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Using Ichimoku Levels To Get The Most Of A Trend

Using Ichimoku Levels To Get The Most Of A Trend

Tyler Yell, CMT, Currency Strategist


Article Summary: Once Ichimoku has helped you identify an old trend has reversed and a new one has begun, traders can look to scale into their position so they get the most of the move while managing their risk. The multi-faceted Ichimoku can help you stay in a trend and add to the trade while the trend continues to prove itself while managing your risk.

Many traders understand that trading with the trend is a higher probability way to trade markets. The fact that Ichimoku is a trend following indicator helps traders in this regard. However, many traders don’t know how to take maximum advantage of a move or trend once it’s been identified.

Safely Getting the Most of a Move

One way to make the most of a move is to scale into a trade. Scaling into a trade is the process of entering into a trade incrementally so as to either not take the entire position upfront or increase your exposure to a proven trend. However, as you increase your exposure to a developing move, you’re also increasing your risk so you must be careful if you decide to utilize this strategy.

It’s been argued that the best time to enter into a trade with Ichimoku is soon after a cloud breakout on your preferred timeframe. Because you don’t know what trade will be the trade to make your week, month, or year it is advisable to “keep your powder dry” so when a trade comes together where the fundamentals and charts line up, you can enter in a conservative fashion. After the initial trade, you can focus on price bouncing off support in an uptrend along with a lagging line confirmation to add to your position.

Learn Forex: Two Scaling In Examples with Ichimoku

(Created using FXCM’s Marketscope 2.0 charts)

(Created using FXCM’s Marketscope 2.0 charts)

If you entered a trade when price broke the cloud and you wanted to add to your position as the trend continued, you could then look for legitimate set-ups as per the Ichimoku trading rules (displayed below). A legitimate set-up would be where someone who was not in the trade prior would look to safely enter the trade as price continually accepting the trend. The preferred filter shown above is when the lagging line “breaks-out” into open space in favor of the trend.

Averaging Up In An Uptrend or Averaging Down In A Downtrend.

Many traders or investors are familiar with the unpopular concept of dollar cost averaging. Sometimes referred to as “dollar-loss averaging”, this is the practice of adding to a losing trade so that the market has to come back less for you to break even. Naturally, we don’t want you to focus on merely breaking even but rather cutting losing trades quickly and sticking or adding to trends you’ve rightly identified.

Learn Forex: Focus on Average Open When Loading Into a Trade & Trailing Your Stop

(Created using FXCM Trading Station 2.0)

The open or average-open when scaling into a trade should be a focal point as you increase your exposure to a trend. Because we’re looking to ride a trend to its completion (which doesn’t always play out as we wish), we can look to bring our stops above the average open so that if some news or trend altering event plays out that goes against our position, we’re not holding a large trade at its reversal point. This methodology does require a more active approach because you adjust your stops if you decide to add to your overall exposure.

Managing Risk When Scaling In

We’ve discussed scaling into a position when a conservative Ichimoku set-up has played out with the lagging line confirming the entry. Other manners of scaling in include doing so in fixed pip increments (example: every 100 or 125 pips), or using fractals to catch new breakouts in the direction of the trend. If you decide to scale into a trade, it’s best to learn how to use this strategy by taking a fraction of a typical full position you would normally trade on your account equity and incrementally enter the trade to get a feel for this type of entry and how to appropriately manage your risk.

Ichimoku Weekly Trade: Buy NZDJPY off Likely Congestion Break to the Upside

(Created using FXCM’s Marketscope 2.0 charts)

Ichimoku Trade: Buy NZDJPY as most rules above are aligned on the chart

Stop: 82.00 (top of the cloud and below price action congestion)

Limit: 87.50 (as of current price, sets our limit at 2 times our risk in pips)

If 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 line on my chart) is above the base line (baby blue line) or has crossed above

-Lagging line is above price action from 26 periods ago (will breakout if price is same or higher on 5/21)

-Kumo ahead of price is bullish and rising (displayed as a blue cloud)

Price is in a temporary congestion phase near major support at the top of the cloud. A break of the current range to the downside would take us into the cloud and would signal a good time to exit if the JPY strengthens against the NZD. As a price action target the current range is around 250 pips and a break of the current range which we’re expecting because we’re above the cloud would take us 250 pips above the range to 87.50.

We’re noticing considerable price action near the rising cloud which gives us confidence (but never certainty) that good news could push this pair higher. One benefit for entering near the cloud is that you can set your exit as close as reasonably possible to our stop at the bottom of the cloud.

This is a heavy news week and NZD is no exception so keep an eye on the DailyFX economic calendar if you prefer to incorporate fundamentals with your trading.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.