Forex, the exchange of foreign currencies, is a global marketplace where individuals, financial institutions, and corporations trade currencies based on an exchange rate. Forex is the world’s largest market, and it’s potentially the most rewarding. This makes Forex an attractive prospect for new traders, but they should be warned that it’s the most complicated form of trading since you’re juggling multiple economies at once.
Forex can quickly become unstable, making it a potentially bigger risk than other investment options. Still, rapid gains are just as possible, hence the popularity. You’ll definitely need a system to anticipate and reduce risk in order to see consistent success. This is where the Ichimoku cloud comes in.
What is Ichimoku?
Ichimoku is an indicator most commonly used in technical analysis trading strategies. It is used to examine trends in the market and to predict future points of support and resistance. Its full name, Ichimoku Kinko Hyo, can be broken down as follows.
Ichimoku: One look, glance
Kinko: Balance
Hyo: Chart
The Ichimoku technique was created by a Japanese newspaper writer who combined multiple trading strategies into a single chart, and it was first published in 1969. The technique is meant to determine the best times to enter and exit the market and has proved successful for traders since going into use.
Interpreting Ichimoku
The Ichimoku cloud chart consists of five lines, each representing a market trend. Days are represented on the chart as “candlesticks,” which are basically bars. These allow you to observe market performance.
The Conversion Line is used to track the midpoint price range for the market over the past nine days. The Base Line tracks the midpoint price range of the past 26 days. The Lagging Span is placed 26 days back to provide a reference for past market behavior.
The last two lines are the Leading Spans. Leading Span A represents the midpoint between the Conversion Line and the Base Line, and it’s placed 26 days in the future. Leading Span B is placed 52 days in the future and is used to track the overall midpoint of the previous 52 bars.
Once all the bars and lines are placed, the “cloud” aspect of the chart comes into play. Areas between the two Leading Spans are shaded in as “clouds,” and these are used to indicate whether the market trends are bearish or bullish. These clouds allow for the “one look, glance” at the chart to be sufficient to determine market performance.
Common Trading Strategies
Ichimoku is useful for a variety of trade strategies, though most traders believe its ideal application is in swing trading. This is a medium-term market strategy that involves studying market pattern for around a week, which is great because of Ichimoku’s nine-day Conversion Line. The general idea is to start riding an upward trend as close to the beginning as possible and sell at the predicted peak point.
Day trading is a short-term strategy that has become increasingly popular in recent years due to the implied daily win rate. This strategy involves smaller trades where currencies are purchased and sold within the same 24 hour period. It doesn’t require much capital to start, but it’s time-consuming and requires a great deal of study to be successful. Traders using this strategy generally consider it a full-time job.
Some long-term strategies are technically possible with Ichimoku, but these aren’t considered the technique’s strong suit. Position trading, for example, is a popular strategy that involves studying market trends for months. While the Ichimoku cloud may be able to make predictions for a roughly two month period, it’s generally best to stick to shorter strategies.