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A. Ichimoku Trading Guide – How To Use

The Ichimoku Indicator
The Ichimoku indicator is an all-in-one indicator that provides information about support/ resistance, trend
direction and momentum all at the same time. The Ichimoku indicator is a potent trading tool, but many traders
feel overwhelmed when looking at all the lines and information that the indicator gives them and then often
misinterpret the Ichimoku signals. In this article, we will dissect the tool and show you step by step how to use
the Ichimoku indicator to make trading decisions.

First step: taking the Ichimoku indicator apart

The Ichimoku indicator is made up of 2 different components:
1) The Conversion and Base lines: Those look like moving averages on your charts, but they are not as we will
see
2) The Ichimoku Cloud: The Cloud is the most popular aspect of the indicator because it stands out the most.

Please note that I am focusing on the momentum and trend-following aspects of the Ichimoku indicator for this
article. The lagging span of the Ichimoku is left out by choice since it does not add much value.
We will now take a look at each component individually and then put it all together to help you find better trade
signals.

Conversion and Base Lines

As I said earlier, that the Conversion and Base lines look like moving averages on your charts, but they do
something different. The Conversion and the Base lines show the middle of the 9 and the 26 period high and
low. This means that they look back 9 and 26 periods (candles), take the highest and the lowest price levels
during that period and then plot the line in the middle of that range.
In the screenshot below, the green and the red line are the Ichimoku Base and Conversion lines. For comparison,
I also plotted a 9 period moving average in white on the chart; the moving average is very similar to the
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Conversion line, but does not match it 100%.

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 Tenkan Sen / Conversion Line: The middle of the 9-period high and low
Kijun Sen / Base Line: The middle of the 26-period high and low

Conversion and Base lines signals and meaning

The Conversion and Base lines have two purposes: first, they act as support and resistance during trends, just
like moving averages. Secondly, they provide momentum information. When price is trading above the two
lines and when the Conversion line is above the Base line, it signals bullish momentum. This is also very similar
to moving averages: when the shorter moving average crosses above the longer moving average, it means that
momentum is up and rising.
▪ Base and Conversion lines act as support and resistance during trends
▪ Only take buy trades when price is above the two lines and sell trades when price is below the two lines
▪ A cross of the two lines confirms momentum
• When the shorter line moves above the longer-term line, it means rising bullish momentum (and vice versa)
• When price moves above the two lines, it confirms the momentum

The Ichimoku Indicator: The Cloud

The Ichimoku Cloud is made up of a lower and an upper boundary and space in between the two lines is then
often shaded either green or red. Let’s explore what this means.
The first and faster-moving boundary of the Cloud is the average between the Conversion and the Base lines.
The second, slower-moving boundary is the middle between the 52 period high and low. An important
characteristic of the Cloud is that it is projected 26 periods into the future.
Again, in the screenshot below we plotted two regular moving averages next to the Cloud and used an offset of
26 (shift the moving averages into the future). You can see that the moving averages are almost identical to the
Ichimoku Cloud.

Seknou A – faster-moving boundary: The middle between Conversion and Base Line
Senkou B – slower moving boundary: The middle between the 52-period high and low
Important: The Cloud is shifted 26 periods into the future
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 Ichimoku Indicator Cloud signals and meaning

The general idea behind the Cloud is very similar to the Conversion and Base lines since the two boundaries are
based on the same premises. First, the Cloud acts as support and resistance and it also provides trend direction
and momentum information. But since the Cloud uses a 52 period component (as opposed to 9 and 26), it moves
slower than the Conversion and Base lines.
Basically, the Cloud confirms an uptrend when price is above the Cloud and a downtrend when price is below
the Cloud. The space within the Cloud is a noise zone and trading here should be avoided. A rally is reinforced
when the Cloud is green and a strong downtrend is confirmed by a red Cloud.
The Cloud, thus, is a way to trade with the longer-term trend and we can sum up our findings as follow:
▪ Trend-following trading based on which side of the Cloud price is
▪ The Cloud acts as support and resistance during trends
▪ It’s a noise zone when price is in the Cloud

The Signals – how to use the Ichimoku indicator

to find trades
Now that we have a solid understanding of what the individual components do and what their signals and
meanings are, we can take a look at how to use the Ichimoku indicator to analyze price charts and produce
trading signals.

1. The Cloud: long term trend, resistance and color

With the help of the Ichimoku Cloud, traders can easily filter between longer-term up and downtrends. When
price is below the Cloud, it reinforces the downtrend and vice versa. During strong trends, the Cloud also acts
as support and resistance boundaries and you can see from the screenshot below how price kept rejecting the
Cloud during the trend waves.
Thus, the Cloud is ideal when it comes to filtering between bullish and bearish market phases. However, as most
momentum indicators, the Ichimoku Cloud loses its validity during range markets.
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2. The faster Conversion and Baselines signals
The Conversion and Base lines are the fastest moving component of the Ichimoku indicator and they provide
early momentum signals. In the screenshot below we marked different points with the numbers 1 to 4 and we
will now go through them to understand how to use the Conversion and Base lines:

1) The Conversion line crosses above the Base line which is a bullish signal. At that time, price was also
trading above both lines which confirms the bullishness. Price dipped back into the Cloud for a moment, but
found support. This could have been seen as an entry.
2) Price started to violate the Base line (yellow) which is a warning signal of a trend shift. The Conversion and
Base lines also crossed into a bearish setup, further confirming the momentum shift. Finally, price entered the
Cloud validating the change.
3) Price strongly crossed below the Conversion and Base lines and the Conversion line also crossed the Base
line; both are bearish signals. At the same time, price was trading below the Cloud. All those signals confirm a
strong downtrend and could have been used as a sell entry.
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4) Price started to violate the slower Base line which is an early warning signal. Then, the Conversion and Base
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lines kept crossing each other, which further confirmed that momentum was shifting. Eventually, momentum
died off and price consolidated sideways.

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3. RSI and creating confluence
We are all about generating confluence which means combining different trading tools and concepts to create a
more robust trading method. Our preferred indicator is the RSI and it works together with the Ichimoku
perfectly.
When using the Ichimoku indicator to ride trends, it’s important to understand when the trend is over and when
a potential reversal signals a trade exit. The screenshot below shows that by adding the RSI and looking for RSI
divergences, it is possible to identify high probability reversals. If, after a RSI divergence, price crosses the
Conversion/Base lines, a reversal is very likely and it can even foreshadow a longer trend reversal into the
opposite direction.

4. Stop placement and exiting trades

Just as moving averages, the Ichimoku indicator can also be used for your stop placement and trade exits. When
exiting a trend-following trade based on the Ichimoku signals, there are a few things you should know:
▪ When, during a downtrend, price crosses above the Conversion and Base lines, it can signal a temporary shift in
momentum…
▪ …but as long as the Cloud holds as resistance, the trend has not yet been broken.
▪ When price breaks above the Cloud, the downtrend is finally over.
▪ Traders can use the Ichimoku for conservative and aggressive trade exits:
The conservative exit (1): A more conservative trader would exit his trades once the Conversion and Base lines
cross into the opposite direction of the ongoing trend. Such a trader usually avoids a lot of the choppiness that
exists before reversals happen. On the other hand, he might miss on future trend moves when price reverts back
into the original direction; not all Conversion-Base line crosses lead to trend reversals.
The aggressive exit (2): A trader who wants to ride trends for a longer time exits his trade only once price
breaks the Cloud into the opposite direction. The advantage is that he can sometimes hold trend trades much
longer and is not as vulnerable to temporary retracements. On the other hand, he might exit some of his trades
too late and could end up giving back a substantial amount of his profits because the Cloud-cross usually
happens very late.
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 Conclusion: The Ichimoku indicator is a solid
trading framework
Overall, the Ichimoku framework is a very solid, all-in-one indicator that provides a lot of information at once.
As we have shown, there is no secret when it comes to using and interpreting the Ichimoku indicator and the
individual components are very closely correlated to trading based off of moving averages. Nevertheless, the
Ichimoku indicator definitely has its place and traders who decide to follow such a trading strategy can create a
robust framework. We also highly encourage to combine the Ichimoku indicator with other tools such as basic
support/resistance principles, price action and chart pattern reading and, potentially, other indicators.
To sum it up, here are the most important things you have to know when it comes to trading with the Ichimoku
indicator:
▪ Use the Cloud to identify the long term trend direction. Only trade in the direction of the Cloud.
▪ The Cloud also acts as support and resistance during trends. But when price enters the Cloud, it signals a shift
in momentum.
▪ When the Conversion line crosses above the Base line, it can signal the shift towards a bullish trend
▪ During a trend, the Conversion and Base lines act as support and resistance
▪ Only trade in the direction of the Conversion and Base lines
▪ A trader can either use the Conversion/Base lines for his exits (conservative), or exit when price breaches the
Cloud (conservative)
▪ During ranges, the Ichimoku indicator loses its validity

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 B. Why To Combine Indicators For Intraday Trading?
List of Technical Indicators
• Stochastic Oscillator
• Relative Strength Index (RSI)
• Moving Average Convergence Divergence (MACD)
• ADX
• Parabolic SAR Indicator
• Moving Averages
• Bollinger Bands Indicator
• ATR
• Standard Deviation
• Supertrend Indicator
• Parabolic sar
• Aroon Indicator
• Camarilla Pivot Points
While there are a lot of technical indicators, there is some best combination of technical indicators for intraday
trading.
To generate calculative signals, technical indicators read the market trends, price, volume, interest, and other
factors. Therefore, they play an essential role in intraday trading as in this trading segment, and you need to utilize
the little intraday trading time and make the best out of it.
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Let us now look at some combinations that can help you in boosting the profits earned in intraday trading.
Why To Combine Indicators For Intraday Trading?
There has been a constant debate about the importance of technical indicators in intraday trading for a long time
now. Some traders find it absolutely necessary, while others often don’t believe in accuracy.
While there are a lot of technical indicators available to the traders, they individually can generate false signals
sometimes. So what can you do to ensure that you are taking guidance of the right indicators?
You can use the assistance of other technical indicators. There are the certain best combinations of technical
indicators for intraday trading that you can use.
Types of Technical Indicators
• Momentum Indicators

They are used to measure or define the fluctuations or momentum of a stock. They also determine the rate by which
the market is changing for a specified time period.

• Trend Following Indicators

These indicators measure where and how strong an ongoing trend is in the market in a given time period.

• Volatility Indicators

As the name indicates, volatility indicators are used to measure the volatility of the stocks. It defines how much
higher or lower stock a stock price has moved from its mean price.
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Best Combination Chart of Technical Indicators

Best Combination of Technical Indicators for Intraday Trading

Momentum Trend Volatility

Stochastic Oscillator ADX Bollinger Bands

RSI Parabolic SAR ATR

MACD Moving Averages Standard Deviation

Now looking at the three types of indicators, it is crucial to combine the right indicators; failing to do so can also lead
to fall signals.
There are some mistakes that traders often make in combining the technical indicators.
Traders often combine two same categories of indicators together. For example- if you combine two momentum
indicators like RSI and moving average together, they will give you duplicate results.
It, therefore, becomes difficult to trust the indicators at this time. Moreover, using similar indicators and duplicate
results can also force the trader to believe that the information is apt.
This can further induce wrong decisions and significant losses.
So, how can you combine the technical indicators for intraday trading to maximize your profits?
Always make sure that you combine two different categories of indicators. This makes sure that you are getting the
most appropriate signals.
Combination of Technical Indicators
ADX, RSI, Bollinger Bands
Now the RSI is a momentum indicator, and ADX, which is a trend indicator, compliments it. Now here, the Bollinger
bands can be used to determine the volatility. So you see how the three different indicators can work together.
Let us understand this with the following screenshots.
Case 1- Now, in this screenshot, the Bollinger bands are showing a breakout, meaning that the trend will now move
downwards, and the RSI accompanies this.
The RSI range around 70 indicates that the stock has been overbought and might face a bearish or consolidated
phase.
ADX, on the other hand, signals a strong strength of the trend.
So, what should be the decision of the trader in case signals of two indicators mismatch each other?
In that case, it is good to combine one more indicator for your analysis.
Here the band of third indicator, Bollinger Bands, are wide open that depicts the volatility in the stock and further
even after the breakout, the price reverses and hence one can expect the downfall in prices.
This is an ideal situation for the traders to go short.
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Case 2- In this case, all three indicators are signaling a low volatility trend:
• Bollinger bands are narrow.
• ADX value is below 20
• RSI is consolidating near the value of 5
Thus, one should not take any trade decisions during this period.

Bollinger Bands and MACD

MACD or moving average convergence divergence is a trend indicator where Bollinger bands help in detecting the
volatility.
A trader looking at MACD must look for the bullish or bearish crossovers to go long or short respectively.
On the other hand, to check the volatility of the stock, one can consider another indicator in the combination,
Bollinger Bands.

How do these Combination of Technical Indicators Work?

Looking at the Bollinger bands, if you are planning to take entry at the point that is marked in the picture below, it is
nearing a good signal as the price is crossing the moving average line from below. So, in this case, there are chances
that the trend will go upward.
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Correspondingly, looking at the MACD crossover it is too giving a bullish crossover signal and hence one can go
longer depending upon the signals obtained from these two indicators in combination.
This confirms that it is the right time to take entry into this particular stock.

Conclusion
Technical indicators are really useful in guiding intraday traders and enjoying the advantages of intraday trading. And
if you use the best combination of technical indicators for intraday trading, your chances of profits also increase. But
keep in mind that more is not beneficial always.
Even if you are combining indicators, make sure that you don’t use a lot of them. It might confuse you and force you
to make wrong trading decisions. So, use the right combinations and reap the benefits.

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