Best FOREX indicators.
|Bollinger Bands||(30,2,2)||It is necessary to turn the position and go long, when the daily closing price crosses below the lower band, flip and go into a short position, when the daily closing price crosses the upper band from above|
|MACD||(12,26,9)||It is necessary to turn the position and go long (Long), when MACD1 crosses MACD2 top and vice versa, turn and go in a short position (Shot), when MACD2 crosses MACD1 below|
|Parabolic SAR system||(.02,.02,.2)||It is necessary to turn the position and go long, when the daily closing price crosses ParSAR top. Turn over and go into a short position when the daily closing price crosses below ParSAR|
|Stochastic Oscillator||(14,3,3)||It is necessary to turn the position and go long, if Stoch% K crosses the top level of 20. Invert the position and go into a short position if Stoch% K crosses above level 80|
|Ichimoku Kinko Hyo||(9,26,52,1)||It is necessary to turn the position and go long, when the conversion line crosses the baseline from the top, turn and go in a short position when the conversion line crosses below the base|
Bollinger Bands indicator is one of the most popular technical indicators. Its principle is to reflect the relative value of the instrument, based on the volatility (in other words, it is based on the range and rate of price changing). This indicator is located on the price chart and consists of three lines. The first line is a central one which is a simple moving average and at the same time is the indicator’s base. The second line is a top one which is a line of a standard deviation equal to the SS 2. The third line which is a lower one is a line opposite to a standard deviation, which is equal to the SS - 2. These tree lines mentioned above create a price band.
John Bollinger noticed a very significant nuance: as soon as a price chart crosses the top or the bottom line of the standard deviation line, then the price will soon come back into the band. According to Bollinger, when the price crosses the bottom line, the tool is underestimated, so the market corrects the situation quickly, returning the price in the band. When the price chart crosses the upper line, the opposite situation occurs. These actions can be considered a "fair attitude" to a financial instrument.
HOW TO USE THE INDICATOR
Bollinger Bands indicator gives quite accurate signals to sell and purchase the financial instrument. If the price chart crosses the lower line, it is a signal to buy, whereas crossing the top line means to sell.
The indicator’s lines can be of a practical use as levels of resistance and support. Therefore it is possible to trade on the small time period charts (M1, M5). When the price is getting close to the level of support (lower line) –it means to buy; when it is approaching the level of resistance (upper line) - to sell.
It is also noteworthy that the price band’s expansion means a trend will continue to grow, whereas its constriction indicated that the trend is losing its potential and it is better to exit the market.
The indicator’s drawbacks:
Bollinger Bands indicator’s drawbacks include only its inability to provide accurate data on large time period charts (Н4, D1, W1, WN). It can be applied to a maximum of H1 only. Using it on a large time period charts can result into a loss of the indicator’s sensitivity and showing false data and signals.
MACD INDICATOR’S DESCRIPTION
MACD (Moving Average Convergence/Divergence), also known as the convergence-divergence indicator of moving averages, was invented by Gerald Appel as the simplest and most reliable instrument on the Forex foreign exchange market.
Basically it combines both trend indicator and central oscillator and uses moving averages, which take into account a few basic characteristics of trend following.
In the setting of the indicator MACD the basic parameters are set for the values of the periods of fast and slow exponential moving averages EMA (i.e., from the values of which the bars of the histogram are built, it is called the signal line of the indicator) and the simple moving average (fast MACD). While setting, their way of application is also being specified.
After setting the necessary parameters, the final MACD indicator’s graph is displayed as a histogram that varies above or below zero (without any restrictions on the bottom or the top).
The first (or the signaling) is based on the local points of each bar of the histogram and represents the difference between the moving averages with periods of 12 and 26. The second red line (or the fast one) is the equivalent of the first with a period of 9 and is shown in the graph regardless of the histogram. The total value of the MACD indicator is calculated as follows: the value of the 12-period moving average is subtracted from the 26-period one, then the result is smoothed with a value of 9-period moving average.
The histogram based on figures from the moving average EMA demonstrates the strength and direction of the current trend in the Forex market. If the bars of the histogram are above 0th mark, the trend rises, if it is lower - it lowers. In addition, if the histogram forms large bars above or below zero point it indicates the current strength of the trend in a certain aspect.
THE MACD INDICATOR’S SINGNALS AND THEIR MEANING IN THE FOREX MARKET
Now let us look at the examples that show what signals can be received from the MACD indicator and how they should be interpreted.
№1. When the MACD indicator’s bars are crossing the zero level, it is the simplest standard signal to enter the position. If the intersection runs from top to bottom it is a sell signal, whereas bottom to top intersection is a buy signal.
№2. The intersection of the MACD oscillator lines. In the case the indicator’s signal line crosses a fast line, this signal indicates that a reverse of the trend in opposite direction is possible. That is, if the indicator crossed the fast line from bottom to top, this is the signal to sell. If, on the contrary, the crossing is directed from top to bottom, this is a signal to buy. However, to filter false signals it is better to enter the market when the price is located behind the maximum or minimum value of the fast MACD line. In other words, it is better to start sales when lines cross at the peak of the histogram, and to start buying if the lines are crossed at the decline. The process is shown in the pictures below.
The signal for the trend’s reverse can be received from the indicator’s red line (the fast one), which reached the zero level. In this case, if there are any open positions, it is high time to close them.
№3. Divergence signal is the analysis of the gap between a price chart and the MACD indicator’s data. If the direction of the price and the oscillator’s data is the same, it is a trend movement, and if it does not coincide, then a divergence signal is received.
When there is a situation when the rates are growing while fixing the mounting extremes (i.e., peaks) but the MACD does not give similar signals and goes in the direction of decline, we have a bearish divergence signal, i.e., the signal to open a position for sale.
For precise entry at a divergence signal, it is better to draw a trend line on a price chart, and only after the price has crossed this line to open a position in the right direction (see the picture below).
As you can see, the MACD indicator is very capable of the analysis and promising positions’ opening. However, regardless any course the situation may take in the Forex market, it is not efficient to rely on the data obtained from the MACD oscillator only. It is better to combine the MACD indicators data with other instruments proved to be capable of displaying the reliable entry market signals. Let us now take a look at a reliable strategy of trading with this indicator.
MACD STRATEGY: DESCRIPTION AND TRADING RULES
MACD with the parameters of (24, 52, 18) accordingly.
Exponential Moving Average (EMA) with a period of 100.
After that, mark the diapason of the market’s minimum and maximum price, using the last local extreme bars in a MACD indicator’s histogram. At the histogram’s pike find the maximum in the price chart and draw a horizontal line, i.e. the resistance line. For the histogram’s bottom find the corresponding minimum in the graph and draw level of support. As a result, we should get the following picture:
As we can see in the graph above, the local the extreme for support and resistance levels should coincide with the local points of the MACD indicator. Supposing we have already marked the diapason levels, we can now move on to trading and making the deals.
Trading should be carried out according to the trend only. Moving average with a period of 100 helps to figure it out. When the price is above the EMA the trend is increasing, when it is below – the trend is decreasing, therefore all the entry signals received should be carried according to the EMA figures. (If a purchase signal was received, the price at this time should be higher than EMA, if the sale signal was received, the price, on the contrary, should be below).
A position for a purchase should be opened in case the price crosses the top level of the diapason, i.e. resistance. Orders are opened at closing candlestick above resistance level. An order should be opened and the closing level of a candlestick chart above the resistance level.
A Stop – Loss order should be launched at the lower end of the MACD indicator’s range. To support a transaction it is best to use a manual Trailing - Stop, moving the level of Stop - Loss by 50-70 points of price’s movement in the direction of the opening, setting it gradually to the level of the moving average, then to breakeven, etc.
Transaction exit is recorded when the MACD fast line crosses the zero level or when the position itself does not close according to the displaced Stop - Loss.
It is all the same with the positions for sell, just vice versa: an entry occurs when the price crosses the lower end of the MACD indicator’s diapason. Stop - Loss is set at the upper end, further support and exit is performed according to the rules above.
At the same time, you can continue to modify the strategy with the MACD indicator on different timeframes with Money - Management for each transaction. It may sufficiently increase profit and improve the efficiency of the strategy.
PARABOLIC SAR SYSTEM DESCRIPTION
Parabolic SAR system technical indicator was invented for the trend markets’ analysis. The indicator is built on the price chart and similar to the moving average line. The difference is that Parabolic SAR moves with higher acceleration and can change its position according to a price. When the trend is up, the indicator is located below the price line, when the trend is down, it is located above it.
When the price line crosses the Parabolic SAR line, the indicator turns.
If the price line crosses the Parabolic SAR line, the indicator turns and its further values are located on the other side of the price line.
When this “turn” occurs, the point of reference is the maximum or minimum price for the previous period. When the indicator turns, it signifies either the end (correction stage or flat) of a trend, or its turn.
How to calculate Parabolic SAR technical indicator
For long positions: SAR (i) = ACCELERATION * (HIGH (i - 1) - SAR (i - 1)) + SAR (i - 1)
For short positions: SAR (i) = ACCELERATION * (LOW (i - 1) - SAR (i - 1)) - SAR (i - 1)
SAR (i - 1) is Parabolic SAR indicator’s value on the previous bar;
ACCELERATION is an acceleration factor
LOW (i - 1) Is the minimum price for the previous period
The indicator’s value increases if the current bar’s price is higher than the previous one in the “bull market” and vice versa
Forex Trading Strategies with the Parabolic SAR indicator
Parabolic SAR is a technical indicator invented by Welles Wilder, Jr. for trend’s movements analysis. It became first known in 1976 in the “New Concepts in Technical Trading Systems” book.
The letters “SAR” stand for “stop and reverse”. Parabolic SAR is one of the few indicators that gives signals to close positions. In many ways it is similar to the moving average line. The only difference is that SAR indicator can change its position according to the price. When the trend is up, the indicator’s line is drawn under the prices (candlestick bars), when the trend is down it is drawn above the prices. When the price line crosses the Parabolic SAR’s line, the indicator turns over.
The formulas clearly show that the indicator’s reference point is the maximum and the minimum price for the previous period. Acceleration factor is defined by the 2 factors: a step and a maximum that can be set in the parameters of a trading terminal’s indicator
When the step’s size increases, the indicator becomes more sensitive to a price
ACCELERATION= Maximum + i’step
Where i is the number of period after the start of calculation.
In fact, the acceleration formula is much more complicated, but let us not get deeper into it so as not to be confused. It is important to know that the more the step’s value is, the more sensitive the indicator becomes to the price changing. The maximum will regulate Parabolic during the price’s moving. For example, if the maximum is 0,3 (30%), it means that Parabolic SAR can get as close as possible to the price of 30% since the last movement.
WHAT PARAMETERS TO USE WHILE WORKING WITH THE INDICATOR IN THE MARKET
Wells Wilder recommends using the step of 0.02 with the maximum on the level of 0.2. These parameters suit the majority of the market situations. However, practicing traders can always experiment on a demo account and find the parameters most suitable for their trading system. Besides, it is better to figure out the tendency beforehand, as the Parabolic better works in trend markets, which is about 30%, according to the statistics.
PARABOLIC SAR TRADE SIGNALS
A signal for order’s sending is when the price line crosses the Parabolic SAR line. A buy signal occurs when the price is above the Parabolic line, a sell signal is when the price is below the Parabolic line.
The indicator is quite often used as a level for the protective stops installation, which can be adjusted manually when necessary. In that case a SAR current value will be the stopping level for the current bar. For the next bar the level will be different.
PARABOLIC INDICATOR WORKS PERFECT DURING THE PERIODS OF THE DIRECTED TREND
Undoubtedly, Parabolic SAR stands out from other indicators. Its positive sides include the Parabolic’s excellent functioning during the periods of directed trends and the possibility of a simple and efficient installation of protective stop orders. The drawbacks are the indicator’s lag and a lot of false signals for the sluggish trends in the phase of lateral movement. Therefore, initially, it is strongly recommended to determine the prevailing trend and to find the right settings for a particular trading instrument and the time period.
STOCHASTIC OSCILLATOR: INDICATOR’S SETTING AND CALCULATING. EFFECTIVE STRATEGY BASED ON THE STOCHASTIC OSCILLATOR USE
STOCHASTIC OSCILLATOR: DESCRIPTION AND USE
Stochastic oscillator is also an indicator that helps to find out when exactly the price of assets is going to change direction using special signals that indicate either the oversold or the overbuying of the assets related. As a rule, an oversold occurs when the trend turns up, whereas an overbought happens with a trend’s turning down.
Using Stochastic Oscillator is effective because with its help traders can accurately calculate the best moment to end the trades even before the trend changes its direction.
This oscillator is also use to choose the right moment to start trading when a new trend appears. In other words, Stochastic Oscillator helps traders to find the perfect time to enter and exit the market if the right strategy is chosen.
As the indicator’s author George Lain admits, the key point and the efficiency of using Stohastic is that when the trend is growing (the tendency of the price increasing), the prices of time frames’ closing stop in the immediate vicinity of previous maximums.
And, vice versa, when the trend is down (the tendency of price decreasing), the prices of time frames’ closing stop near the previous minimums. Thus, Stohastic Oscillator also helps traders to figure out the exact moment of asset’s price changing its direction.
In fact, this indicator demonstrates to the Forex traders the difference between prices of the current period closing and the price of the previous period within a certain (specified) time.
It is necessary to mention that Stohastic Oscillator converts the entire graph in a pretty specific way: it distorts a vertical price axis and turns it into a percentage value
Because a price can vary only in a diapason from 0 to 100 percent, the strategy of using this indicator lets traders see the exact moment of a price getting close to it virtual zero or, on the contrary, to its virtual 100 percent.
In other words, Stohastic Oscillator puts the prices into an absolute corridor out of which the prices cannot get out.
When the price is getting close to the top limit of a certain virtual corridor (which means to the resistance), traders easily can guess that the price is going to start decreasing very soon. The closer a price to the absolute resistance (an upper limit of the corridor), the less probability of its further growth is.
Note that at a price equal to 99.9% its further growth is simply impossible. As a rule, price decrease can be considered when a price line crosses an 80% mark from bottom to top.
Similarly, the closer the price gets to a price support (the low limit of the corridor), the more likely it is to grow. A price cannot fall below the absolute support. When the price crosses the mark of 20%, then its increasing can be assumed.
The Stohastic Oscillator concept is inseparable from its moving average, and that is why it is drawn in red in the chart above. The oscillator’s simple moving average is marked as «%D» and is calculated with respect to some “m” period (not that it is “m”, not “n”).
As a rule, the value of «m» is equal to "3", i.e. a simple 3-day MA (moving average) is taken. This is done because of the fact that the fast stochastic gets even faster and it becomes very important to find to slow it down. Therefore this is achieved using a simple moving average and pre-specified «m» period.
THE PRINCIPLES OF STOHASTIC’S CALCULATION AND DRAWING
As it was already mentioned above, Stohastic Oscillator is two lines of moving average (%K is a fast Stohastic and the other one, %D is a slow stochastic), moving in virtual corridor in three particular zones: the top one is the overbought zone, the middle one is the neutral zone and the lower one is the zone of oversold.
This graph depicts the oscillator’s indicator that is applied to the price maneuvers. You can see:
Line “2” is an overbought zone (the price’s turn in the direction of increase)
Line “1” – an oversold zone, where the price downward turn is most likely to occur;
Line “3” is a neutral zone. If the standard settings are applied, an overbought zone will be located in the graph between 80% and 100%, whereas an oversold one is between 0% and 20%.
Slow stochastic (% D) is a moving average with respect to a fast stochastic (% K) with a small period of averaging.
STOHASTIC FORMULA is going to look like this
Note that it is possible the use various instruments for averaging, i. e.:
%Kt=[Ct – Ln]/[Hn – Ln]*100,
“CT” is a price of a closed current trade period;
“Ln” is the lowest price during the last “n” periods
“Hn” is the highest price during the last «n» periods
SETTING A PERIOD FOR STOHASTIC OSCILLATOR
When traders in the Forex market use stochastic oscillator, the choice of the period of this indicator is experimental, and its selection depends directly on the situation prevailing in the market. However, quite often most traders use the default values that have almost no effect on the efficiency of its use.
When a market’s volatility is high, it is recommended to use the longer period, such as 21 and even longer. This will allow to decrease the oscillator’s sensitivity and to sort out unneeded false signals. On the sluggish market an opposite situation appears, when Stochastic’s accuracy should be increased by reducing its period, for example, to 9.
STOHASTIC OSCILLATOR’S TRADING SINALS AND INDICATORS
It is known that one of the moving average lines (the signal line) used in stochastic reacts to the price changing much faster than the other one. As a rule, this line warns about the assets’ overbought or oversold beforehand. As you can see in the chart below, a slow moving average is crossed by a signal line below 20% level which signifies the bull signal, or oversold.
The signal line is market in this graph as number “1”
Number “2” is a slower line
Number “3” is the crossing point of a signal line with the slower one (a bull signal).
Another way to use stochastic is to watch for the situations when the moving average lines would drop lower than 20% mark for an insignificant period of tie and then rise again. This market situation will be interpreted as an expectation of price growth (as a bullish signal).
In case any of the oscillator’s happens to be above the 80% mark and then is falling down for a bit, this most probably indicated a price fall (i.e. the bear signal).
As statistics show, Stohastic Oscillator is capable of generating a large number of trade signals (which it basically does), not every of which are accurate enough, though. Because if this temporary filters are used to smooth the oscillator’s volatility.
For example, for traders operating on the time chart the evidence of the same indicator can serve as an indicator, but in the afternoon time frame. If you decide to use stochastic on the daily chart, it is recommended to apply the weekly prices’ filter
It should be noted that in addition to the filter time, the signals of the oscillator can be neutralized by another oscillator’s figures, for example, by these of the RSI indicator. Today this combination (Stochastic and RSI) is considered to be one of the best, because less volatile RSI indexes allow to ignore some of stochastic signals and make market trading more accurate.
RSI INDICATOR: DETAILED USE GUIDE
RSI indicator is among standard technical instruments of almost every trading terminal as it managed to prove to be a quite useful instrument during the long time of its being used in various financial markets. RSI stand for Relative Strength Index. Its formula was invented by Wells Wilder who first introduced it in his scientific research work called “New Concepts in Technical Trading Systems”.
Unfortunately, this book has not been translated into Russian. Nevertheless, this in this article you will find a detailed description of RSI indicator, as well as the list of all the signals that traders should know in order to work efficiently and be rewarded with large profits. The author himself, however, often claims that lots of traders ignore simple and clear situations in the market, the notification of which can be received by RSI indicator. For instance, according to Wilder, most traders do not use a "failure swing", and in fact it very often can be usefully applied, thus earning well.
The figures used by RSI indicator are calculation as follows, according to Wilder’s description:
As you can see, the values of relative strength, that are further converted in value for the index are calculated by dividing the positive changes in prices during a particular period (U) into negative price changes over the same period.
RSI INDICATOR SETTING
RSI Indicator itself is a type of oscillators, which should make it easier for beginners its search in a trading terminal. This information also reports that this technical tool can be used very effective even in those moments when the market is flat. It is interesting that despite a delay, the main drawback of all oscillators, the RSI often generates very high quality signals ahead of a price, and this is the reason for all traders to pay close attention to this instrument.
In the process of attaching the RSI indicator to the window of the selected instrument’s chart, the terminal will ask to confirm the basic settings or to set your own.
The picture shows that RSI indicator is based on the closing prices so nothing needs to be altered here. If necessary, you can set a convenient means of displaying lines and levels, but it is the “Period” that requires your special attention. The indicator’s author himself offered to use the period of 14, but in the modern trading the period of 13 is set more often to fasten the indicator’s work.
You can also go to the "Levels" tab, where in classic version two significant levels are set – that of 30 and 70. These values are sometimes reduced to 20 and 80 to produce the most accurate signals for short and medium horizontal trade.
HOW TO USE RSI INDICATOR
RSI indicator forms 5 basic types of signals which are important to know, understand and use while trading in order to always realize market’s trends and therefore feel more secure. This technical instrument reliably shows where to find the points of not only entering the market, but also of exiting out of it.
OVERBOUGHT AND OVERSOLD ZONES
The RSI indicator’s detailed description below will show its ability of generating various signals. The most important thing while using it is to define the overbuying and overselling zones, where one of the struggling sides (wither a seller of a buyer) loses its power. It happens out of natural reasons when a long-lasting impulse simply disappears and the trade makers that move the quotes in a certain direction are ready to take a break or count their profit.
The RSI indicator is most of all known for two areas for which the author offers two use two periods – that of 30 and 70 (marked with red arrows in the screenshot). That is how a trader is supposed to act when the indicator’s main line (blue) enters these areas. When the line enters the zone above 70, a trader understands that at some point a price was growing really actively, which means it is necessary to be ready for its changing to the opposite direction and start decreasing. It is necessary to consider that RSI indicator in this case does not claim a trend’s change with 100% accuracy. A basic correction might be just enough, but in both cases the information about changing trend allows a trader to count the profit and wait patiently.
The very same thing happens when the RSI indicator’s blue line goes down below 30, which in majority of cases signifies that “bears” will take a break and “bulls” will cause the price’s increase.
RSI INDICATOR AND MOVING AVERAGES
This paragraph is devoted to the filtering of the unreliable signals received from RSI indicator. The thing is that every trader’s first rule says: Do Not Work Against the Trend. As RSI indicator gives signals not only at the turn, but also during some corrective movements that are not always safe to use, especially for inexperienced newcomers, it is necessary for a trader to protect themselves. This is how to do it.
Considering the above, the first thing you will need to do is to define the current trend. The easiest way to do so is to use some trend indicator, for example, a moving average. How to set a period for it if several moving averages with different setting are planned to be used is described in detail in the article in our website. Having added a moving average in a graph a trader sees a very vividly shown downward trend.
Thus in order not to break the main safety rule, they should use only those RSI indicator signals to enter the position that suggest the possibility of making deals according to the trend. In the case described, when the downward trend occurs, a trader should open only the “Sell”-type deals after the main RSI indicator’s line will start getting out of the zone 70, signifying the end of the correction cycle.
Therefore, all the signals for buying that RSI indicators forms at the line’s exiting 0-30 zone should be ignored by a trader as they will be subjecting him to make a deal against the trend, which is quite a dangerous method of trading able to increase the risk of this way of money making, which is not that safe itself.
PSI DIVERGENCE INDICATOR
Another way of opening the trading positions while using the relative power indicator is to find
divergences in the RSI graph. Strictly speaking, the reliability of the received signals is not accurate
enough and requires the knowledge of the basics of technical analysis for efficient operation to confirm
the potential signal, with a certain figure.
For the newcomers and those people who do not understand divergence quite so well, it is better not to
use the signals formed by it in RSI.
The two screenshots above clearly tell how to act if divergence is present. They show the most probable price’s direction after the difference between the peak values in quotes graphs and RSI indicator’s diagram is identified. For example, the figure at the first screenshot’s very top shows the following: if the price on the chart forms two consistently growing extreme, and the RSI indicator at this time shows the difference, also showing two peaks, where the second one is below the first one, we should expect the imminent collapse of prices, therefore you can open a deal to sell.
HOW TO DRAW THE TREND’S LINES
In order to trade efficiently using this way of receiving the signals it is necessary to get a crash course in technical analysis, to learn how to draw the trend lines, accurately identifying significant support and resistance levels. It is not difficult to do, and when the necessary theoretical and practical knowledge is gained, they can be applied for achieving high results with the RSI indicator.
There are no any specific recommendations here, as the support and resistance levels are simply lined along the peak values directly in the RSI indicator’s diagram, which differs from a classic variant. Trading signals are obtained when rebounding from the relevant lines and, as practice shows, the results of such a trade reward a trader with quite accurate signals and large profits. The well-known support and resistance levels depicted in a price chart are not used because it is easier to define the price channel in RSI than in the quotes graph, especially if it is some high-volatile financial instrument.
THE RSI FAILURE SWING MODEL
Failure Swing model is quite an effective model to make a profit. It has a large potential, so it is pivotal o
know how to use it. In the RSI indicator this model is formed as follows:
The first condition is that the meaning RSI line crosses the border of 70 (the dot is market with a red
arrow on the screenshot);
(blue arrow) and could not touch it
the next indicator’s maximum should be lower than the previous one, but close enough to the line 70
the figure is formed in the area above 50 in the RSI indicator’s diagram
A sell signal can be used after both peaks are formed and the RSI line crosses the imaginary horizontal
line that is drawn through the lowest correction point after the first peak (marked green).
A breakpoint where trader should open a sell deal is market in the screenshot with a dotted violet
arrow. As you can see, the received signal showed a powerful downward price shift, which allows to
make large profits.
The Failure Swing for a buy is formed similarly in the RSI indicator. The first peak should decrease lower than 30, the second one should form a little over 30, and breaking an imaginary line can be considered a signal. All the figures included should be less than 50.
The RSI indicator that was described in this article can be used as an independent instrument of analysis or as instrument providing extra insurance as a part of some trading strategy. Its main task is to define the dangerous levels where the bears and bulls’ power disappears and the opposite side is ready even for a certain period to take matters into their own hands and change the direction of price movement. If you understand how to use RSI according to a trend, you can gradually increase your deposit with minimal risks.
THE ICHIMOKU KINKO HYO IINDICATOR’S DESCRIPTION
The customs and traditions of the Japanese society have formed quite peculiar trading methods. The candlestick analysis is one of the oldest theories which, however, has not been profoundly studied yet. For every particular person it holds its own amount of abstractness. Steve Nison and his wonderful books “Japanese Candlestick Charting Techniques” and “Beyond candlestick charting” is the reason the candlestick analysis became so popular.
The indicator this article is devoted to was created by a Japanese journalist Goichi Hosoda, who was
using a pseudonym “Ichimoku Sanjin”, which can be translated as “a look of a mountain man”. Literally “ichimoku” means “one glance”, so the indicator’s full name means “to see the equilibrium at a glance” or “a balanced diagram at an instant. The thing is that it was invented long before the computers, so the numerous calculations were being carried out by specially hired students. Nevertheless, the indicator’s full graphical representation is a panoramic view of the price movement. A lot of modern financial analytics consider a successful combination of a number of other technical tools.
Ichimoku derives from the candlestick analysis, thus it shows the best results when used together with other Steve Nison’s works. As it belongs to the trend class, it allows to define support, resistance and trading operations’ entries and exits. For the most part, the indicator is suitable for daily and weekly charts. Signals do not appear very often, but they are reliable. As the Japanese saying goes, “If you wait by the river long enough, the bodies of your enemies will float by”.
If you take a look at the graph you may think at first it looks unusual and even intimidating. And we must warn you right away – it is almost true. Just to figure out how everything works might take some time and efforts. As a rule, numerous nuances are being tried out on demo for a few months.
NOW TO THE INDICATOR’S CORE ITSELF. THE INDICATOR INCLUDES 5 LINES::
kijun-sen or the standard line (a base line of the current movement’s direction)
tenkan-sen or the turning line (conversion line were the bulls transform into bears, the line of the
common trend’s defining)
chikou span or the delayed line (the line delayed time line on the n-periods back);
senkou span A or the leading span 1 (the leading interval 1; the line shifted for n- period forward)
senkou span B or the leading span 2 (the line shifted for n-periods forward)
The distance between the senkou lines are hatched and called a cloud “kumo”.
LET US LOOK AT THE MATHEMATICS OF LINES
standard line = (highest high + lowest low)/2.
Half of the amount of the lowest and highest prices for n-periods, including the current one (in the classic version, proposed by the authors, the value is 26).
turning line = (highest high + lowest low)/2, but the calculation is done for 9 periods, including the current one.
delayed line is a price of the current candlestick’s closing shifted back for 26 periods.
leading span 1 = (standard line + turning line)/2. It is an average value between the tankan-sen and kinjun-sen, shifted forward for 26 tie intervals, including the current one.
leading span 2 = (highest high + lowest low)/2, for 52 periods, including the current one, shifted forward on a time axis.
The choice of time intervals of 9, 26, 52 is not accidental, it has a real meaning: 26 is the number of working days in a month, including Saturday, 9 is one and a half of a working week, 52 is two working months. If you pass these figures on a weekly chart, we get 26 weeks in a half-year, 52 weeks per year, 9 is a one-third of 26 and one-sixth of the 52.
In Hosoda’s times markets were operating 6 days a week. Nowadays there are supporters of the classic version, and there are those who offer other intervals. However, this can be said about any indicator / oscillator (take the MACD figures, for instance: same 9, 12, 26). The most popular Ichimoku time scales, defined by the market’s activity cycles, are those:
an hour: 12, 24, 120 or 120, 240, 480;
a day: 5, 10, 20 or 9, 26, 52;
A week: 26, 52.
The most profound question is: how to use all these figures?
Hosoda believed that an average price reflects moving better than anything else. As you could notice, Ichimoku’s lines resemble moving averages, but use historical minimums and maximums instead of a closing price. The averages look more smoothed which is natural, as for the calculation a point from each candlestick is taken. As for the rest, their behavior is similar to that of Tenkan-sen and kindzhun-sen lines. A buy signal is generated when the turning line intersects the standard line from the from the down top; when the opposite happens, it is a buy signal. And, just as Ichimoku’s moving averages is a trend-tracking system. A Tenkan-sen’s direction is the main in determining the market’s trend. As usual, the up - trend is bullish, the down trend is a bear, or else it is flat. The best option is to wait for a the conversion line’s rollback and enter the market. While prices are above the highs and lows’ averages, all that is necessary for successful trading is to look for an opportunity to take the side of the bulls.
The Ichimoku is unique in using time shifts. As you remember, delayed time is a linear graph shifted back. The only use of this line is the intersection with a price chart. The previous price is compared with the current one. If it crosses the Chickou span, it is quite probable that the market will gain power. As in any other case, the line’s closing should be behind the line.
There is another Japanese saying that goes: “Ask market about the market”. It means that current prices include all the information about the market known to the investors. Therefore, the tenkan-sen and kijun-sen’s average value should be the best predicting the future price. Once set, the support/ resistance is projected into the future and keeps its functions until turns into the resistance/support. Therefore, the false breakouts’ risk possibility is several times smaller than that in a similar situation with moving averages.
The main Ichimoku’s drawback is low figures at the sideways trend. There the trading is carried out inside of a cloud and the senoku lines act as support and resistance. Quite often a small prices’ scale of a cloud does not allow to predict any significant deals. It is better to wait until the prices leave the cloud. When all the 5 lines are lined, it is safe to ascertain the presence of a trend. Thus, Ichimoku helps to define the market’s tendency, support and resistance, breakouts, and all of it in one chart, with a single glance.
The information about Ichimoku you may find in the Internet will make you realize that it is mostly used by professional traders. Remember, you cannot just stand still, the lack of progress is not only the lack of development, but also a step back!
THE INDICATOR’S CODE FOR EQUIS METASTOCK
x:= Input («Tenkan-sen period», 0, 500, 12);
y:= Input («Kijun-sen period», 0, 500, 24);
z:= Input («Senkou Span B period», 0, 500, 120);
ts:= (HHV (H,x) + LLV (L,x))/2;
ks:= (HHV (H,y) + LLV (L,y))/2;
ssa:= Ref (tsksh,-y);
ssbz:= (HHV (H,z) + LLV (L,z))/2;
ssb:= Ref (ssbz,-y);
If( Mod (Cum(1),2) =1, ssa , ssb );
ts; ks; ssa; ssb; Ss;
THE INDICATOR’S CODE FOR OMEGA RESEARCH
Type: Indicator, Name: Ichimoku Cloud
Inputs: Standard (26), Turning (9), Delayed (52);
Variables: Stdline (0), TurnLine (0), Span1(0), SPan2 (0);
StdLine = (Highest (High, Standard) + Lowest (Low, Standard)) / 2;
TurnLine = (Highest (High, Turning) + Lowest (Low, Turning)) / 2;
Span1 = (StdLine + TurnLine) / 2;
Span2 = (Highest (High, Delayed) + Lowest (Low, Delayed)) / 2;
Plot1[-Standard] (Span1, «Span1»);
Plot2[-Standard] (Span2, «Span2»);
Type: Indicator, Name: Ichimoku Lines
Inputs: Standard (26), Turning (9), DelayColor (Yellow), ShowDelayLine (False);
Variables: StdLine (0), TurnLine (0), DelayLine (0);
StdLine = (Highest (High, Standard) + Lowest (Low, Standard)) / 2;
TurnLine = (Highest (High, Turning) + Lowest (Low, Turning)) / 2;
DelayLine = Close[Standard];
Plot2 (TurnLine, «Turning»);
If Close > DelayLine Then
SetPlotcolor (2, Blue)Else
SetPlotColor( 2, DelayColor);
If ShowDelayLine Then