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.

Taking Profits

Celticheart Investor

A beginner's guide to trading and investing

Now this is going to sound obvious but until you actually realise your profits it is pretty much academic how well your investments are doing. You would think that this would have a significant effect on how people manage their profits but frequently it doesn't.

How many times have you heard this statement, spoken with regret:
"If only I had sold when it was at its height"?

Look at how many potential "Dot com" millionaires saw massive paper profits only to see them evaporate before their eyes. The problem comes down to one thing and one thing only, greed. The reluctance to sell a single share when the price is rising for fear of missing out on that "multi-bagger" (a common term for when an equity realises multiples of the original buy price).

We all have to work out our individual strategies but my advice would be to lock in some profits on the way up, that way if the price does retrace you can always buy back in at a lower price. The other benefit is that if your profits allow you to you can sell enough to cover your original investment leaving you with what is in effect a "free carry" for the balance.

This method of profit taking is often referred to as "top slicing", which simply means taking profits off the top of your holding, de-risking your investment as you go.

There is always the danger that the company will do so well you will look back with regret at the percentage you sold thinking you could have made even more money, but that is what investing is all about, taking profits when you can.

There is always going to be the risk of getting the timing wrong, sometimes we will sell prematurely and sometimes we will delay selling until the price has peaked and retraced. Only you can decide when is the right time to bank those profits, you just have to learn to live with those decisions. On balance they will protect your investment and you will probably sleep better.

There is also the danger of getting too emotionally involved with your holding feeling that by selling you are somehow showing loss of faith in that company.
That sounds strange I know but I have seen it happen and even felt myself being drawn into that situation as well.

Recently a CEO of a company I invest in was criticised becase he dare suggest that investors in his company would have been wise to bank some profits along the way. He was not suggesting that shareholders should sell out simply that they should reap the benefits of a volatile market. It was, in my opinion, one of the most honest things I have ever heard a CEO say but it was met with derision by the very people he was trying to advise.

Investing is a business and like all businesses it is ultimately about profit so take a long hard look at your holdings and ask yourself should you be banking some profits or simply holding on in the knowledge that, on paper at least, you are doing very well indeed.

Next time:  A glossary of terms

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.

 

Invest in people

Celticheart Investor

A beginner's guide to trading and investing

I was going to get back to looking at what other tools we have available to us in this blog but something happened to one of my investments, that made me realise the most important thing of all. 

When we invest in any company the single most important factor to consider is the quality of the people running it. In short invest in the people at the top not just in the businesses they run.

The incident I am referring to was a simple RNS or Regulatory News Service
announcement, the London Stock Exchanges service that ensures that price sensitive information from listed companies, and certain other bodies, is sent to all RNS subscribers at the same time.

This one, from "Magnolia Petroleum" was not earth shattering, it was not to say that suddenly we had found masses of oil or gas, it was simply to counter speculation that had been taking place on the various Bulletin Boards of late.

What this did tell me was plain and simple, this company's board of directors listen to the concerns of their shareholders and respond accordingly. 

It is not just this incidence that makes me say, invest in people, look at their track record, are they proven, have they shown previously that they are capable of delivering on their promises. If the company that you invest in have quality people they are more likely to bring value to the company you invest in.

That also extends beyond the BOD to the technical managers further down the line, in the case of an oil company it could be a geologist or  an oil land man who have been in the industry for many years.

I can think of one particular case where the CEO took a small oil and gas company and turned it into a major player, selling it to a national organistation  for over £1.5 billion. The thing is he is now starting again with another venture, wouldn't that inspire you to trust his judgement again. 

Although I have mentioned one particular field, the same values apply regardless of market sector, it is simply a question of doing your research as much into the people involved as the business proposition they offer.

The other value top quality management bring of course is their ability to raise funding, simply because they are trusted by institutional investors to deliver.

I read an argument recently on a Bulletin Board that stated the CEO was not qualified to run the company because he had no hands on experience of the work involved but was a corporate lawyer. The thing is he didn't need to be, that is why he employs specialists that are his skill is in running the business and understanding how the city works.

Richard Branson is not a musician and neither is he a pilot but that has not stopped him from creating fantastic businesses in both the music industry and in the aviation business.

So the message is this, good people build confidence and trust in a company, follow the people that make things happen and you will not go far wrong.


(Note: We will discuss the, complex workings of a bulletin Board at a later date)

Next time:  Stochastic

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.

Fibonacci Numbers

Celticheart Investor

A beginner's guide to trading and investing

Now this is one of my own personal favourite topics, not just because of its use as a technical analysis tool but because it absolutely fascinates me in the way that it appears so frequently in the natural world, such as in the branching of trees, the arrangement of leaves on a stem, the petals on a flower or the arrangement of a pine cone.

That of course is another blog altogether, so for now we will stick to its relevance in aiding us as a technical analysis tool.

Some think that Leonardo of Pisa (also known as Fibonacci) was the most talented western mathematician of the Middle Ages. Fibonacci is best known to us for spreading the ancient Hindu–Arabic numerical system in Europe, primarily through its publication in 1202 in his book Liber Abaci (Book of Calculation). You might want to think about why it is that, to this day, we still work mathematically from right to left in the Arabic manner. Without which we would have none of the mathematical tools available to us today, including computers which are so reliant on sequencing.

So lets look at the number sequence named after him the "Fibonacci numbers", (Also called Fib Numbers) which he did not in fact discover but simply used as an illustrative example in his book. The number sequence we now associate with Fibonacci was known to Indian mathematicians as long ago as the 6th century.

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.
 
The higher up in the sequence, the sum of the division of two consecutive numbers becomes closer to what Fibonacci called the Golden ratio which is approximately (1 : 1.618 or 0.618 : 1). 

e.g. 233/144 = 1.6180555 and 987/610 = 1.618033

The relevance to its use in technical analysis is that you will often find that a bullish rise will often retrace to a key Fib number and also the reverse is true,
a downtrend might correct itself and  rise to a key Fib number (not necessarily the next one in the sequence).

These are just some examples of how Fibonacci retracements in an uptrend look on the candlestick charts, along with the subsequent rises.
As with all things in charting the figures very rarely stop exactly on the fib numbers for reasons already mentioned above. The higher the number sequence the more accurate the golden ratio. 

Fibonacci numbers above all else seem to polarise opinion, with some people swearing by them and others dismissing them as nonsense. I would certainly not advocate using them as your sole means of measuring trends and directional change but, the frequency with which they appear makes me tend to take them seriously, at least as another useful technical analysis tool in your arsenal.

For a more detailed look at Fibonacci numbers check out the links below: 

http://www.tradingfives.com/articles/fibonacci_retracements.htm

http://www.maths.surrey.ac.uk/hosted-sites/R.Knott/Fibonacci/fibmaths.html

http://www.mi.sanu.ac.rs/vismath/lends/ch2.htm

Next Time: Parabolic SAR

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.

Moving averages

Celticheart Investor

A beginner's guide to trading and investing

Moving averages are not in fact a tool as such but just a smoothing out of the average share price activity to form a trend following indicator. 

They do not predict price direction as they are based on past share price so are, by definition, tracking what has already happened. Despite this delay, moving averages help smooth price action and filter out the noise. 

They also form the building blocks for many other technical indicators, such as the Bollinger bands we have already examined (the middle BB is also the EMA 20 line) and MACD (moving average convergence/divergence) which we will be looking at later on. 

The two most common types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These moving averages can be used to identify the direction of a trend and are useful in helping to define potential support and resistance levels. It should be noted 
that it is not possible to create an EMA with out starting with an SMA.

Moving averages can be calculated over any given periods but generally 20 day and 50 day increments are used by most chartists. It is how the two periods interact that is most informative for share traders and investors alike.

Although not a strong enough indicator on its own, when the EMA 20 crosses above the EMA 50 it often signals a buy but when the EMA 20 crosses below the EMA 50 this signals a possible sell. Again I would stress that this applies in the main to traders rather than investors as often the fluctuations we are talking about are too small to consider a buy or sell unless you are trading in high volumes.

For greater accuracy in your judgements use the EMA 20/50 signals in conjunction with some of the candlestick patterns we have already covered.

I wont even begin to try and explain the formulas used to calculate the moving averages (both SMA and EMA) as, to be honest, for most small investors, what the moving averages tell us is far more important than how they were calculated. If you do want to take a more in-depth look at how they are created check out the link below:

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

Next time: The MACD

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.