There is a wide range of instruments for the market analysis, but Ichimoku Cloud can be identified as a separate line. In spite of being established long time ago, it is still constantly used in trade with plummy success. Initially, this technical analysis tool was created by Japanese exchange agent Goichi Hosoda.
Frequently, traders use Ichimoku Cloud together with the Japanese candles classic analysis, or Price Action – its standardized version. This is primarily because the analysis for candles itself is quite subjective as one candle pattern cannot reflect the broad picture of the market. The indicator Ichimoku Cloud was created taking into account the importance of every setup location on the graph. The instrument allows investors to find a perfect entry point that ensures a positive expected value.
We should note that described indicator is a trend one. Despite this, it may fulfill itself either in an explicit flat or in directed price movement. The instrument contains three lines, which are interconnected, and create the basis of the indicator. These lines’ names are Tenkan Sen, Kindzhun Sen, Chinkou Span. In addition, there may be defined two more components – Senkou Span A and Senkou Span B. Such two lines create a so-called Ichimoku Cloud. These complicated names may disappoint the novice investor from the start. However, practical use of this instrument is very simple!
Formerly, we considered the indicator, founded by Goichi Hosoda, and studied its constituent elements. Now, let us consider the shades of Ichimoku use in the market terms. De facto, this indicator is able to provide a wide range of trading signals, but the most significant among them is the price intersection of the Senkou Span B line. If the intersection takes place upward, an uptrend occurs, accordingly, the trader can try to purchase an option Call.
The initial sign of a downtrend is the price crossing the line upward. In such case, a trader can purchase an option Put. The strongest signal occurs when the price leaves the cloud, along with the intersection of the line Senkou Span B. Bearing this in mind, a strong trend emerging in the market, which can last for a very long time, can be noted. Actually, this method is very similar to the case when the moving average intersects the market. Along with this, you can select another important signal that can be produced by the indicator – it’s a touching the indicator’s cloud by the price.
Ichimoku Cloud can be considered as a strong support level which summon to look for strong signals to enter the market. The candle analysis was mentioned in the article knowingly. The patterns formed near this cloud are ones of high importance. They provide an opportunity to clearly capture the most potential points of entry, which have a very high chance of a positive refinement. At most, it is considered that the Ichimoku Cloud is a tool that works perfectly for long time intervals, the experts advise to use it for a period of H4 and above.
Of course, there are those investors who manage to use these indicators within a day, but there is one point. In their trading strategies, this tool acts as a confirmation signal, roughly speaking, its testimony in this case is secondary. Now let’s touch on the issue of trading systems that can be built on the basis described in the article about the indicator.
In truth, there are not so many trading systems based on this technical analysis tools. Now, I would like to highlight one trading system that has the same name – “Ichimoku Cloud”. First, I would like to note that this trading system is precarious and, in part, has a significant share of subjectivism. To use this trading approach it is necessary to have some experience of trading and be familiar with the methodology Price Action or Japanese candles classical analysis.
Without a doubt, the Ichimoku indicator is one of the most interesting and promising indicators that can be found for trading. In its structure there is the quintessence of a few technical analysis tools simultaneously. That is why a large number of investors are willing to use it in their trading. In fact, it allows investors with equal success to track flat and trend movement in the market. On this basis, the trader has a chance to orient in time and act on the basis of the current market situation.
In fact, we can see when the trend is gaining strength, and when it slows down. Understanding these phenomena will allow entering into transactions with an incredibly low risk. So, let’s begin! If watch how the price behaves in relation to the indicator for a certain time, we can see, that when you touch one of the borders of the cloud, strong rebounds and market reversals often occur.
In fact, we consider the boundaries of the instrument as support and resistance levels, which can slow down and stop the market. Nevertheless, even if the price touches the cloud, we cannot judge about the reversal, because we need a confirmation. Here, the candle analysis of the market comes to help us.
So, in the above figure, we see the excellent moment when it is possible to purchase a put option. In this case, the price touches the cloud, then we see the formation of a pattern pin-bar (in the classics it is called a hammer). After the end of the formation of this setup, you can safely enter into a transaction. As a result, an investor using this signal would have received an impressive profit. It should be noted that the preconditions for a market reversal were evident even a few candles before. Pay attention to them, especially to their size and tails. All of them have a small size, and they have upper tails. What can be said about this?
Considering this point, we can conclude that in this area there are strong sellers who are confident that the price of trading assets must fall. Alternatively, they began to open their large positions, at this point there was a lack of buyers, therefore, the proposal without difficulty fought the demand and the price of the trading asset sharply left in the downward direction. As the Board would like to say that it is very important to evaluate the long period of time, in order to objectively assess the market context. Let’s look at another example.
As we can see, the price touches the boundary of the indicator, it is accompanied by the formation of a beautiful pin-bar. Notice this setup, the closing takes place at the top of the candle and at the same time we have a long lower shadow. Considering this point, we can acquire the call option. Ultimately, the price goes up, and the investor, who would have purchased an option, would receive a guaranteed profit.
It is fair to say that clear signals of this kind will not appear every day, especially if you are working on a sufficiently large time interval. Nevertheless, it is important to be patient, because it is such signals may give a huge profit at quite modest risk. However, it should be borne in mind that touching the border of the indicator and the formation of the pattern cannot always give a complete reversal of the market, but the kickbacks can be found very often either. As an example, let’s analyze a screenshot!
So we can see how the price touches the cloud, on which the inner bar model is formed. Through this, we get a clear signal for the purchase of a call option. In the end, you can see how the price gives an explicit price rebound, but then turns around and punches the cloud and then moves further downstream. As you can see, we have a rollback occurred, but the market reversal did not happen. Of course, if an investor decided to go to the position of 6 hours (for example, the hourly graph) immediately, then his position would have been unprofitable.
But while entering the market for 2-3 hours, the position would have brought profit. On this basis, it is necessary to determine the most correct time of exercise. Unfortunately, certain recommendations cannot be given here, it all depends on the trading system of the trader and their trade preferences. Nevertheless, it is possible to acquire options lasting 2-3 candles. What does that mean? If an investor uses the hourly graph, he needs to purchase an option of 2-3 hours. For example, if you use in your trade a daily graph, then one of your intersections with respect to time should last 2-3 days. Again, these are only general recommendations, and not a direct instruction to the end-use.
In order to find the optimal execution time a trader must spend some time testing the system to select the most suitable conditions. As a supplement, you can use additional tools of technical analysis. Let’s look at it on the example.
Additionally, we establish the Stochastic on the graph for a clearer signal filtering. So, the figure depicts a beautiful moment for the purchase of the put options. The price touched the border of the cloud, a Dodge pattern appeared and Stochastic confirms the strength of the signal via the formation of the market overbought.
Ultimately, the price is reversed successfully during two candles, and this signal is profitable.
As a supplement, you can use any tool, the main thing that it is clear for you and easy to use. As you can see, the trading system Ichimoku Cloud is fairly simple to use, yet it provides excellent signals for the entry!
In fact, the described strategy has a huge number of positive aspects, but we will highlight some of them:
- The system is easy to use.
- It is amenable to modernization.
- Provides a clear understanding of the nature of pricing.
- Based on the price movement but not on statistical data.
- If desired, you can use the system at different time periods.
The strategy described in this article, is a powerful tool to profit from investing in binary options. However, if you have the desire, it’s no problem to complement and upgrade it. It should be noted that the trading system is partly subjective. This is due to the fact that each sees different trade setups. Considering this point, you need to spend a certain time on the acquisition of practical skills. Advice – you should always wait for beautiful signals, do not use questionable patterns.
A trader should always be patient, be sure that the market will give you the opportunity to open a trading position. Naturally, this system will not be able to protect you from losses. In any case, you will have losing trades, because all of this is a part of the overall trading process. In fact, you need to learn to accept losing trades and make constructive conclusions. It is important to observe the rules of money management in order 2-3 losing trades do not deprive you your deposit. There are still a lot of trading systems based on this indicator. However, the system presented in this article gives an objective understanding of the nature of pricing, because, as you know, understanding of the market is the key to success!
That’s all for now. Got any questions? Just ask the expert!