Ichimoku clouds are an old Japanese method for technical analysis that is only gaining in popularity today, says Bob Christy, who trusts the method so much he deems it his "Holy Grail."
Obviously, there are a variety of indicators that you can use in trading forex. One that has become more popular these days is Ichimoku clouds.
Our guest is Bob Christy to talk about how he uses them. Bob, talk about this new indicator that's really growing in popularity.
This indicator, to me, is really the "Holy Grail." In 1948, a man by the name of Hosada, who was a journalist, not a mathematician, was actually looking for what he considered to be the "Holy Grail" of investing. He couldn't find it, and so he took his five favorite indicators and he basically put them on one chart.
So the cloud actually gives you the opportunity to see everything in a glance, and that's what "Ichimoku" means in Japanese: "one glance."
In this particular chart study, we can see momentum, we can see trend, we can see definitive support and resistance areas, as well as buy and sell signals all on one chart; one glance.
So you've obviously got price on the chart and then these clouds look like zones around that price. What is it telling you? Are they support and resistance areas?
Those are the actual support and resistance areas, and also, if the current price is inside a cloud, it's actually considered to be in the noise area, and so you don't really want to initiate a position while the price is inside the cloud.
Really, each of the lines is simply a different moving average. For example, the Tenkan is a nine-period moving average. The Kijun is a 26-period moving average. The Chikou is the current price moved backwards 26 time periods, and then you have the Senkou A and B, which are the two moving averages that form the cloud. One is 26 periods, the other 52 periods, and those are projected 26 periods in the future.
There is a lot of information there. How long did it take you to get a feel for this and really use it to make good trading decisions?
It took me about a year to really dissect it. I first saw somebody talk about it and they kind of broadly brushed it, and it looked like an awfully busy chart. So what I did was I went back and I basically deconstructed the chart and then I started putting it back together.
Here, we talk about moving averages, but the Japanese moving average is different than the Western moving average.
Take the nine-period moving average; well, the Westerners use the close and it's a simple moving average or an exponential moving average, what have you. In terms of the way the Japanese did it, it's the highest high of the period, the lowest low, add it together, divide it by two; and so it's a little bit more price sensitive and it's a little bit more jagged. It's not a smooth line.
So, I deconstructed the entire process and then put it back together and I've been using it now about two years.
In the very beginning, you mentioned "Holy Grail." Every time I hear that, I think, "I don't know that anything is the Holy Grail," but obviously, it's been successful for you. Is it 80% successful, 90%?
I trade primarily the cloud breakouts and I've got a 75% probability of being right. I like to use the term "Holy Grail," but I know that it's not the absolute thing because things do change, but it's as close to it as I've seen.
Still, it has taken a really long time to get my arms around it, and now teaching it here, I hope more people will come to understand what it's all about.
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