Moving Average Crosses Really Work?

Most of the research around moving average crossovers has been done in the stock market.

This is a study that I found particularly interesting because they tracked both Golden Crosses and Death Crosses across multiple US stock sectors.

As you can see, trading these crosses worked out well during the bull market between 2009 and 2018.

They also did a longer-term study over 20 years, and the results were also profitable.

However, there's a twist to this study…

Instead of selling short on a Death Cross, they actually went long. 

They found that this method generally outperformed the Golden Crosses in a bull market because they were entering the uptrend on a pullback.

So although a moving average crossover is a super simple concept, there are many variations that you can experiment with.

Some of them might work better than the basic strategy.

When These Crosses Don't Work

Just like with everything else in trading, a Golden Cross or a Death Cross does not a guarantee a profitable trade.

There will be periods where the market goes into consolidation phases and that's when you can lose money.

Here's an example of this in the Russell 2000.

If you took every trade on this chart, you would end up with a net loss.

So be aware of the market you're trading and if price action starts to get choppy, it's best to pause and re-evaluate.

Optimize Your Entries

There are several ways that you can optimize your entries and make your trades more profitable.

Here are 2 ideas that you can experiment with…

Trade a Pullback

Instead of buying or selling exactly when the crossover happens, you can look for an area of support or resistance after the cross to enter a trade.

For example, instead of going long exactly at the Golden Cross on this gold chart, you could wait for the support level to form at the orange line.

Then you could buy below the orange line to get a better price than if you entered at the crossover.

As long as price stays above the 200 SMA, your trade has a good chance of working out. A good place to put your stop loss is at, or slightly below, the 200 SMA.

This entry method will also give you the opportunity to get in late, if you missed the original signal.

It would be the same idea in a downtrend, except you would be looking for resistance after a Death Cross.

Ride the 50 SMA

Here's a classic trend following method…

After a cross, you could also trade a retracement to the 50 SMA.

This entry will cause you to lose out on some profits, but it will also help ensure that you're in a strong trend.

For example, here are a few long entries that would have worked in the S&P500.

First make sure that the 50 SMA is above the 200 SMA.

Next, wait for price to drop below the 50 SMA, then close back above it to enter a long.

Then trail your stop loss is a way that you feel comfortable with. A great place to start would be a close below the 50 SMA.

Again, it would just be the opposite in the case of a downtrend after a Death Cross.

In order to find out if these ideas will work in the market you trade, you'll have to backtest.

Here's how to do that…

How to Backtest Golden and Death Crosses

Let's get real, most trading strategies don't work in all markets.

So you'll have to do some testing to figure out which markets work with these moving average crossovers.  

Since these moving averages are so easy to setup, you can quickly backtest them in any market and on any timeframe.

Backtesting is essential because you want to know that the strategy has worked over a long period of time, which will give you confidence to take trades. 

If you're new to backtesting, then read my backtesting guide for beginners to get started.

NakedMarkets is a great software for backtesting strategies, especially if you don't know how to code.

The first thing you should test is the basic version of the strategy. 

For a long, do the following:

• Enter a long when the 50 SMA crosses above the 200 SMA
• Exit the long when the 50 SMA crosses below the 200 SMA

For a short, do the following:

• Enter a short when the 50 SMA crosses below the 200 SMA
• Exit the short when the 50 SMA crosses above the 200 SMA

From there, test the optimization ideas listed above.

If there's a market that you want to trade with these setups, then it's time to create alerts so you don't miss any signals.

How to Get Golden Cross and Death Cross Alerts

There are a few different ways to get alerts for these setups on your laptop or mobile device.

However, the easiest way that I know of is to use TradingView.

They have a ton of markets available, so there's a very good chance that they have a chart for the market you trade.

Since your alerts are hosted on their servers, you don't have to worry about keeping your computer on all the time.

It's easy to setup alerts, which will ensure that you don't miss any signals.

First add the 2 moving averages to the chart.

Click the Indicators button, then click on Moving Average.

Now you'll see the moving average on the chart.

Double click the moving average line to pull up the settings.

Here are the settings for the 50 SMA.

Add another Moving Average and change the Length to 200.

Then right-click on the 50 SMA and select Add alert on MA.

On the settings popup, change the settings to the following:

If you want email or SMS alerts, you can select them under Alert actions.

Click the Create button to set the alert.

Final Thoughts

The best part about these setups is that they are simple and can be added to any chart, on any platform.

But just knowing about these entries is not enough.

You have to backtest the strategies to see if they have an edge in the market(s) you trade.

Then keep a good trading journal to be sure that you're executing your trades correctly.

The post Golden Cross vs Death Cross Differences Explained appeared first on Trading Heroes.

The Relative Strength Index (RSI) is one of the most well known trading indicators in the world.

It's available on almost all trading platforms and is used by professional traders.

So if you want to learn more about how to trade with this indicator, this tutorial will give you the history of the strategy, how it's calculated and trading strategies that utilize the RSI.

Alright, let's get into it!

Brief History of the RSI Indicator Creator

Before we jump into the details of the indicator itself, here's a quick background on the creator of the RSI, because it's an interesting story.

J. Welles Wilder Jr. was born in 1935 in Norris, Texas.

He attended North Carolina State University, where he studied mechanical engineering.

After graduating, Wilder served in the United States Air Force as a fighter pilot.

Wilder became a mechanical engineer, then a real estate developer. He later became intrigued by technical analysis in the financial markets.

In 1978, he published his groundbreaking book “New Concepts in Technical Trading Systems.”

This book introduced the Relative Strength Index (RSI) along with other technical indicators such as the Average True Range (ATR) and the Parabolic SAR (Stop and Reverse).

The RSI quickly gained popularity among traders and investors for its ability to identify overbought and oversold conditions in financial markets.

Wilder's contributions to technical analysis revolutionized the way traders analyze markets and make trading decisions.

Throughout his career, Wilder continued to develop and refine trading indicators and systems.

He also founded the Delta Society International, an organization dedicated to the study and application of technical analysis in trading.

The Delta Phenomenon is one of Wilder's most interesting books. In it, he shares his research indicating that all markets have a hidden order.

Wilder's innovative work in technical analysis earned him widespread recognition and accolades within the financial industry.

He passed away in 2021, leaving behind a lasting legacy as a pioneer in the field of technical trading.

Now that you know a little about the creator, let's take a look at the indicator itself.

The Core Principles of the Relative Strength Index

Traders use the RSI to identify potential trend reversals and confirm the strength of a prevailing trend.

It can potentially be used in any trading market, but must always be backtested before trading real money.

Extreme RSI readings can signal potential buying or selling opportunities, as they suggest that a market may be overextended and due for a correction.

Additionally, divergences between price movements and RSI values can provide insight into underlying market dynamics and potential changes in momentum.

Key components of the RSI include:

• RSI Formula: The RSI is calculated using a two-part formula, which is explained in detail below.
• Overbought & Oversold Thresholds: The default settings are 70 (overbought) and 30 (oversold) as potential signals for price reversals. However, these settings can be changed to generate fewer signals (greater than 70 and less than 30), or more signals (less than 70 and greater than 30).
• Divergence: When the RSI diverges from the current price trend, it indicates that the current trend may be weakening.
• RSI Periods: By default, the RSI is typically set to a period of 14. However, this can be adjusted to increase sensitivity (with a lower period) or decrease it (with a higher period).

The RSI is usually beneficial when used in conjunction with other technical analysis tools.

Here's what the RSI looks like on a chart:

RSI Strengths

• Since most markets usually trade in ranges, the RSI can be a good tool for taking advantage of reversal moves within a range
• The indicator is easy to understand
• This indicator is widely available

RSI Weaknesses

• The RSI can create many false signals in a strongly trending market
• An overbought or oversold signal does not guarantee that the market will reverse
• Like any other indicator or trading strategy, it takes time to master and needs to be backtested before using

Where to Get the RSI Indicator

The RSI is available on most charting platforms.

In fact, all of the charting platforms I've used had the RSI.

I would recommend using the RSI on TradingView, but use whatever charting software works for you.

How to Get RSI Alerts

If you don't have time to monitor the markets, then a platform that has RSI alerts is very valuable. 

They will send alerts to your phone so you don't miss a signal.

Some platforms require you to install a custom indicator, while other platforms have alert capabilities built in.

That's why I recommend using TradingView.

It has RSI alerts built in.

Another way that you can get alerts is to use my custom indicator for MetaTrader 4.

Other platforms also have solutions, so find out what's available on your favorite trading platform.

RSI Trading Strategies

There  are several ways to use the RSI to trade. 

I'll be covering each method in more detail in future articles and I'll also backtest as many strategies as possible.

Here's a list of the common trading strategies that use the RSI:

• Overbought/oversold
• RSI Divergence
• RSI exit strategy
• Connors RSI 2
• Midline crosses
• Swing 5

You can learn more about each variation in this tutorial.

Now let's take a closer look at the RSI calculation.

RSI Indicator Calculation

The way that RSI is explained in most books and on most websites is a little confusing.

So I created a graphic that clears up the confusion and shows you exactly how the RSI calculation formula works.

Alright, now that you know the formula, let's break down each component.

First, let's start with the variables.

Number of Periods (n) or Length

n is one of the settings that you would use in charting platforms like TradingView, NakedMarkets or MetaTrader.

It's basically the number of periods that you want to look back on the chart to determine the current RSI value.

The default value is usually 14 periods, but it can be changed, according to what you want to achieve.

When the RSI is set to 14, your charting software will calculate the current RSI value based on the last 14 periods.

Many websites refer to the default RSI setting as 14 days, but that's only if you are trading on the daily chart. The RSI look back can also be measured in weeks, hours or minutes. 

It just depends on what timeframe chart you are using the indicator on.

Therefore, I will refer to the RSI look back setting in periods, which is more accurate.

Your RSI period setting will depend on your goals and your trading strategy.

There's no right or wrong answer here.

It just depends on what you have tested and what is profitable for you.

Relative Strength (RS) First Data Point

The raw Relative Strength number simply shows you how current price compares to historical prices over the last n periods.

It can be a little tough to understand what that number is actually telling you.

So Wilder's formula turns the number into an index that stays between zero and 100.

Therefore, the RSI is an oscillator because it goes back and forth on a fixed scale between 0 and 100.

Having a set scale allows RSI to be easily used across any trading instrument.

It's also a momentum indicator because its goal is to show traders when momentum could be slowing down.

The first RSI graph point is calculated by summing the up periods and dividing the result by the n periods setting in the RSI indicator.

That number is then divided by the average of the down periods over the last n periods.

For example, let's say that you are trading the daily chart and n is set to 5.

The last 5 days are as follows:

1. 10 pips up
2. 20 pips down
3. 100 pips up
4. 30 pips down
5. 200 pips up

In order to calculate the numerator, you would average the up days: 10 + 100 + 200 = 310 / 5 = 62

Then you would calculate the denominator with the down days: 20 + 30 = 50 / 5 = 10

Finally, you would divide the numbers to get: 62 / 10 = 6.2

Therefore: RS = 6.2

Converting RS into RSI

From there, you would turn RS into RSI by doing the following.

So starting from the right side of the equation: 100 / (1+ 6.2) = 13.8

Then: 100 – 13.8 = 86.2

Which means: RSI = 86.2 

Subsequent RS Calculations

After the first RSI data point, all of the following data points are calculated with this modified formula.

This formula is similar to an exponential or weighted moving average, in that it gives more weight (importance) to the current RS reading.

So you would start by averaging the first n-1 periods for both up and down moves.

Then you would add in the current average for up and down moves to their respective averages and divide each total by n.

Let's use the data from the previous example and add in a 6th period, to show you how this works.

1. 10 pips up
2. 20 pips down
3. 100 pips up
4. 30 pips down
5. 200 pips up
6. 30 pips down

First, you would average the first 5 (n-1) up periods:

100 + 200 = 300 / 5 = 60

Then you would multiply the average by n-1 or 5:

60 * 5 = 300

Now we do the same for the denominator:

20 + 30 = 50 / 5 = 10 10 * 5 = 50

Next, average the data from the previous 5 periods, plus the 6th period.

Since the 6th period is a down period, nothing would be added to the up periods calculation:

300 + 0 = 300 / 6 = 50

Add in the 6th period down move, then average by 6:

20 + 30 + 30 = 80 / 6 = 13.3

Then RS is:

50 / 13.3 = 3.75

RS = 3.75

Converting RS into RSI

Again, we do the RSI calculation to convert the RS to RSI:

100 / (1+3.75) = 21 100 – 21 = 79

RSI = 79 

RSI Signal Levels

As mentioned above, the default signal levels are usually 30 and 70.

But some traders will use different settings, depending on what they want to achieve.

Other common settings are:

• 20/80
• 10/90

This is where to find the signal levels on a chart.

If the RSI is over 70, price is considered overbought and is a potential sell signal.

On the opposite side, when the RSI goes below 30, that's a potential buy.

The concept is simple, but it takes testing and practice to master.

Common RSI Misconceptions

A few websites will tell you that a longer look back period is more “accurate.”

This is simply not true.

A shorter look back period will make the RSI more sensitive, which can work well for certain trading strategies.

A longer period may work better for other strategies.

Always test your strategy with different RSI settings and find out what really works for you.

Never take anyone's word at face value, always test it for yourself.

Other people on the internet will tell you that the RSI is a lagging indicator, so it's not useful.

The bottom line is that professional traders use the RSI.

Larry Connors is one trader who is well known for developing RSI trading strategies and has published his research.

Final Thoughts on the RSI Indicator

So that's how to RSI works and what it can tell you about a market.

Like with any other indicator, it has strengths and weaknesses.

This indicator is not for everyone, but if you like the idea of using this indicator, you should certainly look into it.

Review the different trading strategies that use the RSI, pick your favorite, then start backtesting.

The post RSI Indicator Explained: Calculation and Definition appeared first on Trading Heroes.

Volume Profile is a handy trading indicator that shows you the price point at which the most volume has been executed. In this video, I'll show you how to add it to your TradingView chart, how it works and when you might want to use it in trading.

If you prefer the text version, it's provided below the video.

Getting Started with Volume Profile

What's up traders, this is Hugh and in this video I'm going to show you how to put Volume Profile onto your charts and why you might want to use it.

Okay, so this is TradingView. I'm looking at the other screen, so forgive me if I'm not looking directly at you. Here is my Volume Profile indicator and this comes with TradingView. I think it's only available with the paid version, but it's a really handy tool because you can see where the most volume has occurred on a chart.

And that's important information because you want to know where you might run into some issues if you're looking at the charts, what price points you're going to run into those issues and where the buying or the selling pressure might be coming from.

Volume Profile vs Regular Volume

So let's take a look at some examples. First of all, I've put the regular volume down here at the bottom. As you can see, it can be a little tough to read this because you have to go candle by candle and you have to really dig into what each candle is telling you.

Whereas Volume Profile is just one line and you can also make it multiple lines, like some people do. So you can show Volume Profile like this and this will show you the levels at which there was the most volume.

So I haven't set it so that it shows me the volume on the candles that are only on the candles that are displayed right now. So as you can see, there's a bunch of volume here and this is the highest volume level.

There's a bunch of here. And then down here around this level is where you're going to see the most volume in this area. So this is really useful information. I only look at the highest volume level because I don't want my charts cluttered up with all this other stuff.

But it's useful to see the volume at all levels. And as you can see, this level is the second highest volume level on this chart. So there's a good chance that there's going to be a turning point.

How Do You Use Volume Profile to Trade?

I don't use it as a rule specifically per se, but I do use it as a guideline to show me where price might turn or where the profit targets might be. So for example, with this Volume Profile right now, I'm actually looking for a short here.

If I do end up taking a short, then I'm going to look for this Volume Profile level as the, as well a little bit above it. But I'm going to sit that as my limit as to how far price could go.

So I'll probably set my take profit a little bit higher than that. And if you are looking for something that's above the level or below level, let's see if I have an example here. So for example, if I move this chart backwards, it will show me the change in Volume Profile level.

Okay, so here, there's a big Volume Profile level here. So if, if you were looking for a long right here, it really helps to know that there was a lot of volume below your level. So you have some confidence to take the trade because a lot of trades have happened here, so there's a good chance that it'll push it out. Right? On the flip side, if you see a volume level really, really close to where you want to take a trade, for example, let's see if we can find one here. Let's scroll back and see, okay, here's a, I think this is a good example right here.

If the Volume Profile is exactly at your level or maybe a little bit below, then you might be in trouble. If you wanted to take a short here and if you had the highest Volume Profile level right there, then that might tell you, maybe you shouldn't be taking that trade because you're going to run into a bunch of volume and you never know what's going to happen at that point.

So if we put the profile back on there, we can see that yes, that is the highest volume level followed by this level down here. It might not be a good trade level, but again, it's just a guidelines. So it's up to you if you want to actually take the trade or not.

If I scroll back a little bit more, like I said, does it help? It helps to zoom out so you can also see the key levels around price and when you zoom in and out like this, you can get a good idea of where the big volume is and you can trade accordingly.

Conclusion

So try it out, backtest it with Bar Replay and see how it works for you. I just use it as a guideline, but maybe you can use it as a specific training program or a trading system.

All right, thanks for watching.

To learn more about TradingView's Volume Profile indicator go here.

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The post How to Setup and Trade with Volume Profile appeared first on Trading Heroes.

The Relative Strength Index or RSI was developed by J. Welles Wilder and published in his book New Concepts in Technical Trading Systems, in 1978. It is one of the most well known and widely used indicators. It is included in almost every charting software on the market today.

But you may not know exactly how this indicator works or how it can be used. This post will get into how it is calculated and a few different ways that it can be utilized to execute trades.

The Calculation

RSI is a momentum oscillator, meaning that it measures directional price momentum and moves between a minimum of 0 and a maximum of 100.

It is calculated as follows:

RSI = 100/ 100-(1+RS)

Where RS = average gain / average loss

The recommended setting for this indicator is 14. So all of our examples will be shown over 14 periods.

RS is a little confusing, so let's clarify it. The most recent period is calculated in the following way.

The most recent average gain is calculated like this:

Average Gain = Sum of Gains over the past 14 periods / 14

A gain is defined as a period where the close is higher than the open.

The most recent average loss is calculated like this:

Average Loss = Sum of Losses over the past 14 periods / 14

A loss is defined as a period where the close is lower than the open.

After the most recent calculation, the following 13 periods are calculated like this:

• Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
• Average Loss = [(previous Average Loss) x 13 + current Loss] / 14

So the most recent price action carries more weight in the calculation. This is similar to how an exponential moving average is calculated.

But that is only the RS calculation. The rest of the equation normalizes the indicator so that it oscillates between 0 and 100. When the indicator is 100, all 14 periods were gainers and when the indicator is 0, all periods were losers.

How to Use the RSI Indicator in Forex

The purpose of the indicator is to alert traders to possible overbought or oversold conditions on the chart. This potentially signals turning points in the market.

The default overbought setting is 70 and the default oversold setting is 30. Whenever the RSI hits 30, it represents a possible buying opportunity and when it hits 70, it is a possible sell opportunity.

Just like with any other indicator, it will not be 100% accurate. It only represents an opportunity. You will have to use your judgement as to when to take a trade.

When It Doesn't Work

In strongly trending markets, RSI can stay overbought and oversold for extended periods of time. If you were to take every single signal in these conditions, it would lead to huge losses.

For example, take this EURCAD chart. If you too every single overbought signal, it would have resulted in at least six losses and probably more.

Therefore, if you are using the RSI for Forex trading, your risk management plan must include a contingency for limiting losses in a strongly trending market. Limiting the number of consecutive losses or a maximum percentage loss are two ways to do it.

You can also use concepts such as divergence and support/resistance to try to find the very best signals. Let's take a look at how this works.

Divergence Between RSI and Price

The first way that you can potentially filter out lower quality signals is by combining the concept of divergence with overbought and oversold conditions. This may filter out false signals, but may also cause you to miss out on opportunities. Thus is the nature of trading, there are no free lunches.

In the chart above, price continues to move higher while RSI makes lower highs. This ultimately signals a drop in price. Again, this will not happen all the time, but it can give you a clue as to what is about to happen.

Support And Resistance

Finally, support and resistance within the RSI itself can be used to signal the end of a trend. Let's look at the strongly trending chart that we saw before, but from a support and resistance point of view.

While price is in a trend, you will notice that RSI continually runs into resistance until breaks out and resistance becomes support. This signals a turn in price and an end of the trend.

You will also notice that there was a false breakout, but the RSI did not stay above the resistance line. Even if you took a trade on the false breakout, you probably would have been able to make the loss back on the next break.

Conclusion

So that is how the RSI indicator works. Some people tend to dismiss it because it is so simple. But often the simplest tools are the best.

It isn't perfect, but with some practice and testing, it might work for you. I would recommend exploring it and seeing if it fits your personality. Never trade it live without testing and demo trading it.

If you would like to get alerts in Metatrader 4, whenever RSI goes to overbought or oversold, purchase our Simple MT4 RSI Alert indicator. You can get alerts on your screen, audio sound on your computer, email, text message or push notification on your smartphone.

The post How to Use The RSI Indicator In Forex Trading appeared first on Trading Heroes.

I have never had any interest in Ichimoku Trading in the past.  I don't really have much interest in trading it now.  However, I am curious as to what it is all about.  Apparently, I'm not the only one, as I got a comment from Adam on Facebook asking about it.

If I don't want to trade it, then you might be wondering why I'm going through so much trouble to research the topic. Well, I strongly feel that knowing more trading strategies will make me a better trader because I may be able to use a concept that I learn to improve my trading.

Sometimes, it just takes one good idea to turn a system from untradeable, into a solid system.  A good case in point is the combination of the pivot system, that I learned a long time ago, and the Trade Up method.

So in this post, I will show you what I learned about Ichimoku Trading and where you can get more information if you want to learn more. Nothing in this post is revolutionary, but hopefully I have explained it a way that is easier to understand than on other sites.

I probably still won't be interested in trading Ichimoku after this, but I'll let you know at the end.  However, at the end of this post, both of us will know much more about trading this odd Japanese indicator and hopefully be able to take away some knowledge that we can use to improve our trading.

History

Let's take it back…way back.  The full name of the indicator is Ichimoku Kinko Hyo and was invented in the 1930's by a Japanese newspaper reporter named Goichi Hosada.  He wanted to create the ultimate trading indicator (sound familiar?) and supposedly took 30 years to develop Ichimoku before publishing it.

I also found that not many US traders knew about the trading strategy until the 1990's.  Since then there has been quite a bit of interest in the method, but there still do not to be too many people outside of Asia who use it as their main trading method.  At least from what I could find.

In my research, I was also not able to find out if Goichi was actually able to use it to profit, but ever since he published the book, it has been a popular trading method in Asian trading rooms.  Because of this, the Yen pairs supposedly respect Ichimoku levels and watching this indicator might be a good way to gauge where these pairs are going.

The components of the name are as follows:

• Ichimoku: Once glance
• Kinko: Balance
• Hyo: Chart

So Ichimoku Kinko Hyo was designed to be a chart in which you can see the balance of the market, at a glance.  It is a trend following indicator, with a built-in support a resistance measurement.  That's great in theory, but what is involved in all this Ichimoku-ness?  Here are the components that actually go into it…you can check out the video or read the text below.

Breaking Down An Ichimoku Chart

The indicator is basically made up of four components, which are moving averages:

• Kijun Sen (standard line):  The (highest high + lowest low)/2 for the past 26 periods
• Tenkan Sen (trigger line):  The (highest high + lowest low)/2 for the past 9 periods
• Chikou Span (lagging line): Current closing price time shifted backwards 26 periods
• Kumo (or the cloud):  It is made up of two components, the Senkou Spans A and B.  Span A (first leading line) is calculated by: (Tenkan Sen + Kijun Sen)/2, shifted forwards 26 periods.  Span B (second leading line) is: (highest high + lowest low)/2 for the last 52 periods, also shifted 26 periods in the future.

The default settings for the indicator are 9, 26, 52.  This is what an Ichimoku chart looks like:

The Signal

So when do we actually enter trades with this indicator?  The entry consists of three parts.  First, we are looking for the Tenkan Sen and Kijun Sen to crossover.  Second, we are looking for a confirmation break of the cloud in the corresponding direction.  Finally, the Chikou Span should be below price in a downtrend, or above price, in an uptrend. This can be hard to imagine with so many lines, so let's take a look a couple of specific examples.

Uptrend

In an uptrend, you would enter long when price closes outside of the cloud to the upside.  As you can see, the Tenkan Sen (red) has crossed above the Kijun Sen (blue), which is a bullish signal.  Finally, the Chikou Span is well above price, also giving us a bullish signal.  You would place your stop below the breakout candle, inside the cloud.

Where the crossover happens is also supposed to be an indicator of signal strength.  If the cross happens below the cloud, it is a weak signal, inside the cloud is a medium long signal and above the cloud is the best.

Downtrend

Then the short, is just the opposite. You are waiting for the red and blue lines to crossover, then wait for price to close outside of the cloud to enter the trade. The Chikou is below price, so you are all set there.

Exit

The exit can be handled in different ways.  You could exit when price enters the cloud again, or when the Tenkan Sen (red) crosses the Kijun Sen line (blue).  Another target could be another area of support and resistance.  Test it out and see which exit works for you.

Ichimoku Trading Resources

I did my best to find credible sources on the topic of Ichimoku trading and if you want to continue your education, you may want to check out these sites.  There just aren't that many sites out there. If I have used the material below, then I say so. Otherwise, these simply look like good resources on the topic.

• 2nd Skies Forex – I have personally purchased this course and I am trading one of the strategies. The best part is that there is something for everyone in this course. There are daytrading and swing trading strategies, along with specific rules for entries and exits. I highly recommend it.
• Action Forex – They provide frequent analysis on Ichimoku and Candlestick trades.
• Forex Factory – One of the Ichimoku trading journals on this huge forum.  You can browse the other threads and find some good information.
• Forex Street Social Network – A collection of blog posts about Ichimoku analysis.

Conclusion

In my opinion, the Ichimoku indicator is way to complex.  I believe that there are simpler ways to trade.  However, since many traders seem to use it successfully, it can be a viable option to explore.  Remember to trade safe and test out any idea thoroughly before actually trading it.

One thing to keep in mind is that there can be a lot of voodoo associated with some trading methods, so be sure to find out for yourself what works and discard what doesn't.  One such trading method that comes to mind is candlestick patterns.  I personally really like using candlesticks, but there is a lot of hocus pocus with some of the patterns.

I have seen a few traders remove the Chikou line and others only trade the cloud.  Just like any other strategy, you have to make it your own and do what works best you.  I hope you found this information helpful, because I did.  Now I know 100% more about Ichimoku Kinko Hyo than I did before.

Update (January 2015): I have since changed my mind about Ichimoku being “too complex” and have implemented a strategy into my trading. Find out more about what I use.

What do you think? Do you use Ichimoku clouds in your trading? Let us know in the comments below…

Disclosure: I do get a commission if you buy through some of the links on this page. But it does NOT cost you anything extra, it helps pay for my hosting costs and a portion of the proceeds go to my charity partner.

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