Tag Archive for: Ichimoku Cloud

What is Dynamic Support and Resistance?

What’s Inside?

  • What is Dynamic Support and Resistance?
  • How I can find Dynamic Support and Resistance in the forex market?
  • What is the Ichimoku Cloud?

In my last article, I talked about how forex traders can find the best key support and resistance levels. This is a critical component to understanding price action trading. But what is less talked about, yet critical for your trading is understanding and finding Dynamic Support and Resistance.

In this article, I’m going to help you understand what is the difference between ‘static‘ and ‘dynamic‘ support and resistance. From here I’m going to talk about why you need to understand dynamic support and resistance, along with give you two methods for identifying and trading dynamic support and resistance.

static and dynamic support and resistance

What is the difference between static and dynamic support and resistance?

When we talked about key support and resistance levels in our last article, you should have noticed a pattern. You should have noticed all those levels were ‘horizontal‘. While many key support and resistance levels are horizontal, many of them are ‘evolving‘, which means they are ‘dynamic‘. Dynamic support and resistance levels, or areas, where the market can pull back into and find support w/o needing to be at a horizontal support or resistance level.

This happens because:

1) The market is evolving, and sometimes buying/selling interest changes in a way that isn’t at pre-designed levels

2) Momentum in trends is dynamic, along with the order flow

Momentum can often be the underlying energy behind trends or movements (kind of like running downhill).

There are other reasons, but the key point is that you get the underlying idea, and can integrate this ‘conceptual knowledge‘ into your trading. We’ll get to this later in the article.

But to summarize:

a) Static support or resistance levels aren’t moving, and are horizontal in nature

b) Dynamic support or resistance levels are moving, and are not horizontal in nature

Now that we know what dynamic support and resistance is, we can move onto the next section.

How I can find dynamic support and resistance in the forex market (or any market for that matter)?

There are many methods to find dynamic s/r, but we’ll talk about two that I prefer to use.

Dynamic Support and Resistance Strategy #1: The 20 EMA

The 20 EMA is one of my favorite choices for discovering dynamic support and resistance as it does a really good job of being ‘balanced‘. What do I mean by being ‘balanced’? So the 20 EMA (exponential moving average) tracks the last closing prices of the candles for the last 20 periods. It gives more weight to the most recent closes (hence why it’s exponential), with less as you go through the series of 20 candles.

Below is a good graphic of how it differs from a ‘simple’ moving average which weighs the data the same regardless of time.

exponential moving average vs simple 2ndskiesforex

EMA’s (exponential moving averages) are balanced (IMO) because it does a great job of detecting the more recent momentum and changes in the price action, while at the same time taking into account some of the longer term movements in the price action, so well placed in between those two forces (hence ‘balanced’).

Below is a 1hr chart on the EURUSD showing the 20 EMA and how the price action related to it.

dynamic support and resistance forex market 2ndskiesforex

Notice how the price action touched the 20 EMA several times (navy line) which could have offered you great trade setups to get into the market with trend?

Another example is below on the S&P 500 on the 4hr chart.

s&p 500 dynamic support and resistance 2ndskiesforex

In this chart of the S&P 500, you can see how the 20 EMA offered some great trade setups both with trend, and counter-trend as the market reversed.

It’s important to note the 20 EMA can act as a solid method for finding dynamic support and resistance on any time frame.

Dynamic Support and Resistance Method #2: The Ichimoku Cloud

In the first 3 years of my trading, I spent the majority of my time learning, studying and trading two strategies:

#1 price action

#2 the ichimoku cloud

If you want to learn about how I trade price action, click here to watch

However for now I’d like to talk about the ichimoku cloud (called ‘ichimoku kinko hyo’) roughly translates from japanese to ‘one glance balanced chart‘. It was created by Goichi Hosada many decades ago. It is one of the most commonly used methods for analysis and trading strategies in Japan, and there are many great ichimoku traders who were considered some of the best analysts of their time (i.e. Hidenobu Sasaki).

ichimoku cloud 2ndskiesforex

To briefly sum up the ichimoku cloud, the goal of this approch is to communicate in one shot (or ‘glance’) the following:

1) what is the trend in the market

2) what is the underlying momentum (or lack thereof)

3) what are future key support and resistance levels

You read that last part right (“future”). One of the primary goals of the ichimoku cloud is to give you an idea where future support and resistance levels will be (and how much there is).

I’m not going to do a whole lesson on the ichimoku cloud. If you want to learn more about the ichimoku cloud and how it’s constructed, click here.

But for our purposes, just understand that the ichimoku cloud measures a) momentum {a form of dynamic support or resistance}, and b) future support and resistance levels.

Below is a chart to show you how this works.

ichimoku dynamic support and resistance 2ndskiesforex

In the above S&P 500 ichimoku cloud chart on the 4hr time frame. There are several ways the ichimoku kinko hyo can act as ‘dynamic’ support or resistance. But for our purposes, in this uptrend, notice how the Tenkan Line (green line) did a good job acting as support on minor pullbacks.

The tenkan line does this well because it’s meant to track the underlying momentum in the price action. If the trend is strong, and has good momentum, the tenkan can often act as support or resistance. If momentum is weak, you’ll see this in the tenkan line by price crossing it more frequently, and not respecting it. This should tell you momentum is ‘weak’ or ‘weakening’ (depending upon the ichimoku context).

You’ll also notice the kijun line (red line) which is supposed to track the underlying trend in the price action. Notice how as price pulled back deeper in the uptrend, it stopped at the kijun several times, offering potential trade setups to get in this with trend.

There are many ways ichimoku is great for helping you find ‘dynamic’ support or resistance, but these are two good methods for now.

NOTE: If you want to learn more about the ichimoku cloud, click here for several free videos on learning more about the ichimoku cloud.

In Summary

While we spent a good amount of time recently talking about horizontal key support and resistance levels, today we’ve showed you how there is a different form of support and resistance which expresses itself as ‘dynamic‘.

We’ve also given you methods for finding dynamic support and resistance, along with showing you how the ichimoku cloud can provide an alternative (and useful) trading method.

Now one thing I forgot to ask is, have you ever looked at a chart and had a hard time finding key support and resistance levels?

Usually when I look at the price action on a chart, and I find it’s pulling back to areas where there doesn’t appear to be any support or resistance, I often try to see if the market is respecting ‘dynamic’ levels vs horizontal ones. Often times when I do this, the chart becomes more clear as this change in perspective gives me new trading opportunities I was missing before.

If you’d like to learn more about the ichimoku cloud, don’t forget to check out my ichimoku trading course. And if you want to learn more about forex dynamic support and resistance, take a look at my price action course.

Now Your Turn

Have you had this experience of not being able to find key dynamic or static support and resistance levels, or why the market pulled back to where it did? What did you learn about forex dynamic support and resistance levels from this article?

Make sure to leave your comments below, along with ask any questions you have on the subject. And don’t forget to tweet/like this article on your favorite social media so others can benefit from it.

Until then, I’ll look forward to hearing from you.

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The Fastest Way to Successful Forex Trading

I recently got an email from a new student who sent me a month of their trading prior to joining my course. Their story is just like many others – they traded well on demo, went live trading, and lost a fair amount of their account. Now they are trying to get back their losses in the quickest way possible.
Sound familiar?
I can appreciate wanting to make gains as quickly as possible. Who wouldn’t?  He asked me ‘what is the fastest way to successful forex trading’?
fastest way to successful forex trading 2ndskiestrading.com
Without a doubt, he had a sincere desire to trade consistently (most do). But two crucial things were missing from their plan.
These two things when done well, will lead to success in trading (and perhaps any skill) faster than hunting for that ‘magic system’ which will  make back all your losses. Without this necessary pair, what you want to accomplish (making money / trading successfully), will not happen. The results will not come.
So what are these two crucial things you need to focus on?  Process and Progress.
Although the goals (making money, trading from home, consistent profits) are what we strive for in trading, when results become the sole focus, your ability to make money trading becomes hindered.
Why?
In order to reach the level of trading profitably and consistently, you have to build the abilities and skill sets necessary to get there. It sounds obvious, almost easy when you hear it, but it is nothing of the sort. It is one of the most elusive aspects of the trading mindset which new traders fail to understand.
How do you get there?
Process First -Then Progress
This starts with focusing on the process by a) doing the steps necessary to build the skill set, which b) allows you to perform.
Do you think an architect started off by creating buildings? Or do you think they had to learn the math, geometry, and basic skills needed to build a structure?
architect focusing on process 2ndskiestrading.com
If you focus on results only, you will skip steps because your focus is not on the task at hand. It sounds counter-intuitive, but your goal in the beginning should not be to make profits. It should be to acquire the abilities (through training and practice), which allow you to perform and trade well.
Remember this next statement well, but a trader will not gain the results wanted BEFORE obtaining and building the necessary skills to reach that result. This comes after you have built those skills.
This is why so many traders fail. They focus on result, not process.
If you think focusing on the process is not important, ask yourself;
‘When getting a complex heart surgery, do you want the doctor focusing on the money he makes from the surgery, or the very complex precise cut he is about to make around your heart?’
focusing on process heart surgery 2ndskiestrading.com
Focusing on Progress
Moving on, once your focus is dedicated to the process, it’s time to track your progress (e.g. end of the trading week analysis).
In the very beginning, I have little concern for a traders profits or losses when they first come to me. My main concern is identifying what parts of the process they are missing or skipping. Then I have them refocus on that so they build the base skills needed.
For example, if a trader (you for example) has trouble keeping risk consistent, and fail to use the risk of ruin formula, you will not make money. So my first goal is to have you focus on keeping risk consistent (process). If you show improvement in this, I’ll have you track the ‘progress‘ you are making.
This latter focus gives you confidence. It communicates to your self-image and mindset you can improve, get better and grow. It self-reinforces you focusing on the process, which helps to see the progress you are making.
If you keep this focus, and don’t skip any steps – it is only a matter of time before you are making money trading.

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Setting Trading Goals for 2013

Now that 2012 is wrapping up for traders, I’m guessing many of you (like myself) are dying to get into the new year of trading.  During this time, it is a fantastic opportunity to reflect upon what successes you had last year, but also what you need to work on.
A common practice and tradition for people before the new year is to set goals or what some refer to as ‘resolutions‘.  Did you know that over 80% of all New Years resolutions around losing weight or getting into shape fail?  Similarly for traders, virtually the same amount of profitable accounts last year (avg. 28%) is virtually identical to the year before (avg. 26%).
Yet I’m willing to bet most of you made trading resolutions last year that were all designed to help you become successful.  Being that around the same amount are, it’s safe to say these ‘resolutions’ failed, so why do you think that is?
The key is around setting proper goals, for if they are done incorrectly, you will move forward without a real plan of action, just attacking the charts hunting for profits and intraday price action setups, but no real progress towards your trading.
This article is designed to share with you an easy 5 step strategy for setting proper trading goals in 2013. This is so you can make the significant changes to your trading you feel is possible.

setting trading goals for 2013 chris capre 2ndskiestrading.com

 
Step 1 – Make Your Goals Specific
If a goal is not specific, there is no way to focus on it, or take specific actions to achieve it.  Your efforts become dis-coordinated towards achieving your goal, and your energy never drives home any specific change.  Stating to yourself;
“I will stick with my trading method“ is too general and not specific enough.
Sure, your method may be to trade price action, or the ichimoku cloud, but that is too vague.  Does this mean one system or many?  Does this address risk parameters?  No.  Does it address the specific rules of your system?  No.
You have to be specific with your goals, otherwise your efforts will be scattered and ineffective.
Although the most common goals will be numbers oriented, try to avoid these typical ones below;
I want to make a 100% gain on my account
I want to make 10% profit a month
I want to make 500 pips per month
Why?
Because you cannot know what the market will bring.  You may have a goal of 20 pips per day, but what if the market is offering you 100 pips on your price action setup?  Why would you not take what is offered?
Consequently, the market may have low liquidity and be in a super small 15 pip range, perhaps waiting for a big announcement.  So why try and force more out of the market then what it is offering?
Focusing on performance means you may sacrifice technique to get there, and this leads to bad habits in trading which will cause greater losses down the line.
Instead, set some clear ‘process‘ oriented goals which focus on technique instead of result.  If you do the technique correct, and trade following your rule based system, then you trade the system as is, and build positive habits towards trading successfully.  I always suggest – focus on doing the technique correctly, and the money will come.
Some examples are;

-I will execute proper risk management targeting minimally 2x my risk on every trade
-I will stay in a winning position until my system gives me an exit signal
-I will spend 30 minutes each day preparing for my trading day, and 30 minutes reviewing my trading day
Not only are these ‘process‘ oriented goals which build positive behaviors to improve your trading, but they are specific.  Instead of saying, ‘I will use ‘better‘ risk management techniques‘, they state specifically what they are.  ‘Better‘ is ambiguous and hard to define, so how do you know if you achieved the goal?
Specific goals (both small and big) are critical because you direct your efforts in a specific direction where the goal is clear.  Each smaller goal is simply a step on the path to a larger goal and gets you that much closer.

setting specific trading goals chris capre 2ndskiestrading.com

 
Step 2 – Goals Need to Be Measurable
Along the lines of goals being specific, they also need to be measurable.  For example, maybe for the last year, across all your trades, you achieved a 1.5:1 reward-risk ratio for all your winners.  Well, with the goal of having a 2x reward-risk ratio, this is something you can measure.
You can also challenge yourself by adding a time value beyond ‘for the year 2013‘.  An example would be;

By March 1st, I will targeting nothing smaller than 2x my risk

or
By March 1st, over half of my trades winners will be 2x my risk, and the other half no less than 1.5x my risk
You may accomplish these goals earlier, but by having a goal be ‘measurable‘, it becomes a measurable indicator directly related to your goal, which will provide you with clear results and a feedback loop which communicates how you are doing, and what specifically you need to work on.  You can even get specific by making smaller measurable goals which are just one step on the way up towards your bigger goals.

small steps towards larger trading goals chris capre 2ndskiestrading.com

 
Step 3 –  Make Your Goal Attainable
Ask yourself, ‘is your goal attainable?‘  Saying you want to achieve 70% accuracy with all your trades may be difficult if you’ve never had a year (or even month) above 50%.
The questions you have to ask yourself ‘Am I prepared, capable and have all the tools needed to achieve my goals?‘
Maybe you do not even have a rule based price action system with an edge to begin with.  So how can you say you want to achieve 70% accuracy when you a) do not even have a system and b) have not tested your system on demo or live to see how it performs?
Perhaps one of your goals is to write in your trading journal every day.  Well, ask yourself – do you even have a trading journal?
First figure out what you need to achieve your goals, then determine whether you have everything you need or not.  A goal must be attainable, but only if you have the right tools in place.
 
Step 4 – Make Your Goal Realistic
It is easy to make a goal, just like it is easy to make a new years resolution.  But setting a realistic goal is a completely different thing.  Just like a goal needs to be attainable, having a realistic goal keeps you honest about where you are and what is workable to you without putting undue stress on yourself.
setting realistic goals chris capre 2ndskiestrading.com
For example, using the goal, ‘I will spend 30 minutes every day preparing for my trading day‘, what if you work 9 to 5, and your trading day starts at 5:30?  Maybe it takes you 15 minutes just to get home, so spending 30 minutes preparing for your trading day may not be realistic if you need to be trading at 5:30 when your price action setups form.
This is the failure of many exercise or weight goals.  Saying you want to lose 50lbs in 3 months is one thing, but maybe it would be unhealthy for you to lose that much weight so quickly.
The same is for trading – make your goal realistic.  If you are going to make your goal a performance number, like 1000 pips per month, yet you’ve never made over 200 pips, you may be setting yourself up for failure and disappointment which will have a negative psychological impact on your trading.
Thus, find a goal that is achievable, but will force you to work and stretch your current abilities.
 
Step 5 – Make Your Goal Timely
Obviously you will start working on these new goals beginning the new year, but what is your deadline or finish line?  Would you ever join a race if you had no idea how far you had to run?  Of course not.  Thus, not having a finish line for achieving your goals can cause your motivation to wane, or discipline to slip by taking breaks from working on your goals consistently.
Remember, the finish line is not just an ending you are moving towards passing.  It is a guide on how to manage and use your time and effort.  Most traders fail to manage their time effectively, both in front of the screen (trading, analyzing the market for setups), and away from their screen (reviewing trade journal, analyzing performance/stats).
It is common to think ‘next week, or next month I will use proper risk management, or write in my trade journal‘.  How many times have you said this to yourself, and how many times have you not hit your goals on time?
The difference between successful people and those who are not, is successful people know how to manage their time well, set small goals that lead to the larger goal, and constantly make progress towards them.  By knocking down the smaller goals, it makes the larger goal seem much more possible.
setting trading goals 2013 2ndskiestrading.com
Each step you take should have a finish line for achieving your goals, so you know how to effectively manage your time and build towards your new heights.
 
In Summary
Creating resolutions and goals at first seem simple and straightforward, especially if they are just done in your head.  But you’ve committed to becoming a successful trader.
You’ve spent money, time, and made many sacrifices to complete the journey.  Why waste that time and effort to fall short and not get the financial freedom you want?  Why spend so many hours and dollars to not get a return on your investment which is the the best kind of all – independence for both money and time?
Thus, make sure you know what you need to achieve your goals, that they are specific, measurable, attainable, realistic and timely.
I always suggest starting off asking, ‘What Do I Need To Trade Successfully‘.  This is a critical step towards achieving any goal.  But once you’ve asked these questions, then you know what you need to do and where to go.  Now you just need a map and to set your goals for getting there.
Maybe you want to achieve your goals in a few months, a year, or maybe a few years.  Regardless, you need a map, and clear goals/steps to get there, so make sure to make your plans and goals workable by following the five steps above.  Doing so is the fastest way to reaching your goals and crossing the finish line.
trading goals crossing the finish line chris capre 2ndskiestrading.com
Thus in 2013 accept the challenge to become a successful trader by working with a trading mentor, study a rule based system, do the work, and enjoy the rewards as they are more than worth it.
I’d like to end with a quote that was inspiring for me in my early years of trading from Hannah Moore:
“Obstacles are those frightful things when you take your eyes off your goals”
Kind Regards,
Chris Capre
Make sure to out my latest trading articles:
My Top Trading Mistakes for 2012
Developing a Successful Forex Trading Mindset Pt. 1
The Ideal Trader

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Trading Rule #1 – Know Thyself

I am going to start this article talking about one of the most important things developing traders will need to know – that is to ‘Know Thyself‘.  This recently came up for me as a newer student sent me a few emails which made me realize how important this is for anyone starting on the learning process, but hasn’t found the right trading system to trade from every day.
know thyself matrix 2ndskiestrading.com
First I will start off with the student of mine and how critical it is for the trading process.  Then I will discuss the importance of this rule, how it relates to you, what system you decide to trade, whether it is price action strategies, or ichimoku cloud trading (or whatever), and how this applies to your trading.
I will end by giving the rule which should immediately follow this one, which, my guess is will surprise you.
How It Began
This student of mine (we’ll call him James), had signed up for my Price Action Course not too long ago and was definitely an eager beaver.  He jumped right into the material, asked a ton of questions, and wanted to know the details of the systems inside and out so he could use them properly.  So far so good.
He eventually decided on mastering one system which was an intraday price action system focused on the 5m time frame. For weeks, that was all he traded, asking questions each day, sending me screenshots of all his trades to make sure he did them correctly, etc.  He decided to demo the system until he was sure he had it down.  Again, so far so good.
However, this is where things got interesting.  He was having trouble getting comfortable with the frequency of the system (active).  After trading the system for a couple of months, he decided to move on to another system, this time on a slightly higher time frame (1hr).
Obviously it was less active, but still active enough throughout the week (on average – a trade a day). Again, he took the same approach – trade it on demo to learn it inside out.  Interestingly though, the same thing happened again.  He was making money with it, but still felt uncomfortable with it when it went for runners.
confusion foto
So what did he do?
He hired a programmer to write an algo for it.  He thought maybe the problem lie in himself (it usually does) but that an algo would solve his problems.  Remember his process which was the same at every turn;
1) choose a system
2) learn it inside and out
3) practice it on demo for a few months
4) makes money (key note), but was uncomfortable with the trading process
5) looks for another solution
It was the last two parts of his process where I started to question things.  My golden rule is;
If it happens once, its an occurrence
If it happens twice, its a pattern
If it happens three times, its a program (or with humans, a conditioned response)
The Common Denominator
To me, something wasn’t quite right as he was making money with the systems (most people would be happy with this), but was still uncomfortable in the process and thus searched for another solution.  I decided to see where this leads before making my suggestions.
After getting the system programmed, he decided to let it run.  It started to lose money and he couldn’t figure out what was going on.  He questioned himself, why he paid for the programmer, if he picked the wrong system to program, was it a bad time in the markets, etc.  Turns out the programmer had made a mistake in the coding so the system wasn’t trading properly.
So what was his response?  He emailed asking about my shadow system.  This is the system I wrote about in Ode to The 4hr Charts.
Remember this one…whereby my student Tony traded one system, on one pair (AUD/USD) on one time frame (4hr charts – go figure).  Tony did 110% on the year, was profitable on every trade for the last 2.5mos of the year, was about 60% accurate with his largest winner far larger than his largest loser.
It turns out James (looking for answers where to turn next) read this article and thought this was it.  So he started asking me about it, emailing a ton of questions, a lot about performance, if he could learn it, what would it entail using this system, etc.
stressful brain
Now before we continue, lets map out his progression of the systems he has gone through;
-5m intraday reversal system
-1hr momentum trading system
and now, wants to learn the next one…
-4hr swing/trend trading system
Do you see the pattern here?  Other than each system gets progressively higher on the time frames – there is no pattern.  Its all over the place.  There is no consistency in the style, type of system, time frame – nothing.  The common denominator in this process is not the system, it is him.
Has this ever happened to you in your trading process, or is this happening to you now?  Have you gone full polygamy on systems, that you’ve traded every time frame imaginable, every type of system imaginable, but still haven’t found your weapon of choice, one that performs the way you want it?  What is the one root cause of all this?
Rule #1 – Know Thyself
As a trader, my job is to find opportunities in the market, exploiting my edge week in-week out, to make a living from this and profit for my clients.
However, as an educator, my job is not just to provide systems to students that make money.  My job is to help them with the educational process (wherever they are at) and find a solution to help them turn the corner.
Considering very few students are the same, I have to find out what is their trigger, what is holding them back, and how they can correct their mistakes while strengthening their weaknesses.  But, if there is one response I get a lot from developing students, it is this one to the following question:
‘What type of trading are you looking to do and what are you looking for in a system?‘
This is really a probing question to gauge where they are in the process and what will be their best path forward.
Can you guess what answer I get most often is?
‘I want a high probability system that consistently makes money every month with very low draw-downs‘
No shit, that’s what everyone wants.  But here is the kicker…
What if I provided you with a system, which does virtually that, which made over 100% last year on one pair and one time frame.
But…(big but here), you had to hold a position for several days, perhaps over the weekend?  What if that system only traded 8x in one month, or 18 the next, and you were not trading everyday?  What if you had to go through a two month draw-down period, but would still do over 30-50% return on capital at the end of the year?  Would you still want to learn that system?
If the answer is YES because all you care about is making money, then your not understanding rule #1 – Know Thyself.
If the answer is YES because you are comfortable holding positions for days, don’t want to trade every day, and are ok with having one or two months of draw-downs, then this would be a good system for you, because you understand who you are..
The same goes if your answer is NO because you want to trade everyday, and do not want to hold positions overnight, or over the weekend.  That is being honest, and that is ‘knowing thyself’.
know thyself 2ndskiestrading.com
The Importance of It
Why is this rule so critical to your development and learning process?
Because your personality, style of thinking (left brain, right brain, whole brain, no brain, whatever), personal schedule, temperament, level of patience, etc. will all come into play when trading your system.  If your allegiance is only to profit, this will become a problem.
Why?
If the system doesn’t match who you are as a person (style, temperament, schedule, etc), a tension will be there everyday which will eventually turn into a friction in your mind – like having a car which doesn’t fit your needs (2-Door Scion when you have 5 kids).
What good will it be, if you only have an hour to look at charts, and trading a system whereby you need to be at the computer for 3-4hrs at a time?
What good will it be to trade a system which requires you to wait for days to get a signal, when you have ADHD?
What good will it be if you do not want to be in front of the computer for hours, want more free time to enjoy life, yet have a system which you have to be there at certain times for hours on end?
It won’t.
By Knowing Thyself well, you can find a system and style of trading which matches best with you, your lifestyle and mentality.  Perhaps you prefer trading with no indicators and want something simple and completely rule based?  Then maybe you would want to learn how to read and trade price action.
Perhaps you are comfortable with more intricate systems, like ichimoku cloud trading.  It doesn’t really matter what the system is, whether it has a 10%, 20% or 50% edge.
What matters more than anything else, is you find a system and style of trading that works best for you. And to do this, you have to start with rule #1 – Know Thyself.
temet nosce matrix 2ndskiestrading.com
Maybe it is not rule #1, which is certainly open for debate.  But it is definitely up there in the top 5, and could be in a photo finish for first place.  What matters is, unless you are totally settled into your system and consistently making money, you will need to start by knowing yourself – figuring out who that is, style of thinking, what is your current lifestyle, what kind of lifestyle do you want to have, and what systems will match up with this.
Once you have found this, then you can begin the journey by working with a mentor, and finding a system which suits you most.
I hope this helps and that you found it useful.  I definitely look forward to your comments and wish you all the best in trading.
Kind Regards,
Chris Capre
Facebook: 2ndSkiesForex
P.S.  Oh, I forgot to mention, the follow up rule which succeeds this one……is to ‘Forget Yourself‘.  But this is a more advanced rule, which we will get into later.

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The Ichimoku Cloud

This Ichimoku forex trading video is designed to provide an introduction to the Ichimoku Cloud, a popular Japanese trending indicator with high accuracy in all global markets. The video focuses on key elements that can enhance Kumo Break trades and show you how to spot them.

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Using the Ichimoku Cloud to discover Reversals

 

One of the amazing things about the Ichimoku Cloud trading strategy is the actual Cloud or ‘Kumo’ which is something unique wherein nothing like it was created before and nothing sense has come after. The Ichimoku Cloud or Kumo is designed to represent support or resistance but in a different form the western world has seen – to view support and resistance as evolving or dynamic and not static like pivot lines, Fibonacci lines, support lines or trend lines.

To the creator (Goichi Hosada), support and resistance was evolving and really based upon previous price action.Particularly, the highs and lows of previous price action was of great concern to Hosada (along with the opens and closes) which showed levels of rejection where the market would not accept price.The previous highs and lows would also give traders the range where the market was accepting price.

So the real question is ‘how’ does the Ichimoku Cloud or Kumo represent support and resistance?The answer lies in the construction of the Cloud or Kumo.

 

Kumo Composition

There are two main lines of the Kumo which are referred to as Senkou Span A and Senkou Span B.  For the purposes of efficiency, we will refer to them as Span A and Span B.  The space or value in between these two lines is what forms the Kumo.

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

Span B is formed by taking the highest high (over the last 52 periods), adding to it the lowest low (over the last 52 periods), dividing that by 2 and plotting that 26 time periods ahead.  The formula is;

(Highest High + Lowest Low for the last 52 periods) / 2 and plotted 26 time periods ahead.

 

Now, before we fully get into the construction of the Kumo, we have to talk about what the Tenkan and Kijun lines are which help to form the ever changing Senkou Span A.

The Tenkan Line or Tenkan Sen (Sen means line in Japanese) is known as the conversion line or turning line is similar to a 9SMA but actually is quite different.  Remember a SMA (simple moving average) will smooth out all the data and make it equal but the Tenkan Line will take the highest high and lowest low over the last 9 periods.  The explanation for this is Hosada felt price action and its extremes were more important than smoothing any data because price action represented where buyers/sellers entered and directed the market, thus being more important than averaging or smoothing the data out.  As you can see by the chart below, the Tenkan Line is quite different than a 9SMA.  Because the TL (Tenkan Line) uses price instead of an averaging or the closing prices, it mirrors price better and is more representative of it.  You can see this when the TL flattens in small portions to move with price and its moments of ranging.

Ichimoku Cloud,Kumo Composition

 

The Kijun Line (or Kijun Sen) is known as the datum line, standard line or trend line designed to indicate the overall trend for the instrument or pair.  The formula behind it is the same as the Tenkan line using price action and the highest high + lowest low with the only change being in the periods as it does it over the last 26 periods.

aud-usd

 

 

Why 26 periods?  The answer to that is a matter of history.  When the Ichimoku was first created, the Japanese markets were open 6 days a week on Saturdays.  If the markets are open 6 days a week, this generally results in 26 trading days for the month – hence 26 periods for the Kijun.  In essence, what it was meant to be was a measure of the highest high + lowest low for the last month of price action.  If the Kijun has been climbing – it means price has been gaining ground for the last month.  If it is flat, then it will be the midpoint of the range of price for the last month of price action (or representative of the price equilibrium).

Now that we have uncovered the composition of the Tenkan and the Kijun lines, lets talk about how they form the Senkou Span A.

Going back to its construction:

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

So the Tenkan line (which is the momentum line) and the Kijun line (which is the trend line) that are based upon price action are moving.Their valued added together, divided by 2 and sent 26periods ahead is what forms the Senkou Span A or Span A.So the first portion of the Ichimoku Cloud or Kumo is based upon evolving price action lines which are half momentum, half trend monitoring.When you put these two together, you get the Span A which is always changing based upon the acceleration or deceleration of price based upon how they effect the Tenkan/Kijun lines (and in turn, the Senkou Span A).

The second line is the Senkou Span B which is a little different.Its based solely upon price action, particularly the last 52 candles of whatever time period you are on.If you are working with a daily chart, we are talking about the last 52 days, for a 1hr chart, the last 52 hours of price action.After taking the high and low for the last 52 candle range, it takes their values, divides them in half, and shoots them 26 time periods ahead.

The shading in between is called the Cloud or Kumo.

 

Why 26 periods?

The answer to that is a question of history.Originally, when the Ichimoku Cloud was built, Hosada was mostly using it off of daily charts.The Japanese were trading 6 days a week so 26 days would represent a full month of trading.Hence 26 time periods to see where future support and resistance would be one month out.

This is where we can use the Ichimoku Cloud for reversals.

If the Ichimoku Cloud or Kumo represents support and resistance, then the thicker the Cloud, the thicker the S/R it offers.If price is below the Kumo, it will act as resistance, if price is above the Kumo, it will act as support.The Cloud can take many forms and shapes (virtually infinite) which is what makes it tricky but thick Kumo’s often will reject price and the longer the time frame (4hr, Daily, Weekly), the more powerful the Kumo will act as support or resistance.

Take a look at some Ichimoku cloud trading strategy examples below.

 

USDJPY 4hr Charts

Notice how the pair rejects off the really thick Cloud but when it reverses is where the Cloud was the weakest or most thin.

usd-jyp

USDCAD 4HR Charts

Taking a look at another example, the USDCAD after its initial fall, rejected off a really thick Kumo twice telling us a reversal was less likely.However the Kumo starts to thin out giving us a window to break through the Kumo and likely reversal point.

usd-cad1

So the key tactic in both is to look for thinner Cloud formations which offer a window or glimpse into an upcoming reversal.Remember the Kumo is sent 26time periods ahead so you have plenty of warning when the window is opening.If you are in the current trend, the window in the Kumo could be a warning to take some profits or if you are looking for a reversal, then the Cloud offers you a good location and method to time a reversal which is one of the hardest things to do in trading.

Another clue hidden in the Cloud can be the flipping of the Senkou Span A and B which can indicate a reversal but do not always.The other main point is price does not always reject off a thick Kumo so its important to watch price action as well but the Ichimoku Cloud is excellent at spotting and timing reversals.

To learn more about Ichimoku Cloud trading strategies, or proprietary quantitative based strategies on the Ichimoku Cloud, check out the Advanced Ichimoku Course.

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Trading the Tenkan Kijun Cross

This is by far the most popular of the trading methods in the Ichimoku Cloud trading arsenal.

It is simple, elegant and great at picking up trends and trend reversals. If you like trading trends or momentum trading, the Tenkan/Kijun cross is a great method to use.

What is the Tenkan?

The Tenkan Line or Tenkan Sen (Sen means line in Japanese) is known as the conversion line or turning line is similar to a 9SMA but actually is quite different. An SMA (simple moving average) will smooth out all the data and make it equal, but the Tenkan Line will take the highest high and lowest low over the last 9 periods.

The explanation for this is Hosada felt price action and its extremes were more important than smoothing any data. This is because price action represented where buyers/sellers entered and directed the market, thus being more important than averaging or smoothing the data out.

As you can see by the chart below, the Tenkan Line is quite different than a 9SMA. Because the TL (Tenkan Line) uses price instead of an averaging or the closing prices, it mirrors price better and is more representative of it.  You can see this when the TL flattens in small portions to move with price and its moments of ranging.

Akin to all moving averages, the angle of the Tenkan line is very important as the sharper the angle, the stronger the trend while the flatter the Tenkan, the flatter or lesser the momentum of the move is.  However, it is important to not use the Tenkan line as a gauge of the trend but more so the momentum of the move.  However, it can act as the first line of defense in a trend and a breaking of it in the opposite direction of the move can often be a sign of the defenses weakening.

The Kijun Line (or Kijun Sen) is known as the datum line, standard line or trend line designed to indicate the overall trend for the instrument or pair.  The formula behind it is the same as the Tenkan line using price action and the highest high + lowest low with the only change being in the periods as it does it over the last 26 periods.

Why 26 periods?  The answer to that is a matter of history.  When the Ichimoku was first created, the Japanese markets were open 6 days a week on Saturdays.  If the markets are open 6 days a week, this generally results in 26 trading days for the month – hence 26 periods for the Kijun.

In essence, what it was meant to be was a measure of the highest high + lowest low for the last month of price action.  If the Kijun has been climbing – it means price has been gaining ground for the last month.  If it is flat, then it will be the midpoint of the range of price for the last month of price action (or representative of the price equilibrium).

Also like the Tenkan Line, the angle of the Kijun is reflective of the overall trend in place. Price breaking the Kijun after being in an up/down trend often has serious consequences for that trend and can many times lead to a reversal of sorts. Ultimately because it uses a longer period to measure price action, its a more stable method for determining the direction of the trend than the Tenkan Line.

Because of price to respect this line during a strong trend, it can potentially be used as a stop loss for traders already in the correct direction of the trend. Hence, when price breaks or closes below it by a significant amount, the trend is often over.

Applications for the Tenkan and Kijun

The most common usage of the Tenkan and Kijun are the ‘cross’ or what we call the TKx (Tenkan-Kijun Cross). Similar to how a MACD uses a cross of its two lines, the Ichimoku Cloud does the same. It is interesting to note that the Ichimoku uses the same periods as the MACD, however it was created over a decade earlier.

One of the main signals for Ichimoku traders, the TKx can often indicate when a trend is about to begin by forming a cross (upward cross = possible upward trend while downward cross = possible down trend). A generic upward cross can be used as a bullish signal (or exit for people already short) and a generic downward cross can be used as a generic bearish signal (and vice versa for current bulls). However, notice we used the term ‘generic’ meaning there is more to the cross.

Hosada was able to give a further definition to the cross based upon its position to the Kumo or cloud. If the cross was below the Kumo, then it was considered a ‘weak’ signal since the cross was below the Kumo or below resistance. A medium signal was when a cross happened inside the Kumo as it was occurring within the field of support/resistance. A strong signal was when the bullish cross happened above the Kumo as it was happening after clearing resistance. The opposite is true for bearish signals whereby a weak signal is a cross above the Kumo, while a medium signal is inside the Kumo and a strong signal below the Kumo.

One important reminder to all this is to make sure you reference the Chikou Span to see how current price is in relationship to previous price action.

Exhibit A – Tenkan / Kijun Crosses

Take a look at how the USD/INX gave 3 strong downward crosses with each move selling off nicely and never penetrating the Kumo highlighting the downtrend.

In another example, the AUDUSD gives a nice upward cross in an already established uptrend. First it entered the Kumo but had a very shallow penetration leading to a strong upmove over 1300pips from the Tenkan/Kijun cross.

Closing

There are many important factors to consider when trading the Tenkan/Kijun cross such as time frame, kumo shape/configuration, previous moves-series of crosses, angle/shape of the cross, etc.

We have proprietary quantitative data on all pairs for the last 10 years to give you an edge when trading the Tenkan/Kijun cross. To get access to this data, or learn how to trade the Ichimoku on an advanced level, check out the Advanced Ichimoku Course.

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Learning the Ichimoku Cloud

Introduction

Still growing amongst the Western and European traders, the Ichimoku Cloud (or Ichimoku Kinko Hyo = One Glance Balance Cloud Chart) was originally developed pre-WWII by a man named Goichi Hosada.  Because of the war, his research was halted and then later finished in 1968 whereby he published a 1,000 page, 4 volume body of work releasing the Ichimoku Cloud to the world under the pen-name Ichimoku Sanjin.

Originally built for the Japanese stock markets, the Ichimoku cloud indicator has made its way out of the land of the Eastern sun and into the trading world at large, being applied and used widely in the Commodities, Futures, Options and Forex markets. Part of the Ichimoku Cloud trading system’s success is its ability to find trends and reversals well before they begin.

 

The Indicator

The Ichimoku Cloud has several components which give it a lot of versatility and uses.  The most unique aspect of the indicator is its ‘Kumo’ or cloud which offers a unique perspective of support and resistance.  Most western methods look at support and resistance in a linear fashion or as straight lines in the sand (e.g. Fibonacci, Pivots, Channel Lines, Trend Lines).  However the Kumo or cloud is an ever evolving object which was designed to represent support and resistance based upon price action.  Generally, when you are in a strong upward trend, the support is strong as the price levels below have been accepted.  The same goes for a strong downtrend and having more layers of resistance.  Below are two examples of up and downtrends – showing how the Kumo was quite thick in nature.

ichimoku-cloud

ichimoku-cloud2

The most important way to look at the Kumo is as support and resistance – meaning if it is thick, then the support/resistance (depending upon where price is in relationship to the cloud) is strong.  If price is above the Kumo, we are in a general uptrend or would want to look for more buying opportunities.  If price is below the cloud, it is below resistance (the Kumo) and we want to be searching for more shorts than longs.  The longer price stays below/above the cloud, the stronger the trend we are in and the more support/resistance the Kumo will offer.

 

Kumo Composition

There are two main lines of the Kumo which are referred to as Senkou Span A and Senkou Span B.  For the purposes of efficiency, we will refer to them as Span A and Span B.  The space or value in between these two lines is what forms the Kumo.

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

Span B is formed by taking the highest high (over the last 52 periods), adding to it the lowest low (over the last 52 periods), dividing that by 2 and plotting that 26 time periods ahead.  The formula is;

(Highest High + Lowest Low for the last 52 periods) / 2 and plotted 26 time periods ahead.

kumo-chart-1

We will talk about some important points regarding the construction of the Kumo later.

 

Other Ichimoku Components

(Tenkan, Kijun and Chikou Span Lines)

The Tenkan Line or Tenkan Sen (Sen means line in Japanese) is known as the conversion line or turning line is similar to a 9SMA but actually is quite different.  Remember a SMA (simple moving average) will smooth out all the data and make it equal but the Tenkan Line will take the highest high and lowest low over the last 9 periods.  The explanation for this is Hosada felt price action and its extremes were more important than smoothing any data because price action represented where buyers/sellers entered and directed the market, thus being more important than averaging or smoothing the data out.  As you can see by the chart below, the Tenkan Line is quite different than a 9SMA.  Because the TL (Tenkan Line) uses price instead of an averaging or the closing prices, it mirrors price better and is more representative of it.  You can see this when the TL flattens in small portions to move with price and its moments of ranging.

tenkan-line

Akin to all moving averages, the angle of the Tenkan line is very important as the sharper the angle, the stronger the trend while the flatter the Tenkan, the flatter or lesser the momentum of the move is.  However, it is important to not use the Tenkan line as a gauge of the trend but more so the momentum of the move.  However, it can act as the first line of defense in a trend and a breaking of it in the opposite direction of the move can often be a sign of the defenses weakening.

The Kijun Line (or Kijun Sen) is known as the datum line, standard line or trend line designed to indicate the overall trend for the instrument or pair.  The formula behind it is the same as the Tenkan line using price action and the highest high + lowest low with the only change being in the periods as it does it over the last 26 periods.

Why 26 periods?  The answer to that is a matter of history.  When the Ichimoku cloud was first created, the Japanese markets were open 6 days a week on Saturdays. If the markets are open 6 days a week, this generally results in 26 trading days for the month – hence 26 periods for the Kijun.  In essence, what it was meant to be was a measure of the highest high + lowest low for the last month of price action.  If the Kijun has been climbing – it means price has been gaining ground for the last month.  If it is flat, then it will be the midpoint of the range of price for the last month of price action (or representative of the price equilibrium).

kijun-line

Also like the Tenkan Line, the angle of the Kijun is reflective of the overall trend in place.  Price breaking the Kijun after being in an up/down trend often has serious consequences for that trend and can many times lead to a reversal of sorts.  Ultimately because it uses a longer period to measure price action, its a more stable method for determining the direction of the trend than the Tenkan Line.  Because of price to respect this line during a strong trend, it can potentially be used as a stop loss for traders already in the correct direction of the trend.  Hence, when price breaks or closes below it by a significant amount, the trend is often over.

The Chikou Span or lagging line is created by taking the current closing price for the instrument and shifted 26 time periods back, hence why it is a lagging line.  This is a strange concept and not something usually seen in technical indicators which makes the Ichimoku Cloud even more unique.  The purpose is simply to gain perspective in regards to how the current price action is in relationship to previous price action.

The main application for giving perspective to the trader is how does the Chikou Span relate to price 26 periods ago.  If the Chikou Span is lower than price 26 periods ago, then there is resistance for the current upmove or pressure which could force price down into a bearish move.  However if the Chikou Span is above price from 26 periods ago, then it would mean there is little or no resistance ahead since price is in the process of making new highs and there is no recent price above it – thus paving the way for a strong trend.

chikou-span

 

Applications for the Tenkan and Kijun

The most common usage of the Tenkan and Kijun are the ‘cross’ or what we call the TKx (Tenkan-Kijun Cross).  Similar to how a MACD uses a cross of its two lines, the Ichimoku Cloud does the same.  It is interesting to note that the Ichimoku cloud uses the same periods as the MACD, however it was created over a decade earlier.

One of the main signals for Ichimoku cloud traders, the TKx can often indicate when a trend is about to begin by forming a cross (upward cross = possible upward trend while downward cross = possible down trend). A generic upward cross can be used as a bullish signal (or exit for people already short) and a generic downward cross can be used as a generic bearish signal (and vice versa for current bulls).  However, notice we used the term ‘generic’ meaning there is more to the cross.

Hosada was able to give a further definition to the cross based upon its position to the Kumo or cloud.  If the cross was below the Kumo, then it was considered a ‘weak’ signal since the cross was below the Kumo or below resistance.  A medium signal was when a cross happened inside the Kumo as it was occurring within the field of support/resistance.  A strong signal was when the bullish cross happened above the Kumo as it was happening after clearing resistance.  The opposite is true for bearish signals whereby a weak signal is a cross above the Kumo, while a medium signal is inside the Kumo and a strong signal below the Kumo.  One important reminder to all this is to make sure you reference the Chikou Span to see how current price is in relationship to previous price action.

tkx

The nature of the cross usually indicates the overall strength or potential for the move but it should be noted strong trends have developed from weak crosses.  It is always also important you reference the construction of the Kumo when trading the typical TKx signals.

 

Some Important Final Notes on the Kumo

As we talked about before, the Kumo is designed to represent support and resistance but it has a host of implications in doing such.  To review, the thicker the Kumo, the stronger the support/resistance it will offer.  Price will often reject off of the Kumo only to resume the current trend as depicted below by a few examples.

What this also means is if the Kumo is exceptionally thin, in a ranging market it likely means the range will continue as their is neither enough support or resistance to hold a single direction for the pair.  What it also means is if we are in a current trend and price is approaching a thin Kumo, the chances increase for a trend reversal since the support/resistance offered by the Kumo is not significant.  This is why Kumo analysis is important as it can often lead to reversals and inform us in the future of pending trend changes.

Also, there is a common formation in the Kumo called the ‘flat top or bottom’.  This refers to when the Span B becomes flat.  Remember the Span B is composed of the last 52 candles absolute highest high and lowest low – thus referring to price action over the last 52 periods.  If Span B is flat, the only way it can do that is if price has not extended to make any new significant highs or lows.  This means we are in a range and the tendency of a range is to move towards equilibrium or towards the center of the range – also known as the value area for price.  The end result is during a ranging environment, the Span B is the virtual 50% fibonacci retracement level for that range and is the ever changing 50% fib level for a trending environment, dividing the last 52 candles into two halves, the upper and lower half.

What does this mean for traders?  If price is inside the Kumo, it will have a tendency to gravitate towards the flat top/bottom.  If price is above it, the tendency of price will be to gravitate towards the flat top/bottom, often using it as a springboard for a rejection off of it.

flat-top

Lastly, one of the most important things about the Kumo is what happens when price breaks it.  If we have been in a strong trend for sometime and price then breaks the Kumo, it usually represents a trend change and the likelihood of a large move about to begin in the direction of the break as you can see by the examples below.

kumo-break-1

kumo-break-2

It is because the Kumo is always changing shape that it can represent a much better perspective of support and resistance.  It is essentially based upon price action and changing shape based upon previous price moves.  This makes it a little more sensitive and representational to price unlike static forms of support and resistance (fibonacci retracement levels, pivots, trend lines, etc) which do not move at all once they are in place.  It is its unique construction which allows the Kumo to be both Static and Dynamic in giving support/resistance levels to the trader.

 

In Closing

This is just the beginning of the Ichimoku Cloud and designed to give the trader an introduction to the key elements around such a fascinating indicator and method for trading the markets.  The Ichimoku Cloud has the ability to detect trends, reversals, support/resistance levels, trend strength/weakness and momentum for a pair.  It is due to its ability to be used in multiple environments, along with its unique perspective upon price and support/resistance levels that Institutional and retail traders have gravitated towards using this method.