Technical Analysis - Ichimoku Cloud

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Agenda

• Background

• The basic setup and calculations

• Buy and Sell signals

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Background

• Introduced in 1969 by Goichi Hosada.

• Ichimoku Kinko Hyo meaning “equilibrium at a glance”

• Commonly applied in Asia and should be respected when doing analyses on Asian instruments

• Based on a philosophy examining simple things in nature from a mountain top and how they act in their respective environment

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In the MT4: a) Tenkan-Sen b) Kijun-Sen c) Senkou Span A d) Senkou Span B e) Chinkou Span

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Decomposition

1. Tenkan-sen is the average value of the price for the first time interval (nine days), meaning:

𝑇𝑒𝑛𝑘𝑎𝑛 𝑆𝑒𝑛 =𝐻𝑖𝑔ℎ𝑒𝑠𝑡 ℎ𝑖𝑔ℎ(9) + 𝐿𝑜𝑤𝑒𝑠𝑡 𝑙𝑜𝑤(9)

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2. Kijun-sen is the average value of the price for the second time interval, 26 days.

𝐾𝑖𝑗𝑢𝑛 − 𝑆𝑒𝑛 =𝐻𝑖𝑔ℎ𝑒𝑠𝑡 ℎ𝑖𝑔ℎ(26)+𝐿𝑜𝑤𝑒𝑠𝑡 𝑙𝑜𝑤(26)

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3. Senkou Span A is the middle of interval between two above mentioned lines (Tenkan-sen and Kijun-sen) projected 26 days in the future;

𝑆𝑒𝑛𝑘𝑜𝑢 𝑆𝑝𝑎𝑛 𝐴 =𝑇𝑒𝑛𝑘𝑎𝑛 𝑆𝑒𝑛 −𝐾𝑖𝑗𝑢𝑛 𝑆𝑒𝑛

2

4. Senkou Span B is the average value of the price for the past 52 days projected 26

days into the future;

𝑆𝑒𝑛𝑘𝑜𝑢 𝑆𝑝𝑎𝑛 𝐵 =𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝐻𝑖𝑔ℎ 52 − 𝐿𝑜𝑤𝑒𝑠𝑡 𝐿𝑜𝑤 (52)

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5. Chinkou Span is the current closing price projected 26 days back

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Interpretation

1. Tenkan-sen – also known as the Conversion Line – is interpreted as a simple moving average.

2. Kijun-sen – also known as the Base Line – similar to the Tenkan-sen, but on a longer time-frame.

3. Senkou Span A& B: The ingredients of the cloud. Area in between is shaded illustrating the cloud. Composition gives an idea of future trend.

4. Chinkou Span is the current closing price projected 26 days back and is used for comparison on the chart and defines potential trends.

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Signals

When studying the Ichimoku Chart, it is important to notice the following: 1. Cross of Tenkan-Sen and Kijun-Sen 2. Closing price against the Cloud 3. Position of Chinkou Span 4. Senkou Span A & B Composition/Cross The more signals in sync, the stronger the signal. As always in Technical Analysis, we are looking for CONFIRMATION.

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Signals Signal 1: Cross of Tenkan-Sen (red) and Kijun-Sen (blue) Bullish: Red line closes above blue. Bearish: Red line closes below blue.

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Signals Signal 2: Closing price relative to Cloud…

Interpretation Price Action

Bullish Price above Cloud with bullish momentum

Bullish Tendency In the Cloud, but past 2-3 days bullish

Bearish Price below Cloud with bearish momentum

Bearish Tendency In the Cloud, but past 2-3 days bearish

Bullish

Bullish Tendency

Bearish Tendency

Bearish 9

Signals Signal 3: Position of Kinjun-Sen (Green line) Bullish: Kinjun-Sen crosses above the closing price Bearish: Kinjun-Sen crosses below the closing price Remember that the Kinjun-Sen is lagging 26 days and is also known as the “lagging mountain”

Bullish

Bearish 10

Signals Signal 4: Senkou A & B relationship A is above B is a sign of a rising market. A is below B is a sign of a declining market.

Rising Market Declining Market

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Example 1

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Example 2

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Example 3

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Indicator Example 1 CAD/JPY Daily

Example 2 AUD/JPY Daily

Example 3 EUR/JPY Daily

Tenkan-Sen vs. Kijun-Sen

Bullish Bearish Bullish

Closing vs. Cloud

Indecisive Bearish Bullish

Cloud Composition

Declining Market

Declining Market

Declining Market

Chinkou-Span Positive Negative Positive

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