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Learn Forex: Ichimoku Strategy Signals EURUSD Strength

Learn Forex: Ichimoku Strategy Signals EURUSD Strength

Tyler Yell, CMT, Currency Strategist


Article Summary: The EURUSD is finally setting up for a trend following trade as per Ichimoku. The EURUSD has been a long time favorite for many traders but has failed to yield many signals and opportunities this year for steady trend followers.

Here is the set-up for the EURUSD and why this should be on your watch list.

Fundamentally speaking, the Eurozone economy is picking up nicely. Over the last two months the major stock indices like the DAX, Athens Index, & IBEX have increased notably as institutions and traders see the fallout risk of the Eurozone waning.

Another positive note, if the Fiscal Cliff is averted we could see a nice move to the upside which could take us to our target sooner than expected. Looking at the chart below, you see us moving higher on EURUSD with mainly negative news coming out on a deal coming together. If a deal comes together, EURUSD could move higher quickly.

Learn Forex – Ichimoku Buy Signal Triggers on EURUSD Daily Chart

Ichimoku Trade: Buy EURUSD @ Market

Stop @ 1.2845

Limit @ 1.3250

Ichimoku Trading Rules

Using the Ichimoku Indicator, here are the rules we follow before entering a buy trade. The opposite will apply for short trades:

-Price is above the Kumo Cloud

-The trigger line (Tenkan Sen) is above the base line (Kijun Sen) or has crossed above

-Chikou line is above price action from 26 periods ago

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

-Entry price is not more than 150 pips away from the Tenkan Sen / trigger line as it will likely whip back to the line if we enter on an extended move.

Side note: The EURJPY has been a stronger trend. However, the last rule of this system keeps us from entering the EURJPY because price is greater than 330 pips away from the Kijun Sen / Base Line. That rule opens our eyes to a correction before we move higher.

A unique aspect of Ichimoku is the Chikou Span or Lagging Line. Chikou Span is the teal line which is current price plotted back 26 periods. Historically, that was the number of trading days in a month. The purpose of this line is to give you a snap-shot of whether or not price is higher or lower today than it was 26 days or a month ago.

When the Chikou Span or lagging line is in undefended territory above the cloud, it is bullish for the currency pair. We see this exact set up now on EURUSD as current price and Chikou Span are above the cloud. The trigger line is also above the base line even the price tested and bounced off the signal line last week.

Technically speaking there are two major indicators supporting the EURUSD buy signal. The 200 Day Moving Average and the Speculative Sentiment Index both support the buy trade.

The 200 day exponential moving average gives EURUSD downside support and also sits right above the Ichimoku signal. When learning the ABCs of trading, many traders first learn to buy above the 200 day moving average and sell when price is below the 200 day moving average. This elementary principle allows us to enter with an edge as price is above the moving average with our stop below the moving average.

Learn Forex –EURUSD Daily Chart with 200 Day EMA and Ichimoku

Lastly, we can turn to sentiment in the market to support our EURUSD Ichimoku buy trade.

Learn Forex: Speculative Sentiment Index as of December 03, 2012

The Speculative Sentiment Index or SSI is an advanced tool that should be considered when trading. The SSI is derived from over 150,000 live accounts from one of the largest non-bank Forex dealers. The SSI acts as a contrarian indicator.

We can see above that the EURUSD has a heavily weighted short bias as 71% traders are long on the EURUSD even as the pair has moved up. Using SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the EURUSD may continue higher. The logic behind this signal is that as the trade moves higher, the majority of short traders will eventually unload their trade which will push the trade higher.

Regardless of the set up, we recommend keeping the trade size within your risk management rules. If you need assistance, you can find an easy formula here to customize your trade size.

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.