Ichimoku Cloud (Kumo) charting

Celticheart Investor

A beginner's guide to trading and investing

The Ichimoku Cloud (Kumo) chart, also known as the Ichimoku Kinko Hyo; Ichimoku meaning “One Look” is a modern Japanese charting system that (as it says on the tin) shows a lot of information at a glance, without the need for any other technical indicator, something that candlestick charts cannot do alone, relying on multiple supporting tools as we have seen in previous chapters. 

As with other Technical Analysis indicators the purpose of this system is to help us determine changes in market direction and trading signals. This system was developed by Goichi Hosoda, a Japanese journalist, and was published in 1969.

At first glance the Ichimoku Cloud looks complicated but if you take a little time to study it the simplicity of the system soon becomes clear, as you would expect from an indicator that was created by a journalist not an analyst.

Ichimoku Cloud shows us, in one easily accessible chart, probable future support and resistance levels as well as momentum and trend directions. Some of the elements we are already familiar with such as the moving averages, Tenkan-sen (Conversion line) and Kijun-sen (Base line) to show bullish and bearish crossover points, similar to that of the EMA 20 and EMA 50 (See chapter Eleven, Moving Averages).

The "clouds" (kumo, in Japanese) are the areas formed between spans of the moving average of the Tenkan-sen (Conversion line) and Kijun-sen (Base line), which are plotted six months ahead Senkou (Leading) span B and of the midpoint of the 52-week high and low (Senkou span B) also plotted six months ahead.

        

Analysis tells us that we are in an uptrend when the prices are above the cloud, and in a downtrend down when prices are below the cloud. When prices are within the cloud itself the market is seen as flat or indecisive.

Senkou span A crossing above Senkou span B indicates a strong uptrend, and just like candlesticks, is shown as a green coloured cloud (Kumo). Conversely when Senkou span B crosses above Senkou span A the trend is downwards and is shown as a red coloured cloud (Kumo).

Because the Cloud is projected 26 days in advance it can, unusually, provide us with a glimpse of future support or resistance.

The Ichimoku Cloud consists of five basic plots as explained below:

Tenkan-sen (Conversion Line): This is the 9 day high + the 9 day low divided by 2. The default span for this is 9 trading periods but can of course be adjusted

Kijun-sen (Base Line): This is the 26 day high + the 26 day low divided by 2. The default span for this is 26 trading periods but can also be adjusted to suit your trading strategy.

Senkou Span A (Leading Span A) is the average of the conversion and base lines, calculated with 9 and 26 trading periods, Senkou Span A (green) moves faster than Senkou B (red) much as EMA20 moves faster than EMA50.

Senkou Span B (Leading Span B): is the 52 day high + the 52 day low divided by 2. This is the mid point of the 52 day high and low trading range. Although the default setting for this is 52 periods it can also be adjusted. This value is also plotted 26 periods ahead, which is why it is referred to as a leading span.

Chikou Span (Lagging Span): This is plotted 26 days behind the current trading. The default setting is 26 periods, but as with the Senkou Span (Leading span) this can be adjusted to suit. Because this value is plotted 26 periods behind it is referred to as a lagging or trailing span.

For a more in-depth look at the Ichimoku Cloud system go to:

http://www.ichimokutrader.com/

http://www.investopedia.com/terms/i/ichimokuchart.asp

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ichimoku_cloud

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

The games people play

Celticheart Investor

A beginner's guide to trading and investing

You would imagine that dealing in stocks and shares would be quite straightforward, whether as a trader or an investor. The object being to buy cheaply and sell at a profit, so why is it so unpredictable at times.

The reason is that not everything is in fact what it appears to be at first sight, manipulation is often the name of the game, sometimes subtly and at other times quite blatant.

So who is responsible for this kind of manipulation and is it in fact allowable under FSA rules? Well the second question is probably the easiest to answer so I will deal with that first. Much of which is covered by the "Financial Services and Markets Act 2,000" (FSMA). http://www.fsa.gov.uk/pubs/staff/code_conduct.pdf

One of the catagories defined in the FSMA is the misuse of information where information is not generally available. It is an offence to trade or deal based on that information or in fact to encourage others to do so. This is generally referred to as insider dealing. Worth bearing in mind that where market abuse has deemed to have occured by the FSA they are empowered to enforce an "unlimited" financial penalty, a sobering thought.

In addition to which it can carry a seven year prison term under the Criminal Justice Act 1993 if the FSA feels it a serious enough offence to prosecute.

That of course is the extreme end of manipulation and quite clear cut but let's look at the sorts of manipulation we all come into contact with on a daily basis.

On the London Stock Exchange (LSE) there are official market makers (MMs), these are some of the LSE's member firms that take on the obligation of always providing a buy/sell (bid/ask) price in each of the stocks in which they make markets. Both their bid and ssk prices are displayed on the Stock Exchange Automated Quotation (SEAQ) system and it is they who are responsible for dealing with brokers buying or selling stock on behalf of their clients.

http://en.wikipedia.org/wiki/Market_maker 

Can what they do be seen as market manipulation? We have all been in the situation where a stock is being heavily bought and yet the Bid price stays static or even drops back, particularly when the market first opens. If this is indeed manipulation it is very difficult to prove but Market Makers are on occasion known to deliberately lower prices to panic weaker investors into selling their shares, a practice referred to as "Tree shaking".

Raising the bid price encourages selling, sometimes this is done in a falling market and is referred to as a "Dead cat bounce" with the Market Maker trying to convince buyers into believing the share price has bottomed. The aim of all of this of course is to encourage liquidity as it is by generating trades (buys or sells) that the MMs make their profits.

Dropping the price suddenly can also have the effect of triggering stop losses which is why I generally advocate not using them on volatile stocks but that is something for each individual to decide for themselves.

http://celticheart07investor.blogspot.co.uk/2013/01/stop-loss.html

There is though another far more devious form of manipulation going on that has nothing to do with the official Market Makers, at least not transparently so. These are those individuals and sometimes groups that post on social media and bulletin boards either talking up a share (Ramping) or talking down a share (De-ramping). This practice is widespread and becoming quite a problem at times. So much so that some CEOs have actually taken legal action against those that spread blatant lies about their company.

So what is the motive behind these posts? Well as far as the Rampers are concerned, they are generally holders of a share who want it to rise and will make a concerted effort to convince anyone who will listen that it is going to do so. Whether or not this has any real effect on the market price who knows but it is noticeable that shares do rise rapidly (spike) for not justifiable reason at times given some credence to this practice.

As for the De-rampers well their motive is generally one of two things, they are shorting the stock (taking a short position) or are looking to drop the price for a cheap buy in at a lower level to go long (taking a long position). My advice would be to ignore both Rampers and De-rampers because the one thing you can be certain of is neither have your best interests at heart.

There is of course another significant area where stocks could be seen as being manipulated these days and that is through the medium of the advice columns in our daily newspapers. If a share is tipped or knocked back in these journals then quite often the response is disproportionate. 

The same is true of pundits who go online and tell people to buy or sell stocks often quoting totally unrealistic target prices. The scary thing is that many small investors are influenced by these people, my advice would be to do your own research and treat these articles as just another form of research but certainly not as gospel.

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.

Glossary of terms

Celticheart Investor

A beginner's guide to trading and investing

One of the things that initially confused me was the vast number of obscure terms and acronyms that are used when discussing investing or share trading. 

I have complied a glossary of the more commonly used terms to try and help you make sense of some of these.

I will add to and expand this glossary as new terms become known to me or when people advise me of additional terms they would like to be included.

Glossary

A

Accumulation - When an investor are is building up a volume of stock.

Agent - Another name for a broker, acting as the agent between the buyer and a seller.

AIM - The Alternative Investment Market, a sub division of the London Stock Exchange set up for smaller companies, with cheaper listing costs and a lighter regulatory environment.

Amortization - Writing off an intangible asset investment over the projected life of that asset.

Analyst - A person with expertise in evaluating a company's financial assets, they will analyse available data and make recommendations to institutional and retail investors to buy, sell, or hold.

Annual Report - A legally required publication sent by companies to shareholders annually outlining the company's operations, development, balance sheets, profit and loss accounts, and any other relevant information about the company.

Arbitration - A common method of settling disputes by a panel of one or more arbitrators who will make a decision for or against one or other of those companies.

Ask Price - The lowest price at which a dealer is willing to sell a share or commodity, also called the offer price. One of the two main factors to look at in level 2 trading.

Asset Allocation - Balancing risk and return by spreading investment assets over a range of options such as stocks, mutual funds, bonds, commodities etc.

Assets - Any possessions or holdings that have a monetary value.

At Best - An instruction given to a broker to buy or sell at the best available daily rate.

Automatic Trade (AT) - An automatic trade generated by the SETS system through the order book.

Averaging down - The tactic of buying additional shares in a company stock at a lower price as the price falls resulting in bringing  the average price of the shares down.

B

Bear Market - A declining market in which prices are falling or are are likely to fall. Sellers are dominant in a bear market. A bear is a term used to describe someone who believes a market is in a downward or negative trend.

Bid / Ask Spread - The difference between the price at which a dealer is willing to buy (bid) and sell (offer/ask) a security, stock or commodity. The bid will be the lower of the two prices and the offer price the higher

Bid Price - The highest price at which a dealer is willing to buy security, stock or commodity.

Block Trade - A trade of a large number of shares, usually 10,000 shares or more.

Blue Chip Stocks - Generally used when referring to Footsie 100 companies or well established corporations with a history of paying dividends. These are considered some of the lowest risk stocks, based on their proven track record.

Book Value - A company's total assets less its intangible assets and liabilities.

Break-away gap - A technical analysis term for a significant gap in a price chart that signals the end of a upward or a downward trend and often signifies a directional change.

Breakeven Point - The point at which the equity becomes worth what we paid for it

Broker - Also called the agent, an intermediary between a buyer and seller. The term broker can refer to the individual person or the company they work for.

Broker to Broker - A transaction between two member firms where neither firm is registered as a market maker in the security in question and neither is a designated fund manager.

Bull Market - An ascending market in which prices are rising or are are likely to rise. Buyers are dominant in a bull market. A bull is a term used to describe someone who believes a market is in an upward or positive trend.

C

Candlestick Chart - A traditional Japanese chart that has been widely adopted by the West that indicates the trading range for the day as well as the opening and closing price.

Capital Gain - The profit achieved when buying an equity at a lower price and selling it at a higher price. This does not include dividend or income achieved through interest.

Capitalisation - The underlying financial value of a company or corporation, including that provided by the shareholder's equity and any long term bonds

Cash flow - The flow of income through a company effectively the balance of sales and expenses

Contracts For Difference (CFD) - A leveraged equity derivative security that allow users to speculate on share price movements, without the need for ownership of the underlying shares.

Consolidation - Reducing the number of shares in issue e.g. 10 for 1 to increase the shareprice. It should be noted that the value of the shares held is unchanged only the number of those shares.

Charting - The analysis and interpretation of bar charts or candlestick charts in order to predict the future performance of a security based on historical data. Also known as technical analysis or TA

Closing Price - The price at the end of the day's trading on a commodity market or stock exchange.

Commission - The fee an investor pays a broker for buying or selling a security.

Commodity - A physical product traded on a commodity market, these are classed as either hard commodities e.g. Gold, platinum, copper, oil or soft commodities e.g. grain, cotton and rubber.

Common Stocks - The basic form of equity ownership in a corporation.

Counter-party - One of two participants in any financial transaction.

Current Assets - Any company assets that are converted to cash within the financial year.

Current Liabilities - Obligations that must be paid within the financial year

Current Yield - The value of any stock dividend, catagorised as either high or low yield.

Cyclical Stock - A company whose share price is linked with the ups and downs of the economy.

D

Day trader - A stock market trader who will open and close positions (buy/sell) during a trading day to make a profit. Although in theory these trades are not held overnight the term has come to mean someone who trades short term rather than just for one day.

Dealer - An individual or organisation that buys and sells products on behalf of others.

Debt to equity Ratio - A company's debt divided by the shareholders' equity

Depreciation - The reducing value to a company of non-cash assets such as machinery or property
De-ramper – Someone who talks down a share on a bulletin board. 

Derivative Security - A contract whose value depends on the performance of some other form of security, or investment. e.g. a stock option is a derivative security whose value depends on the value of the underlying stock.

Dilution - The release of additional stock onto the market which has the effect of reducing the share price because the market capital being divided by a greater number of shares in issue.

Diversification - Investing in a range of unconnected assets or commodities to reduce the risk associated with any one investment. This could be diversification across companies, trading sectors or even geography.

Dividend - A payment made to shareholders, proportional to their holding in that company

Dow Jones - One of the main US indices, the closest equaivalent to the FTSE 
Dummy trade (buy/sell) - To place a provisional trade to check the shareprice

Earnings Per Share (EPS) - A company's profits divided by the number of shares in issue

E

EBITDA - Earnings before interest, taxes, depreciation, and amortization.

Entry point - The price at which a stock or trade share is entered.

EPIC code - The alphabetical index used by the stock market to identify a company

Ex-dividend - The time between the announcement of a dividend and the payment of that dividend. Buying shares within this period does not entitle you to that dividend, depending on the company you would then have to wait 6 months to a year or the next dividend payment.

Exchanges - Central organisations for the control of trading in equities, commodities etc.

i.e. in the UK the primary exchange is the LSE (London stock exchange).

Exit point - The price at which a stock or trade share is exited.

F

Fibonacci - The man responsible for the introduction the ancient Hindu–Arabic numerical system in Europe, primarily through its publication in 1202 in his book Liber Abaci (Book of Calculation).

Fibonacci numbers - In the Fibonacci sequence of numbers, each number is the sum of the previous two numbers, starting with 0 and 1. This sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 and so forth. Also called Fib numbers.

Fibonacci retracement  - In technical analysis a bullish rise will often retrace to a key Fib number and also the reverse is true, a bearish downtrend will often reverse at a key Fib number

Forwards Contract - An obligation to buy or sell an asset on a specific date at a set price, similar to futures, but usually a private transaction between two parties and not actively traded.

FRA (Forward Rate Agreement) - An arrangement that allows for borrowing and lending at a constant interest rate for a specified period of time in the future.

Fundamental Analysis - The practuce of studying a company's general financial position. This would encompass looking at financial statements, company management, competitors, markets and also external economic such as interest rates, unemployment, consumer price index and general economic climate.

Futures Contract - A contract to buy or sell a fixed quantity of a specified equity for delivery at a fixed date in the future at a fixed price. Futures contracts are standardised agreements traded on Futures Exchanges.

G-H No entries to date

I

II - The acronym for an Institutional investor 
Illiquidity - When the market is experiencing low levels of trading, with little underlying stock readily available. Buying and selling can cause exaggerated price fluctuations in such a market.

Insiders - The board of directors and officers of a company. It can also be someone who has a large voting share in the company. These insiders are said to possess "insider information."

Insider trading - The illegal activity of using insider information prior to its release to the public domain to benefit from trading in any for of equity or security.

Interest-Rate Swaps - The process of changing the form of debts held by banks or companies, in which one party exchanges a stream of interest for another stream. Interest rate swaps can be fixed-to-floating, fixed-to-fixed or floating-to-floating rate swaps.

IPO (Initial Public Offering) - The first time a company's shares are traded on the stock exchange, also referred to as a flotation. Prior to flotation a  detailed prospectus is issued for potential investors to resaerch the company,its prospects, directors and finances before investing.

IPO Date - The date that a company's shares first started trading publicly.

J-K No entries to date

L

Level 1(L1) - This shows the lowest ask (buy) and the highest bid (sell) price

Level 2 (L2) - Also referred to as the order book, displays the best current bid and ask prices and also the depth of the market. (the number of contracts currently pending at each of the available prices).

Leverage - Also called Gearing is the ratio between potential profit or loss and the initial investment. A company with high level of gearing or leverage is seen as a higher risk investment.

Limit Order - An order to buy or sell a stock at a pre-determined maximum price.

Liquidity - When the market is experiencing high levels of trading, with underlying stock readily available. Buying and selling causes minimal price fluctuations in such a market.

Long / Long Position - When an investor buys a share or other security expecting the market price to rise

LSE - London Stock Exchange, the UK's primary stock market

M

Margin call - When a broker requests that their client deposits further cash or securities to cover possible losses from outstanding trades, they will sometimes even close the trade if the request is not complied with.

Market capitalisation  - Also referred to as the market cap which is the value of a company as determined by the market. A company's market capitalization is calculated by multiplying the number of shares in issue by the company's share price.

Market Order - A Market Order is an order to buy or sell a stock or equity at the market's current best displayed price.

Market Maker (MM) - A Securities firm which is obliged to offer to buy and sell securities in which it is registered throughout the mandatory quote period.

Market tend - The tendancy for a stock or market to move in a particular direction, upwards (up-trend) or downwards (down-trend)

Maturity Date - The date on which the principal amount of a bond is to be paid in full.

Moving Average - An average of a security's price taken over a particular time period, frequently 20 day and 50 day periods, referred to as the EMA 20 and EMA 50. Moving averages are used as a technical trading tool to determine support and resistance.

Net Asset Value (NAV) - The market value of a share or equity, synonymous with a bid price.

N

Net Assets - Also called net worth is the value of a company's assets less its liabilites and is usually stated as at a given point in time e.g a calendar year.

Net Income - Income after all expenses and taxes have been deducted, and used in calculating a variety of profitability and stock performance measures.

O

Offer price -The lowest price at which a dealer or broker is willing to sell a commodity or currency (also known as the ask price)

Open Order - An order to buy or sell a security that remains in effect until it is either cancelled by the customer or executed.

Open position - A long or short trading position that is not yet closed. In either case the dealer remains vulnerable to fluctuations in the share price until the position is closed.

Options Contract - A derivative investment, giving the holder an option to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.

Order - An offer to buy or sell a specified amount of a security or commodity at a specific price

Order Book (L2) - A facility operated by the Exchange for the electronic submission and automatic execution of orders in order book securities.

Ordinary Trade - A standard trade made through a broker

P

Price/Book (PB) Ratio - A stock analysis statistic in which the price of a stock is divided by the reported book value as of the date specified.

Price/Cash Flow (PCF) Ratio - A stock analysis statistic that compares the price of a stock with the company's known cash flow per shares in issue.

Price/Earnings (PE) Ratio - A stock analysis statistic in which the current share price is divided by the reported actual earnings per share (EPS) of the issuing firm, also called the "multiple".

Price/Sales (PS) Ratio - A stock analysis statistic that compares the share price with sales per share or market value against total revenue.

Principal Orders - Trades carried out by a broker or Agent for its own account and risk.
PI - The acronym for a Private investor 

Q

Quoted price - The sell (Ask) or buy (Bid) price offered by the broker or agent

Rally - A recovery in the value of a share, commodity, security or market after a decline.

R

Ramper – Someone who talks up a share on a bulletin board. 
Registrar - The company or an official from that company who maintains the shareholder database

Relative Strength (RS) - Strength of the stock relative to other stocks in its category.

Relative Strength Index (RSI) - A technical analysis tool for tracking the Relative strength.

RNS - is both a regulatory and financial communications channel for companies to communicate with the professional investor.

S

Scrip - A temporary substitute for a dividend. Companies that are having cash flow difficulties sometimes pay scrip instead of cash dividends, a promise to pay the dividend in full when it is liquid again.

Sell - A trade in which you exchange your equity for cash

Shareholders' Equity - Another name for a company's net worth.

Short / Short Position - A Position resulting from selling a stock you do not own with a view to buying it at a lower price prior to fulfilling the order. Not allowed in a falling market.

Short Covering - The act of buying back a commodity to close out a short trade.

Short Selling / Shorting - A trade predicting the shareprice will fall. For retail investors in stocks and shares it is is an uncommon strategy as it involves the speculator "selling" a commodity or security that they do not own in order to profit from a falling market.
SIPP - A Self Personal Pension from within which you can trade and invest in a tax free environment, similar to an ISA. Tax being paid on withdrawals only. Contributions to pension funds are supplemented by government.

Slippage - When the price at which a trade is executed is not the same as the price placed. This can happen when the market is moving very fast in either direction.

Spot Market - When commodities shres or equities are bought and sold for cash and immediate delivery.

Spot Price - The price of a commodity being traded live on a spot market.

Spread - The difference between the current bid (sell) and ask (buy) prices

Spread Betting - A bet on whether the outcome will be above or below the spread (see above).
SSAS (small self-administered scheme) - An occupational pension scheme set up under trust with fewer than 12 members. 

Stock Dividend - Payment of a corporate dividend in the form of stocks or shares instead of the usual cash dividend. The stock dividend may be additional shares in the parent company, or shares in a subsidiary being spun off to shareholders.

Stock Split - Issuing additional new shares to replace or rank alongside the existing batch, this has the effect of splitting current shares into multiple shares. This is the opposite of consolidation.

Stop Loss/Stop Order/Stop - An automatic order placed to ensure that a trade will be protected from dropping below a given percentage. The stop will automatically sell if the share price hits a pre-determined trigger price.

Support / support level - A pattern used in charting or technical analysis that indicates buying pressure or a price "floor" that the market would be expected to bounce back from. If the stock price declines below the support level, a technical analyst might view the decline as a sell signal.

T

Target - A pre-determined point when profit is taken.

Technical Analysis - A method of analysing shareprice trends using a variety of charting techniques. This can be bottom up or top down analysis

Ticker symbol - The US term for an EPIC code

Trade Date - The date on which a trade is executed.

Trading Volume - The number of shares traded in a trading period usually the trading day, this is a total of all buys and sells.

U

Uncrossing Trade (UT) - This is used for the single uncrossing trade detailing the total executed volume and uncrossing price as a result of a SETS auction.

Underwriter - As well as insurance underwriters, the term can refer to the investment bank that floated a company onto the stock market.

V

Value Date - The date on which a commodity is added to an account and also when payment is due.

Volatility - A general term for the amount of price fluctuation of a share or security

Volume - The amount of shares traded in any given period

W

Warrant - A certificate issued by a company giving the holder the right to purchase securities at an agreed price within an agreed time frame.

X No entries to date

Y

Yield - The return on an investor's capital investment, often refers to the dividend.

Z

Zero uptick - A short-selling technique to avoid having to wait for the market to increase.

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.