Ichimoku Kinko Hyo-equilibrium at a glance.
I am going to disclose here a few secrets of Ichimoku. This is a wonderfull trading system which will give very good results if it is use propperly. For a good use of Ichimoku a trader must also know the chart patterns and also a few of the most reliable candlestick patterns. This is not holly grail, this system will not generate 100% winning trades!
The chart patterns which must be learned are the usual reversal and continuation patterns.
Reversal patterns: Double top/double bottom, triple top/triple bottom, head and shoulders/inverted head and shoulders.
Continuation patterns: bullish/bearish flaggs, triangles, wedges.
You also must learn a few of the most reliable candlestick patterns like bullish/bearish pinbar and engulfing bars, morning star, as a bullish reversal pattern and evening star as a bearish reversal pattern. You can also consider an abc or 123 reversal pattern.
On some forums I have read discussions about the settings. This subject is a dangerous one, in my view. The system was originaly designed with this settings for a very good reason and if you will change the settings you will change the meaning of this system and the system will not work properly. Even if you do not understand why Goichi Hosoda have choosed this settings you have to work with this original settings.
In the western world just a ery few (I am not even sure about this, I just supose this!) traders have understood the meaning of this settings. This settings are very important and are the very core of the Ichimoku. Even if I have understood the real meaning of this numbers 9, 26, 52, I will not disclose this here but I will tell you how to use the Ichimoku propperly to make good trades.
The first secret of Ichimoku is that, as an indicator, Ichimoku is revealing the market sentiment. Not the retail sentiment or small retailers sentiment, not the big speculators sentiment but the all market sentiment. The Tenkan sen (9 period) is revealing the short term market sentiment. The Kijun sen is revealing the medium term market sentiment and the Senkou span B the long term market sentiment.
Because you can use Ichimoku as an indicator in any time frame, you must understand that short, medium and long term market sentiment is related to the use of that particular time frame.
Even if you can use Ichimoku in any time frame I recommend to you the 4 hr and daily time frame. I preffer the 4 hr time frame for two reasons, it is long enough to allow a real change or a real formation of the market sentiment and is fast enough to give me good and more frequent signals. I also scalp using Ichimoku in 5 or 15 minutes time frame.
Real market sentiment:
Short term market sentiment: Bullish when Chikou span is above Tenkan sen, bearish when the Chikou span is bellow Tenkan sen. Even if the Chikou span is the current price shifted back 26 periods, we do not watch and follow the price it's self directly but the Chikou span, this is another secret.
Medium term market sentiment: Bullish when the Chikou span is above the Kijun sen and bearish when the Chikou span is bellow the Kijun sen.
Long term market sentiment: Bullish when the Chikou span is above the Senkou span B and bearish when the Chikou span is bellow the Senkou span B.
The second secret of Ichimoku is the Chikou span. The Chikou span is the most important element of Ichimoku. All the elements of Ichimoku are important but the Chikou span is the most important. The Chikou span is the current price shifted back 26 periods. It is very important that the Chikou span is shifted back with 26 periods. This number is very important. I will not tell you why this number is so important for Ichimoku but even so you can use Ichimoku in a propper way. You don't need to know all the secrets but you need to know enough in order for you to use this system to make good trades.
Now, I will give to you a few examples of how to use Ichimoku with the help of a few charts.
GBPUSD-4 hrs. time frame:
In the picture above we see the double bottom bullish reversal pattern. We see that the Kijun sen is flat at the level of the neck and is acting as the resistance of the neck. In the case of this double bottom pattern we know that we have to wait for the price to break above the neck resistance-line. In this particular case, in which we use Ichimoku, we do not watch and follow the price it's self but the Chikou. As I have already told you, Chikou is the secret and we watch and follow the Chikou. Because the Chikou span is the secret here we judge the movements of the Chikou related to the cloud. As we see in the picture above, the Chikou is crosing above the kijun sen and is going up to meet the Senkou span A. We see that the Senkou span A is rejecting the Chikou at first encounter. The real Ichimoku trader knows that the current price is influenced by the interaction of the Chikou with the other elements of the Ichimoku, and this is the third secret. Remember the third secret, the price is influenced by the interaction of the Chikou with the other element of the Ichimoku. We see that when the Senkou span A rejects the Chikou the price is correcting a bit lower and is going into the cloud a bit. Now, we see that the Chikou is resuming the upward move because it is supported by the Kijun sen but also it is suported by the Senkou span B in the future which is acting now as a real support line. The Senkou span B is not suporting the price it's self but the Chikou as a future shadow. The shadows are another secrets of Ichimoku. The price is influenced by the shadows trough Chikou. There are two kind of shadows, past shadows and future shadows. The past shadows are past events which have acted as support or resistance and the future shadows are future events which will act as support and resistance. This past and future events are coded into Ichimoku trough Senkou Span A and Senkou span B, this is why Senkou span A is shifted in the future with 26 periods, Senkou span B is also shifted into the future with 26 periods but the Chikou is shifted back with 26 periods.
We can trade the situation from above in two ways, in a more fast way and in a conservative way.
The fast way is to enter long when the Chikou has crossed above the Kijun sen but we have to wait for the equivalent candlestcik to close. If the equivalent candlestick has closed and the Chikou is still above the Kijun, we enter long. We put a SL at the lower of the double bottom pattern or at the level of Tenkan sen at the momment when we enter. We exit when? We exit when the price it's self, this time or the chikou has crossed back below the kijun sen, you have the liberty to exit in which way you want.
The more conservative entry in our case is to enter when the Chikou has crossed above the cloud and the equivalent candlestick has closed. If the equivalent candlestick has closed and the Chikou is above the cloud we enter with the open of next candlestick. We exist as I have explained above.
Order size: use only a microlot which is 0.001 lot for every 100 USD in your account.
Order management and SL management:
You can enter with one order when the Chikou has crossed above the Kijun, as I have explained above and you can add a new order when the Chikou has crossed the Cloud as I have explained above. In this way you compound two orders and you have a chance to make a bigger profit. When the Chikou is above the cloud you can move the SL of first order on BE or even you can secure a 10 pips over the entry point.
Also in the picture above you can see that the price is reversing from the top of the chart and we can also trade that set-up. Now we do not have a double top but we see that the Chikou is crossing bellow the Kijun and the equivalent candlestick is what I call an impulsive bearish bar which tells us that the bears have gained control and this is also confirmed by the fact that the medium term market sentiment has turned bearish because the Chikou has crossed below the Kijun. We can enter short at the close of the impulsive bar which is the equivalent bar of Chikou when Chikou is crossing below the Kijun. SL will be put at the high of the last bullish bar. It seems that I choose the SL levels randomly but is not so. I choose the lowest price and highest price of current chart pattern when the signal is generated. We can aply the same money management and order management as above.
In the pictures bellow I will just give you more examples of entries and exits because a picture is worth a 1000 words:
You must make your home work. I advise you to trade at least 1 to 3 months on demo. Because the Ichimoku give you exat entry and exit points there is not much to guess. You also need patience not to enter earlier but also you must be firm not to enter to late. As you see if you miss the exact entry point you have time to enter a bit later.
If the ST level, as I have told you above, is to big, I advise you to put your SL with 5-10 pips bellow the Kijun when you enter long and above Kijun when you enter short.
I advise you first to read the free e-books about Ichimoku which you can find with google if you search for ichimoku 101.