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                                         Usage of Ichimoku Kinkyo

In spite of the apparent of complexity, the Ichimoku cloud is very simple and easy to use once you get a grasp of how it works, and what it is. As we mentioned at the beginning, the indicator is more of a strategy than an indicator. It combines four separate tools into a single visual framework for trade decisions.

Trade signals are generated as the tenkan sen moves below or above the slower moving kijun sen, in a way very similar to the interaction of moving averages in the MACD, or the stochastics indicators. A bearish trend is indicated by the tenkan sen moving below the kijun sen, and vice versa. Once such a signal is generated, and we anticipate the development of a trend and open a position, the kumo (cloud) of the indicator comes into the picture. As mentioned elsewhere, the cloud is the support/resistance zone of the trade. In a bearish position, we expect that the price action will remain outside of the kumo most of the time, and if it remains in that region for too long, it may be time to reconsider or close the trade. Conversely, we will maintain our position for as long as the support/resistance zone established by the cloud holds. This makes 'letting profits run' a much easier task than it is with a simple crossover/ support/resistance strategy, since the problems created by volatility are handled better by the ichimoku cloud.

Take profit orders can be placed at any point outside of the cloud. Stop-loss orders should be placed in or at the edge of the cloud, and money management methods must always take into account the possibility of maximum losses being incurred as the cloud support fails.

Conclusion

There are a couple of conclusions that we can draw from our discussion of the indicator.

The Ichimoku cloud indicator is a complex tool that provides a lot of information when it is depicted on the chart. Two moving averages, and a layered support/resistance area makes the implementation of complex strategies a possibility, but also renders the addition of any extra moving averages, vertical Fibonacci levels, or arbitrary support/resistance data superfluous. Understanding the components of the indicator, and the rationale behind its usage will be helpful in avoiding noise on our charts. If we possess credible information about where order clusters are, it is not a good idea to utilize the ichimoku kinko hyo.

The kumo, or cloud component of the indicator is useful in conditions of high market volatility where strict adherence to single support/resistance levels on the chart may result in lots of false signals and small failed trades. By providing a zone, instead of a line, this indicator can be helpful in isolating more reliable signals from noise. We could easily construct a support/resistance zone with multiple Fibonacci indicators, or simple support/resistance lines, and decrease the number of generated signals by refusing to act on mere breaches of the outer and inner lines. The strength of the Ichimoku cloud against such a strategy is automation and speed. You have to depend on the same basic formulae in all market conditions, with little manual intervention,but at the same acquire greater flexibility in your decisions.

In conclusion, we can summarise the advantages of the Ichimoku cloud as concision, automation, and simplicity. Its disadvantages are a lack of customizability, and blanket coverage for lots of possible market configurations. If you think that the particular market situation is suitable for trading with two support/resistance lines, and two moving averages, the indicator is a perfect choice. If you conclude that other or more tools are necessary, it is a good idea not to take much time with the Ichimoku cloud.

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                                  Stochastics Indicator

The stochastics indicator is one of the oldest analytical tools in the market today. It was introduced in the 50s byGeorge C. Lane, and has been popular ever since with both novice and experienced traders. It's great advantage is its simplicity. It's very easy to plot and evaluate it, and while it's just as prone to generating false signals as any other indicator, the vast amount of analysis and study available means that its behavior is better understood by traders and analysts.

On a chart, the stochastics indicator looks like this:

Note: Past performance is not indicative of future results.

In the above chart, the faster %K component is depicted in blue, while the slower %D component is shown in red. And now we'll discuss how to interpret and calculate these components.

Calculation of the Stochastics Indicator

The stochastics indicator is composed of two parts. The %K component is an oscialltor itself, and it is usually provided separately as the Williams Oscillator in most trading software packages. Let's first see how it is calculated, although we'll discuss it separately under its own heading.

%K = 100 x ( Recent Close - Lowest Low )/( Highest High- Lowest Low)

Here the highest high, the lowest low, indicate the values created during the entire timeframe on which the indicator is being applied.

The %K component tells us where the most recent range falls with respect to the maximum registered in the timeframe of our analysis. For example, if the most recent range is 50 pips, while the largest range is 100, the value of the component would be 100 x (50/100) = 50, which would mean that the latest range is in the 50 percentile of the maximum value in the analysis period.

The %D component is the 3-period MA of  %K. Both are plotted on the chart to help us derive signals. The MA can be a simple, or an exponential moving average depending on the desired degree of sensitivity to the latest market action.

The two types of slow and fast stochastics indicators both depend on the same principles, with the difference between them being that the slow stochastics indicator applies a longer period moving average to the %K component in order to smooth out crossovers and indicator volatility. The slow stochastics indicator is usually more reliable, although it emits a smaller number of trade signals.

Trading with Stochastics Indicator

The stochastics indicator is for the most part a range pattern indicator. It is used to determine overbought/oversold levels in a manner similar to the RSI. The oversold level is at 20, while the overbought level resides at 80. Although this is the most basic way of using this indicator, it is in fact rarely used because of the tendency to create false signals. Instead, as with most other oscilators, convergence/divergence patterns are sought between the price and the indicator, and then trading decisions are made sometimes supported by secondary concepts like the price extremes, or crossovers that can sometimes signal momentum changes.

Both for the fast and slow stochastics indicators, indicator crossovers are used to create trade signals on the basis of the movement of the %K component. The %K component is the faster moving of the two components, and when it rises above, or falls below the slower %D, a buy or sell signal will be generated.

Accessibility

Stochastics oscillator is available with just about any trading software in the market, since it is a part of the most basic technical analysis toolbox. All the major platforms provided by MGForex, Easy-Forex, ForexYard make this indicator available.

Conclusion

What is the best way of using the stochastics indicator? In a ranging marker, with a relatively calm trading environment, traders can use simple crossovers or overbought/oversold levels in formulating their trading strategies. In more complicated market conditions, it is probably the best choice to seek the divergence/convergence phenomenon, and to confirm with volatility indicators, or moving averages to pick only the most reliable configurations. You can, for example, choose a less volatile, ranging market as determined by the Bollinger Bands, or the ATR, for trading with the Stochastics indicator in trendless market conditions.

It is not a good idea to use the stochastics indicator in strongly trading markets, especially if you depend on overbought/oversold levels for trade decisions. Trending markets can be brutal in the way they breach these limits, and it simply is not worth the risk to try to test them with range indicators .

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                                      Momentum Indicators

What is momentum? The term has a specific meaning in physics, and perhaps it is easier to understand the momentum of prices by considering an analogy. We know that the speed of a swinging pendulum will vary along the vertical axis, for example, as the pendulum moves from the bottom to the uppermost extent of its oscillation. Although the vertical movement of the pendulum is zero at the top of its range (since otherwise it would fly away), the forces acting on it at the same point is maximum. Conversely, as the pendulum reaches its maximum speed, the forces generating the speed are at their minimum. The oscillation of force and speed that creates the observed back and forth movement in the pendulum is very similar to the oscillation of prices in the market.

As the prices move between successive extremes, the speed of the price action reaches its maximum at a point where the entry of new traders or money has peaked. Thereafter, the trend will continue to generate new highs in all likelihood unless the continuous nature of the price action is broken by an unexpected event, but since the amount of new buyers or sellers steadily decreases, achieving and sustaining new highs will be harder. And just as the case with the pendulum, as the driving force of the trend dries out (timeframe or size of the trend is irrelevant), opponents of the trend will sooner or later achieve dominance, and will drive the price action in the opposite direction, replicating tick-tock pattern that is familiar to most traders.

Momentum indicators aim to characterize and portray these swings of the price. Needless to say, there are no precise, deterministic rules in trading and technical analysis that can give such satisfactory results as those obtained by the physicist, but the momentum indicators do help us place the price action into the context of trader enthusiasm which then enables the determination of the underlying trend's strength.

How to use Momentum Indicators

There is of course no rock-solid rule about the use of this type of indicator. A capable trader can create profitable trades even with a most unlikely combination of indicators. On the other hand, there are some common rules that would help many newcomers by restricting them to a less volatile, less emotional course of action. This section is mostly aimed at supplying such a set of rules.

Momentum indicators are not directional indicators. They are most beneficial in the context of an existing trend already identified by a trader who is unsure about when to join the same. In other words, we know our destination, and we know the vehicle that we'll board, but we would like to board it at such a time and under such conditions that the risk of an accident or crash is minimal. Momentum indicators facilitate this task by telling us when the trend has enough fuel to burn, so to speak, in volume, trader enthusiasm, and overall market dynamism. For instance, when using the stochastics indicator, a trader may choose to exploit a crossover as a sign that the trend has achieved enough momentum to justify a new trade. In a range pattern, the RSI may be used to determine reversals which are equivalent to the highs or lows of the pendulum.

Another, and perhaps more popular way of using momentum indicators is making use of them in light of the divergence/convergence phenomenon. In this case, the trader does not seek to confirm the price action with a favorable momentum signal, and aims, instead, to identify the price levels where momentum is contradicting the price action. We had discussed that the net force acting on a pendulum will be zero when it reaches its greatest speed at its highest or lowest level. Similarly, the trader seeks out phases of the market action where momentum is falling rapidly, while the price action accelerates towards a point of reversal. When that point is reached, we enter a counter-trend position with the aim of benefiting from the ensuing correction.

Types of Momentum Indicators

Momentum indicators are both popular and numerous. By definition, they are also oscillators, and all the general principles that apply to oscillators discussed in the relevant articles apply to momentum indicators as well. Here we'll mention a few examples briefly, in order to preserve the completeness of our presentation.

-Oscillators: Oscillators such as the RSI, MACD, CCI or Stochastics indicators are momentum indicators as well. They swing back and forth between predetermined levels, and can be traded on the basis of the divergence/convergence phenomenon, as well as the simpler crossover techniques.

-Momentum Indicator

As its name indicates, this indicator is dedicated to measuring the impulse of the trend. It is perhaps the most basic type of momentum indicator.

-Rate of Change

An advanced version of the momentum indicator, the rate of change indicator presents an easier-to-interpret, more refined picture of the market's emotional configuration, and is useful in any market that displays a strong tendency to oscillate.

The Williams Oscillator is also a momentum indicator.

Many guides and textbooks on technical analysis tend to restrict momentum indicators to range trading, but it is perfectly possible to use them in trends provided that one solidifies their signals through confirmation from another class of indicators that is more suitable to a trending market.

We'll also discuss each of these indicators in their separate articles in greater detail.

Conclusion

Momentum indicators should be used with other types of indicators that establish directionality. Combining them with Fibonacci indicators, which generate far more precise trading points for exploitation, is also a reliable technique.Although there are a large number of indicators that measure momentum, it is probably not a good idea to use more than one of them on a single trade. And especially in strongly directional markets, such as those where developing bubbles are dominant, it is not a great idea to depend too much on momentum readings, even when strong divergence/convergence patterns exist.

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                           Moving Averages: What Are They?

Moving Averages are technical tools designed to measure the momentum and direction of a trend. The idea behind their creation is simple. Price action is thought to fluctuate around the average value over a period of time, and we can expect to be able to the represent the market's momentum by calculating if the current prices are above or below the market's average value. But since the total length of the time period that must be included in the calculation of the average is too large (are we going to begin in 1980, or the year 2000 while computing our time series?), we pick the period arbitrarily, and update the average as time progresses.

Why Should I Use Moving Averages?

Moving averages are some of the most useful and effective gauges of market action in a trending market. Crossovers, divergences, as well as trends of the moving average itself can be used to analyze and crystallize the signals that can be distilled from the market action, which can then be used to help us make future decisions about our trades.

Types of Moving Averages

There are a large number of moving averages available for traders. Some of them are:

Simple Moving Average

The simple moving average is the most basic of these tools. It simply sums up the cloaisng prices over a specified time, and divides them by the duration of the period, reaching at the value of the indicator. No weighting is used, and no smoothing factor is applied.

Exponential Moving Average

The exponential moving average is one of a number of different moving average types that gives greater value to the most recent prices. As its name implies, the weighting is done exponentially. In other words, as we move to the left on the chart (towards past values), the weighting that they receive in the computation of the MA decreases rapidly (faster than it would be in a linear progression), and the most recent prices are far more significant, as a result, in determining the value of the indicator.

Smoothed Moving Averaged

The smoothed moving average is similar to EMA, except that it takes all available data into account. The earliest price values are never discarded, but receive a lower weighting, and possess a smaller role in determining the value of the indicator. As its name hints, the smoothed moving average is mostly used to smoothen the price action, removing short-term volatility, allowing us a better understanding of the long term momentum of the market.

Linear Regressed Moving Average

This moving average is similar to the MA, except that the weighting factors are linear, not exponential. For example, the price of the earliest period (n) is multiplied with 1, the following, more recent period (n-1) is multiplied by a factor of, 2, and the next one is multiplied by 3, and so on, until we reach the present timeframe. In this context, the most recent prices receive greater emphasis, and the latest fluctuations, rises or falls are depicted with greater clarity, aiding trade decisions.

Using the Moving Averages

Although there are almost countless improvised, and professionally created strategies based on moving averages, there are three typical methods that lie at the basis of most of the strategies and methods.

Crossovers

Crossovers arise when the price rises or falls below the moving average, signaling the end or the beginning of a new trend. Crossovers are some of the most common occurrences in technical trading, and as such, do not grant us a great deal of predictive power in the evaluation of the market action. They are used best in combination with other tools and techniques when we seek to evaluate the price action with greater confidence.

Moving Average Trends

Apart from trends in the price action itself, the moving average can also have its own trend at times. It is possible to take advantage of these trends for determining entry/exit points. Although not as reliable as the price trend itself when used alone, it can be an efficient way to confirm the price action when used in combination with it.

Divergence/Convergence

A divergence occurs when the trend is in ascendance, but the moving average is descending. A convergence happens when the market trend is bearish, but the moving average contradicts it by registering higher highs. These events are thought to signal a future reversal. When the price action is contradicted by the indicator values, the expectation is that the market is about to run out of energy, and it may be a good time to open a counter-trend position. It is important to remember that timing is very uncertain in all these formations, and that the anticipated reversal may never occur. Especially in strong trends, it is common to observe divergence/convergence phenomenon arise regularly without leading to any significant reversal. Still, it is the rarest, and most popular technical configuration preferred in the interpretation of a moving average.

MA Hopping

We use this term to define a method of trading in which MAs of different periods are used as successive resistance levels for the price action to breach. For example, we expect an ongoing trend to first breach the 1-hour, then the 3-hour, then the 10, and 40-hour moving averages in succession, and may choose to open a position at each of these successive indicators. Since we anticipate continuity between levels indicated by these MAs, we will maintain our positions as the price hops, so to speak, between them.

We'll examine each of these methods as we discuss each moving average type in its own article. To learn more about how these calculations are performed you are invited to visit the relevant page.

Conclusions

The main weakness of the moving average is its lagged nature. In many cases, and especially for short term fluctuations, by the time a moving average captures a market event, it may have already ended. The moving average will only note a developing market pattern after it has been set up convincingly, and if the pattern is short-lived, it will not be possible to trade it, and we may suffer from whipsaws as well.

The strength of this indicator type is its ease-of-use, clarity, and simplicity. They can be easily incorporated into any overall strategy, and it is also possible to devise methods exclusively through the usage of the moving average as well. The great versatility of this indicator type makes it a valuable addition to any trader's arsenal of technical tools, regardless of trading style, or the preferred market type

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Oscillators Explained

Oscillators are a group of indicators that confine the theoretically infinite range of the price action into more practical limits. They were developed due to the difficulty of identifying a high or low value in the course of trading. Although we may have mental concepts of what is high or low in a typical day's price action, the volatile and chaotic nature of trading means that any high can easily be superseded by another one that sometimes follows on the heels of a previous record, and negates it swiftly. In short, practice and experience tell us that prices in themselves are very poor guides on what constitutes an extreme value in the market, and. oscillators aim to solve this problem by identifying indicator levels that hint at tops or bottoms, and helping us in the decision process.

Why should use I oscillators?

There are two ways of using an oscillator. One is to determine turning points, tops and bottoms, and this style is usually useful while trading ranges only. Oscillators are also used trending markets, but in this case our only purpose is joining the trend. Highs or lows, tops or bottoms are used for entering a trade in the direction of the main trend.

Types of Oscillators

There are many kinds of oscillators available for the trader's choice, and although they have different names and purposes in accordance with the creators' vision, there are a small number of distinctions that determine which group an oscillator falls into, and where or how it can be used, as a result.

It is possible to group oscillators first on the basis of their price sensitivity. Some, like the Williams Oscillator, are very sensitive to the price action. They reflect market movements accurately, but under the default configuration do not refine movements into simpler, clearer signals for the use of the trader. Oscillators like the RSI are less volatile, and are more precise in their signals, but also less sensitive to the price action, which means that two different movements of different volatility and violence may still be registered in the same range by the RSI, while the Williams Oscillator analyzes it more accurately to reflect its violent nature. Some oscillators provide limit values to determine various oversold/overbought levels, while others create their signals through the divergence/convergence phenomenon alone. In general, oscillators that provide oversold/overbought levels are useful in range patterns, others are mostly used in trend analysis.

Let's take a look at a few examples to have an idea of the different types oscillators used by traders.

1.         MACD:: The MACD is one of the most commonplace indicators. It is a trend indicator, and it is useless in ranging markets. MACD has no upper or lower limits, but does have a centerline and some traders use crossovers to generate trade signals.

2.         RSI: RSI is another commonplace and relatively aged indicator used by range traders. It is almost useless in trending markets.

3.         Williams Oscillator: An excellent tool for analyzing trending markets, especially those highly volatile, the Williams Oscillator requires some commitment and patience to get used to, but it is popular, partly due to its association with the trading legend Larry Williams.

4.         Commodity Channel Index: The CCI is particularly useful for the analysis of commodities and currencies that move in cycles. It is not as popular as the others mentioned above, but it has been around for some time, and has stood to test of time.

The indicators are examined in greater detail in their own article.

Using the Oscillators

Each oscillator has its own how-to of trading the markets. Some provide the aforementioned overbought/oversold levels for trade decisions, others are used by traders through various technical phenomena to generate the desired signals. But it is generally agreed that the best way of using this indicator type is the divergence/convergence method. Although this method is also prone to emitting false signals at times, it does not occur as frequently as the other technical events such as crossovers or the breach of overbought/oversold levels, and is therefore preferred over other styles of analysis.

Conclusions

Oscillators can be used in ranging and trending markets, and since, depending on the timeframe, even a range pattern can be broken down to smaller trends, it can also be possible to use trend oscillators in range trading as well. Creativity and experience are the main requirements for the successful use of these versatile technical tools. If you seek to use them in your own trading, it is a good idea to do a lot of backtesting, and demo trading just to get used to the parameters, and to gain an idea of what works and what does not. In time, your own trading style will develop which will determine the indicator types that you enjoy most and find most versatile and useful for you. You can begin by studying the various articles on oscillators at this website

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