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.

Relative Strength Index (RSI)

Celticheart Investor

A beginner's guide to trading and investing

The relative strength index (RSI) is another technical analysis tool created by the renowned J. Welles Wilder who, surprisingly enough started out as a Mechanical Engineer by profession.

He was also a keen investor in real estate and, after just seven years quit working as an engineer to concentrate on real estate full time. It was only after he sold out to his business partner that he started to focus on research and trading, concentrating mainly on silver futures.

He is best known for having developed several technical analysis tools that are now regarded as "core indicators" in trading, such as "Average Gain / Average Loss" and one which we have already covered Parabolic SAR

The RSI is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. It's prime function is to compare the amount of recent gains to recent losses to try and identify when the stock has been overbought or oversold and is calculated using the following formula: RSI = 100 - 100/(1 + RS*)

I have extracted a concise description of how RSI works from Wikipedia (with thanks) as it explains it far more succinctly than I could:
How the Relative Strength Index (RSI) works.

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

"The RSI is regarded as a momentum oscillator, measuring the velocity and momentum of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum."  (Quote courtesy of Wikipedia)





For a more in-depth look at RSI check out the link below:

http://www.investopedia.com/terms/r/rsi.asp#axzz2HC5UYARm

Next time:  An overview of charting

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.

Bollinger Bands

Celticheart Investor

A beginner's guide to trading and investing

Having looked at some examples of candlestick charts 
it is obvious that alone they are not always conclusive enough (something which seems to sit uncomfortably with shareholders that want clear direction), which is why we use other tools to supplement these charts to help make sense of what is going on. 

This blog is not meant to be an in-depth analysis of any individual company so my apologies to those that took it that way, I was simply trying to show an example of how, sometimes, the charts do not tell us enough.

Moving on, the first additional tool that is used to complement candlesticks is referred to as "Bollinger Bands" or BBs for short, so what exactly are they?

"Bollinger Bands" is a technical analysis tool devised by John Bollinger in the early 1980s and trademarked by him in 2011.

There are in fact three bands, the upper middle and lower bands. The middle band which is a simple moving average (usually set at increments of 20) which tracks the intermediate trend and the upper and lower bands track the overall volatility of the share price. 

If the BBs are wide apart then the trading is pretty volatile but when they are close together this shows that the sp is becoming more stable. This can often help, in conjunction with the chart patterns themselves to give a more accurate indication of where the share price is going.

I believe this is a good example of how the BBs close up when market sentiment turns in favour of the share in question.

How Bollinger bands are interpreted varies depending on the individual's trading strategy.  Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger

As I said at the beginning, BBs are a great tool to use in conjunction with candelstick charting to add confirmation to trends. For a more detailed look at Bollinger bands check out the links below

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

http://www.bollingeronbollingerbands.com/chart/main.php

http://www.bollingerbands.com/

Next time:  Moving Averages

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. 

Fundamentals

Celticheart Investor

A beginner's guide to trading and investing

Now you have identified the market sector you are interested in how on earth do you decide which of these companies to invest in? If there was an easy answer to that one then we would all be millionaires. Maybe a good starting point is a quote from one of the world's truly great investors and a genuinely inciteful man:

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."  -  Warren Buffet

At the end of the day what you want is a company to invest in that will grow in value. If you consider that company's share price is only the overall value of the company divided by the number of shares in issue it will give you an idea of what I mean. 

So what is fundamental analysis? It is basically looking at any factors or data, which is likely to impact the share price or the perceived value of a stock. As the name implies,   it means getting down to basics. unlike technical analysis, which focuses more on the trading and price history of a stock, fundamental analysis focuses on creating a portrait of a company, identifying the intrinsic, or fundamental, value of its shares and buying or selling the stock based on that information. So what are those values?

• Overall value of assets
• Level of borrowing (gearing)
• Cash flow (income against outgoings)
• Management track record
• Potential for growth
• EPS (Earnings per share)

Ultimately the value of a share comes down to supply and demand, how much a buyer is prepared to pay for the share measured against how much a seller is willing to sell for. One factor that you cannot put a value on is market sentiment. No matter how good a company is, if the market (by which I mean the institutional investors who hold the real power rather than small investors) do not find favour with it, the share price will not rise significantly and in some cases will drift back down.

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

As I mentioned previously, there are two ways of measuring a company's net worth, fundamental analysis and technical analysis, I think it is important at this stage to clarify the difference between the two schools of thought:

Fundamental Analysis relies on looking at a companies finances; balance sheet, cash flow income etc. whilst Technical Analysis focuses more on charts and trading patterns on the basis that the fundamental financial data is already factored into the share price.

Generally private and institutional investors use fundamental analysis as their basis for buying shares, while short-term traders rely more on technical analysis. There is a huge difference between investing and trading, for the investor daily fluctuations in the share price matter less than the long term goal but for the trader who relies on these "spikes" to make their profits they are far more significant.

Fundamental analysis provides a lot of valuable information, but a lot of small investors might feel that they do not have the time available to research the fundamentals. Invest the time, if you are serious about investing the information you will get is invaluable. The most basic and probably the single most important fundamental is the EPS (Earnings-per-share) which is calculated by dividing a company's total after-tax profits by the company's number of shares in issue. Comparing the EPS of those companies you are looking to invest in is a great way to determine which to choose.

 Next time:  Technical Analysis

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.