Nº 1: The Ichimoku Cloud

This pre-World War II Japanese charting technique still helps you find some tremendous opportunities in all sorts of markets.

I have used a plethora of technical indicators and their countless combinations during last 10 years to find trading opportunities. I have even programmed a few myself. It was an important process to learn firsthand that all technical indicators work in certain market conditions but behave awfully in others. There is no magic indicator that all traders like to find.

Eventually, you should clear up your screen and settle for a combination of may be two or three indicators and learn their strengths and weaknesses.

The key is to stick with your technical indicators but be aware of when to use them and when to avoid them for determining your market entry and exit points. Though it's easier said than done because it takes time and considerable pain to reach a point where you settle on indicators suiting your trading style and understanding them reasonably well. If you have a series of losing trades after settling on some indicators, resist the temptation to start checking the "Indicators" menu of your trading software searching for alternates. Because whatever you will choose from that menu, ultimately you will face the same trouble.

With this conclusion I reached after years of exploration, I have settled for Ichimoku Kinkō Hyō as my key indicator for determining start of bullish or bearish trends, and more importantly riding them to their full potential.

The Cloudbreak

Goichi Hosoda, a Japanese journalist who used to write under the name of Ichimoku Sanjin (meaning: what a man in the mountain sees) came up with this charting technique back in 1930s, which has stood the test of time.

I will skip the full technical details of Ichimoku Kinkō Hyō in this post and encourage readers who would like to explore it further to search the web as there is plenty of great information already available. A good source is this website.

Among many details of Ichimoku, an important aspect is price breaking above or below the so-called bullish or bearish clouds (Kumo). An example is shown in the picture above where the price breaks decisively above the bearish cloud to enter the bullish territory. Like a man on top of the mountain watching sun breaking through the clouds at dawn (Ichimoku Sanjin). Once risen, sun completes the day. Similarly, the price action is likely to move higher fairly strongly, as it did in the example above.

Of course, like all indicators, Ichimoku also has its limitations and it does not perform well in range-bound markets. Having said that, the market may be range-bound on Daily time-frame where Ichimoku is not working well, but try dropping your time-frame lower, say to 1-Hour, and you may find some good shot-term opportunities or an early indication of a new trend developing on a higher time-frame.

In conclusion, traders should consider Ichimoku cloudbreak an important event for going long or short no matter which instrument they are trading. Moreover, they should never fight it by going against it, especially when the break is decisive.