The Kumo as an Oscillator

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The Kumo as an Oscillator

In my first post I talked about an ichimoku component called the Kumo. Typically the Kumo along with the other components of the system are used to define & trade trends. Price inside the Kumo is considered to be consolidation, above is bullish & below is bearish.

In the picture below price is displayed as 450 tick candles and there are three Kumos – (55,34) (21,13) & (8,5). Price tends to oscillate through the Kumos and they tend to point out good trade locations and targets. I’ve circled two great trade locations from this morning just after the Chicago open. The first is the beginning of a trend defined by the break of the middle Kumo & the second is the reversal of that trend.

Just to reiterate from the previous post, the reason these levels often work as support, resistance & trend indication is that they are composed of midpoints of ranges & price tends to respond to midpoints of ranges, especially in moving markets.

The Ichimoku Indicator Explained – What is the Ichimoku Indicator?

The Ichimoku indicator or trading system is a rather recent development, originating in Japan back in the sixties. The system combines a variety of indicators to create an overall picture of the market, thereby providing traders with high probability trading signals. The system was used primarily in the commodities and futures markets, but forex traders have recently discovered its usefulness in their medium. Traders that handle positions over a few days are the main users, since the system works best over longer timeframes. The chart can appear visually complex, but signals are easily seen.

The Ichimoku trading system is classified as an “oscillator” since the various components fluctuate over and below pricing candlesticks for chosen time periods. The system also has the unique quality of extending into the future, while also depicting prior market sentiment. Nomenclature follows Japanese tradition, but the “cloud” is the distinguishing feature with three additional line indicators that help signal potential trading patterns and set-ups. Longer timeframes help eliminate market “noise” and increase the effectiveness of this technical support tool.

Ichimoku Component Formulas

The Ichimoku indicator is common on Metatrader4 trading software, and an example appears in the following chart for the 4-hour “EUR/USD” currency pair:

Here is a brief summary for each of the noted components:

  • Kumo Cloud: These areas depict support and resistance, derived from previous pricing data. The borders of an “Up” Cloud are known as Senkou Spans A and B. Key alerts occur when candlesticks exit the “cloud”, various lines enter or pass through the designated regions, or when the cloud changes color;
  • Tenkan-sen and Kijun-sen: These lines, similar to moving averages, are calculated from previous highs and lows over 9 and 26 periods, respectively. The “Green” line, or Tenkan-sen, is the quicker of the two, and its intersections are key trading signals, while its slope tends to measure momentum;
  • Chinkou-span: This line measures market sentiment, based on current closing prices, but is moved backward typically 26 time periods. Its position relative to pricing data indicates if Sellers or Buyers are dominating the action, while the cloud’s position may portend resistance if it enters the picture.

The Kumo Cloud is used in many ways to form and confirm trading strategies. The areas represent support and resistance, while the width and breadth speak to volatility and strength. If prices are above the Cloud, it is a “bullish” condition, and below, a “bearish” condition. Twists and flips of the Cloud denote imminent changes in direction, and traders are counseled to withhold from trading when the candlesticks are within the Clouds Senkou Spans or boundaries.

The Ichimoku trading system provides “one look”, as its name implies, for the trader to interpret. Rather than relying on a single indicator to frame a “macro” view, the trader is given four integrated indicators to view the interplay of critical market variables. The Ichimoku indicator is useful in gauging medium timeframe momentum when compared to projected regions of support and resistance.

The next article in this series on the Ichimoku trading system will discuss how this oscillator is used in forex trading and how to read the various graphical signals that are generated.

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Trading Binary Options with the Cloud/Kumo

One of the most popular trading indicators is the Ichimoku Kinko Hyo. Judging by the name of course one can tell that is is coming not from the Western branch of technical analysis but from the Japanese side.

The Ichimoku is famous for the cloud, or the kumo like the Japanese are saying. The cloud is actually being formed by two indicators that are projected 26 periods into the future. I am talking about the Senkou A and Senkou B. Everything that is between the two lines represents the cloud.

Interpreting the Ichimoku

The main interpretation of the cloud is the fact that it is showing potential support/resistance areas that are projected forward. Of course, the usual caveat applies: the higher the time frames, the stronger the support/resistance area.

Therefore, the thing is that traders should buy call options when price is coming from the upside and touches the cloud, both on the Senkou A and Senkou B lines, and put options when price is touching the cloud when it comes from the downside and the cloud represents resistance at that point.

Ichimoku Indicator – Simple Approach to Trading

Ichimoku indicator is famous throughout the world as it brings a new and simple approach to trading as it is acting both as a trending indicator as well as a potential oscillator.

As a matter of fact, on some trading platforms it is listed as a trend indicator while on others as an oscillator and this comes only to confirm the above statement.

Kumo Indicator

The cloud or the Kumo is by far the most important part of the indicator and it is having two different colors: green and red. It is obvious that a red cloud signals bearish conditions and a put option should be looked for trading while a green cloud signals bullish conditions and therefore a call option should be searched for.

The fact that the cloud is projected 26 periods ahead of current prices is showing us that the moment the cloud turns the color we should be careful into continuing with the previous trend. The next thing to look for is to wait for the Kinjun (the blue line) and Tenkan (the red line) to cross as this cross is a bullish one if it happens below the cloud and a bearish one if it happens above the cloud.

That is the confirmation that price is turning and a new trend is starting.

One way to trade binary options with the cloud is to use an additional oscillator, like the RSI for example that should offer divergence confirmation to the regular trader.

Interpreting the Kumo

In other words, if price is turning and touches the cloud and market formed a divergence on the RSI as well, then might be a good idea to try to pick a bottom if the previous trend was bearish or a top if the trend was bullish and trade a call and a put option even before the Kinjun/Tenkan cross to happen. The expiration date should be closely correlated with the time frame the pattern is forming on as it is making no sense to trade a small expiration date if the time frame is bigger than 4h chart or a long expiration date is the time frame is the 5m or the 1m chart.

Exploiting the Tenkan/Kinjun Cross

When riding a trend then one should make sure the Tenkan is always on top of Kinjun in a bullish trend and below the Kinjun in a bearish trend and buying the dip or selling the spike strategy works like a charm each and every time price is retracing into the Kinjun line.

The cloud also acts as a classical support and resistance level as well as a dynamic support and resistance and a trader knows that in advance for quite some time as the 26 periods that are being projected represent 26 different candles.

If the time frame is the monthly chart for example then the 26 periods represent 26 months and we already have an idea from current levels were price should hesitate in the time ahead.

Dynamic support and resistance is always more important than the classical one and this feature makes the Ichimoku Cloud unique as an indicator that any trader should know how to master.

The cloud also offers the possibility to trade call or put options both when it is tested for the first time, on its top or bottom and when it is tested for the second time on the upper or lower part.

From this point of view it is offering a range and the way to trade is to measure the length between the upper side of the cloud and the lower one, basically between Senkou A and Senkou B and that range should be divided into as many parts as options intended to trade are. Choosing an expiration date here should be correlated as well with the time frame the indicator is applied.

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