Ichimoku clouds are useful technical tools that identify trends and key price levels, says Robert Christy, who explains how to use the clouds most effectively.
There are lots of things to watch on forex charts, and one that is becoming a lot more popular these days are Ichimoku Clouds.
Robert Christy is here to talk to us about what those are and how he uses them to trade. Robert, tough to pronounce, but how do you use Ichimoku Clouds?
The cloud is something that’s really unique on the chart, because it’s the only chart that I’ve ever seen that when you look at it at a glance, you can see the trend, you can see momentum, and you can see predetermined areas where you have support and resistance.
You also can determine the magnitude of the move based on the size of the cloud.
Now these clouds almost look to me like Bollinger bands. You’ve got kind of a top level and a bottom level, and a middle line between there. How do those work; what do they tell us?
Those are actually moving averages. It’s like a 9, 26, and longer-term moving average all combined.
What it does is just really show you where you are in terms of the move itself. A lot of times people get in to soon. Getting in to soon is a mistake, just like getting out too late is a mistake.
What it does is it helps you determine your best probability of success.
If I’m looking at these clouds, I’ve got a top of a cloud, a bottom of a cloud, are those my limits where I should be setting support and resistance levels and entries and exits? How does it work that way?
What I do is I use the cloud itself. Whenever the price is inside the cloud, that is considered an area of noise. I don’t want to really take a position while it’s in the cloud because I don’t know what direction it’s going to come out of the cloud.
Let’s say that we have something like the euro that has dropped over time here. Whenever it pops out of the cloud and closes out of the cloud—and here I’m using a ten-minute chart—what I want to do is I want to get short on the opening of the next bar. Then I’ll use my stop-loss area as the top of the cloud on the other side.
What we have found is that currencies really trend well over time. Even in erratic markets like we have today, they do trend. What we’re trying to do is to put ourselves in a position whenever we close outside of the cloud, let’s say on the downside we want to be short, and we’ll let that thing run for as long as it can.
Conversely, we do it on the other side as well. When it closes on the upside—closes outside of the cloud on the upside—we want to get long at that point.
Now are you using this technique on all currency pairs or are there one or two that you have found that it works particularly well on?
I trade primarily the G7 pairs. Works really well on the euro and the aussie dollar.
Does it also tell me anything about position size? Do you use it in that manner?
In terms of position size, the way we try to do everything is on our initial stop, if it looks like we have something that is, say, a 30-pip risk, we’ll measure based on the absolute risk that we want to take for that position.
Let’s say I want my loss to be no more than $2000. Well, I’ll measure that by the number of pips to the nearest level. Then we’ll adjust our contract size based on that.
Then besides Ichimoku Clouds, anything else that you like to put on a chart or outside of the chart to have some confluence or confirmation of what you see on that chart?
With the Ichimoku Clouds, it has everything that you need on it. You don’t have to have the sub-charts, the sub-bars, or anything else because you have really the best of all worlds.
You have moving averages, and so you can trade inside the moving averages. We have the break; it also gives you the Chikou line, which gives you a look back 26 periods, and so you can actually judge the current price to what it was 26 periods ago, so that helps determine the strength of the move.
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