Ichimoku TK Cross Forex Strategy

Introduction

This is one of the strategies that can be pulled off from the Ichimoku Kinko Hyo indicator. The indicator is a complex one, made up of 6 components. These components are:

  1. Kijun Line
  2. Tenkan line
  3. Chikou span
  4. Senkou span A
  5. Senkou span B
  6. Kumo (cloud). This is bordered by the Senkou span lines.

In order for you to appreciate the various components of the Ichimoku Kinko Hyo, we have attached a snapshot for you to look at. Take careful note of the location of the Tenkan line and the Kijun line, as they are the basis of the strategy to be discussed in this article.

Ichimoku

Components of the Ichimoku Kinko Hyo

Indicators

The main indicator to be used for this strategy is the Ichimoku Kinko Hyo. You may also want to add the coloured MACD histogram for confirmation of trades.

The Strategy

The TK cross strategy makes use of the Tenkan line, the Kijun line and the Kumo for confirmation. The coloured MACD indicator can also be used. The basics of the strategy are the directional cross of the Kijun line over the Tenkan line to determine the new trend of the currency pair, and to check for momentum of this move by confirming the position of price action relative to the Kumo, which serves as a support or resistance level (depending on the direction of the TK cross).  The momentum can also be confirmed by the use of the coloured MACD.

The sharper the angle of the TK cross, the better the signal. A TK cross without a sharp angulation is not likely to do well as this signifies that the market is more of a range-bound market than a trending one.

  1. The TK Cross: Long Trade

For the long trade, we are looking for the following parameters to be met:

  • Tenkan line (red colour) to cross the Kijun line (blue colour) upwards.
  • Up Kumo showing on chart. If price is either at the upper border of Up Kumo or above the Kumo, this is a better signal.
  • MACD histogram showing a blue colour.

If we see these three parameters being met on the chart, a long entry should be made at the open of the next candle as soon as the signal is confirmed.

TKcrosslong

Long trade setup for TK cross

Stop Loss

The stop loss should ideally be set below the Kumo. If you are feeling brave, you can set this below the Kijun line and using a trailing stop to follow the trade. In other words, this is a mobile stop loss.

Take Profit

The most ideal way to take a profit for this trade is to watch the MACD histogram for a colour change. Once the colour of the MACD histogram changes to red, you should exit the trade. Look at the snapshot above and see the notes made on this.

b) TK Cross: Short Trade

For the short trade, we are looking for the following parameters to be met:

  • Tenkan line (red colour) to cross the Kijun line (blue colour) downwards.
  • Down Kumo showing on chart. If price is either at the lower border of Down Kumo or below the Kumo, this is a stronger signal.
  • MACD histogram showing a red colour.

If we see these three parameters being met on the chart, a short entry should be made at the open of the next candle as soon as the signal is confirmed.

TK_crossshort

Short trade setup for TK cross

Stop Loss

The stop loss should ideally be set above the Kumo. You can set this above the Kijun line and using a trailing stop to follow the trade, thereby converting the stop loss into a mobile stop loss.

Take Profit

The most ideal way to take a profit for this trade is to watch the MACD histogram for a colour change. Once the colour of the MACD histogram changes to blue, you should exit the trade. An example is available for you to see on the snapshot.

Conclusion

We cannot conclude this piece without mentioning certain precautions that need to be followed in order to make a success of this strategy.

  1. Beware of false setups and there are many occasions where this will happen. If the TK cross is witnessed on the wrong side of the Kumo or even within the Kumo itself, that trade is highly likely to fail. Remember that the Kumo is there to resist price action that is trending upwards and also to act as a support to downtrending price action. Furthermore, price staying within the Kumo is regarded as the market being in consolidation.
  2. Ensure that the angulation of the TK cross is sharp so that the trade will be able to pick as many pips as possible.
  3. Always make sure that these setups are practiced on demo before being applied to a live account.
  4. The stop loss should be set on the other side of the Kumo not facing the direction of expected price action. For the Take Profit target, the trader can be followed with a trailing stop until the Tenkan and Kijun lines cross once more in reverse fashion. This should be the signal to exit the trade.

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