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Ichimoku’s Strategic Use of Price Mid-Points for Strong Trend Entries

Ichimoku’s Strategic Use of Price Mid-Points for Strong Trend Entries

2013-04-23 03:00:00
Tyler Yell, CMT, Currency Strategist
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Article Summary: The 50% point of any move (high + low / 2) shows you the point of equilibrium. When a move has gone past the 50% point of a prior trend then momentum is quickly shifting away and as a trader, you should take note. Ichimoku takes this analysis a step further by integrating mid-points into many parts of the indicator so you know when momentum is on your side and where you can expect momentum to continue in to the future. This article will give you a better understanding of the indicators purpose in using mid-points as well as the conviction to take a good trade next time you see one of these levels hold.

When price rises quickly, some sort of decline often follows. The amount of the decline can tell you a lot about the next move. Throughout the history of speculation, many traders have preferred to look at the 50% point of a move to determine the trend’s validity and the likeliness of the trend’s return.

At the core of Ichimoku, is the concept of the mid-point. Ichimoku has 5 moving parts and 4 of those parts use the mid-point concept in helping you understand and trade a trend within one glance. The only line that doesn’t use mid prices acts as a momentum indicator and that is the lagging line.

Learn Forex: 4 of 5 Ichimoku Components Use Mid-Points of Price

Ichimoku’s Strategic Use of Price Mid-Points for Strong Trend Entries

Knowing Mid-Prices Helps You Trade the Trend

Traders who use western moving averages often treat the closing price of the day as king and base indicators of the close price alone. This means that regardless of the volatility within the day or the day’s range, whether it be 20 or 200 pips, the close is what is concerning. Ichimoku dismisses this belief and because of this, you may see a flat Trigger line (black on the charts) whereas you’ll see a bumpy yet without direction moving average if you’re using western moving averages based on close prices.

Ichimoku’s creator, Goichi Hosada, said that the mid-point of the day helps you grasp the crucial direction of the market when trading trends. Because Ichimoku is a trend following indicator and doesn’t work well in ranges, Ichimoku is concerned with helping you see if the average mid-point was moving higher. A mid-point average helps you see if price is trading in a defined range in which case it will be flat or moving conclusively higher or lower in which case there will be defined slope showing us the trend.

The way the Tenkan-Sen (Trigger Line) and Kijun-Sen (Base Line) is finds the mid-point is simple. The trigger line takes the highest high and lowest low over the last 9 periods and divides by 2 to give you the appropriate mid-price. The base line takes the highest high and the lowest low over the last 26 periods and divides by 2 to give you the range of price over the last month on a daily chart.

Learn Forex: Notice the Difference of Mid-Price Moving Averages vs. Closing Price Moving Averages

Ichimoku’s Strategic Use of Price Mid-Points for Strong Trend Entries

When a trend is present, two things will happen distinctly. Naturally, price will stay above or below the cloud. Secondly, the trigger line will stay below the base line in a downtrend (above in an uptrend) and will not violate until the trend begins to consolidate or switch directions.

How the Cloud Uses Mid-Points to Show You Support & Resistance

The Cloud, which is our basic trend filter, is also comprised of mid-points. Again, mid-points are used so that you capture the previous volatility that has brought us to our current price so that we’re in a better place to capture and trade the trend. The Cloud is comprised of two mid-point components.

The Leading Line A (orange line on my chart), is comprised of the mid-point between the trigger and base line. This gives you a clean understanding of the recent trend because if the mid-point of the trigger and base are moving up together, then you have an uptrend. The Leading Line B (Dark Blue on my chart), is comprised of the mid-point of the last 52 trading days by taking the sum of the highest price and lowest price over that period and dividing by two.

Learn Forex: Mid-Points of the Cloud

Ichimoku’s Strategic Use of Price Mid-Points for Strong Trend Entries

The Mid-points of the cloud bring you a dynamic version of support and resistance which we use as a trend filter. The two key points about the cloud’s use of mid-points is that you have the cloud in relation to both current price and the future cloud which is based on recent data and pushed forward 26 periods. The cloud under current price is what is commonly used if you’re going to use Ichimoku for stops and limits and the future cloud helps you develops future bias.

Trade of the Week

Normally, a trade of the week is given that aptly applies the Ichimoku indicator to a current trade set up. Out of respect for the system, there was not a current set up that I recognized to bring you a high probability set-up so I will not be posting a trade. However, this is your first reading of the Ichimoku report; here is a recap of the rules for a buy trade:

-Price is above the Kumo Cloud

-The trigger line (black) is above the base line (light blue) or is crossing above

-Lagging line is above price action from 26 periods ago

-Kumo ahead of price is bullish and rising

-Entry price is not more than 300 pips away from base line as it will likely whip back to the line if we enter on an extended move (on a daily chart).

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To be added to Tyler’s e-mail distribution list,please click here.

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