Stock Trading: Second Look
Stock Trading: Second Look
Continuing on in my discussion from last week, I plan to dissect more of the Ichimoku charting technique and show the practical application of it. In "One Look," I described the cloud and the lagging line. Today, we will turn our attention to the Tenkan-sen (conversion line) and the Kijun-sen (base line).
The conversion line is a nine period average of the high and low prices and will respond faster to price changes than the base line which is a 26 period average of the highs and lows. This is similar to a moving average crossover technique and will not necessarily get you in or out at the beginning of a move, but will allow you to join a trend in progress.
A simple buy signal is generated when the conversion line crosses above the base line. It is important to check and see where you are in relation to the cloud. If you are in a bullish trend and trading above the cloud, this crossing of the conversion and base lines may be viewed as an entry for a long. However, a buy signal generated when price is trading below the cloud is weak and may be ignored unless you are using it to time an exit from a short position.
Figure 1
The process is similar for a sell signal. You would watch for the conversion line to cross below the base line. If price is trading below the cloud in a confirmed downtrend, then you would want to enter a short. If price is above the cloud, it may only be viewed as a signal to exit longs rather than entering a short counter to the trend.
Figure 2
For those traders looking for a more aggressive entry, you can use signals from price crossing the base line in a trend. If price is in an uptrend (price trading above the cloud), look for an oversold situation. That is when price trades below the base line, but does not break the cloud. The long entry is signaled when price moves upward and crosses above the base line.
Figure 3
Aggressive short entries may be signaled when price is trading below the cloud in a downtrend and becomes overbought. The overbought condition is seen when price trades above the base line. The sell signal is when price crosses below the base line.
Figure 4
If you noticed in the above figure, I was still reverting back to supply and demand when looking for my price targets in the trade. Even though Ichimoku charting can give me additional information and signals in price, I never want to forget the strength of supply and demand zones when trading.
In trading, the markets sometimes turn before we reach our targets and we may want a trailing stop to protect profits in our trades. The Ichimoku charts offer this as well. In a strong trend, price should not break and close beyond the conversion line. If it does, this could be used as a stop. If you find yourself stopped out too easily though, you could wait for a break of the base line as a trailing stop signal. You need to be comfortable with whichever method you choose.
Figure 5
I have also used daily charts in my figures. You can use Ichimoku charting on any time frame and also any asset class. You can even change the parameters of the lines if you choose to offer faster signals. You should practice using these charts and see if you can indeed predict market behavior with only one look!
- Brandon Wendell
About Brandon Wendell
Brandon has appeared as a guest on CNBC, Bloomberg TV, and Fox Business Channel. He has conducted special seminars for CNBC staff on technical analysis of the financial markets. Brandon has published articles in The Trader's Journal, Forex Journal, Investor Magazine, and Investor’s Business Daily. Brandon has also appeared as an industry expert speaker at the Trader’s Expo, The Money Show, and Asia Traders and Investors Conference.
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