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.

Confirmation

Celticheart Investor

A beginner's guide to trading and investing

I just had to post this chart as a great example of how to recognise confirmation signals. The initial signal was 

a spinning top (not quite a doji) 3 days ago followed by a relatively weak confirmation signal and, with the release of yesterday's RNS a much more positive signal that this company is moving back up quite dramatically. It is all about reading the signs and reacting accordingly from a chartist's point of view.

Next time:  Bollinger bands

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.

Reading the Signs

Celticheart Investor

A beginner's guide to trading and investing

Interpreting candlestick charts might seem complex at first but as with all things, the more you understand the easier it gets. There are many elements that can be applied to charting (Stochastics, Bollinger bands often called BBs, Parabolics, Fibonacci numbers and MACD) but for now we will focus only on the candlesticks themselves and look at the others an element at a time. Trying to understand them all at once would only add to the confusion.

To recognise what the candlesticks mean we have to look at the patterns they form. It is by seeing repeating patterns that we come to understand the likely course that trading will follow. Basically all candlestick charts are mapping is sentiment; whether or not the market is positive, negative or neutral and more importantly which way the trend is going to shift.

To start with there are a only a few basic elements you need to worry about, as I mentioned earlier the basic structure of the bar is as shown here on the left with a main body in solid or white and wicks at top and bottom. These are frequently also shown as red and blue or green.

You don't really need to worry about what they are called only to recognise the shapes and the patterns they will form part of in your candlestick chart. It does help to know their names though so that you understand what others are referring to.

So lets look at some basic indicators and what they mean. Candlesticks come in three basic types; Bullish (buyers are dominant), Bearish (Sellers are dominant) and if they are Neutral (Neither buyers nor sellers are dominant).  

If the pattern is bullish then the likelyhood is the share price will either stay as 

it is or rise, if it is bearish then there is a chance the share price will drop and 

of course if it is neutral the price will not change.

The trick is to try and anticipate the change of direction or sentiment before it happens or at least recognise the start of that change. These are some basic patterns that will help you identify that change. 

Some are stronger signals than others but I would always say not to take one signal alone as a certainty, look for conformation signals to back it up.

Below is an example of such a change in direction from earlier today on MAGP showing a shift in sentiment from bearish to bullish.

The chart on the right was based on 1 hour increments but the same principles can apply on a daily, weekly or monthly basis too. The hammer followed by the long red bar was a sign that this share was being oversold and would probably reverse upwards but it was not until two hours later with the doji formed that it was confirmed.

Before we look at more complex patterns it is probably wise to look at simple reversal signals based on as few as 2 or 3 candlesticks. To start with stick to daily chart comparissons although later on you might want to look more frequently on fast moving shares. These are of course just a selection, there are many others to look for.

Below you will see examples of all three types, Bullish, Bearish and Neutral. Some signals are stronger than others but we will come back to that later on. Don't be too focused on the colour as it is not as important as the size of the main body and its relationship with its neighbours.

I have already referred to this book in a previous blog but for me it is an accessible introduction to understanding the basic fundamentals of analysing candlestick charts.

http://www.amazon.co.uk/Candlestick-Charts-introduction-candlestick-char ts/dp/1905641745/ref=sr_1_1?ie=UTF8&qid=1352029161&sr=8-1 

Next time:  How the Candlesticks are formed

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.