Welcome to day 2 of reader Alex’s Guest Trader slot. Catch up with day 1 here.
Day 2: Mid to Long term trading – Ichimoku on 4H charts;
Before we argue on the ‘Long term’ meaning I have to state that I don’t trade long term, my longest operation was three weeks long, but I think that the following setup could be very good to start long term operations.
As I mentioned before you have to distinguish the forest from the trees, and in order to identify a mid to long term trend I use 4H charts and a Japanese trading system born in the ‘30s called Ichimoku (‘at a glance’), plus some commonly used simple moving averages (55 DMA, 100 DMA, 200DMA) and MACD. Ichimoku is a stand alone trading system, of which I use some features, and is a MT4 standard template. Pay attention that the colors I use are non standard for the template.
EURUSD H4 chart
At the heart of Ichimoku there are the 9 period (green) and the 26 period (blue) moving averages built on average price. The start of the action with the Ichimoku takes place with the crossover of these two lines: a bullish signal is generated when the fast moving average, or the Trigger Line (Tenkan-Sen) crosses the slow Base Line (Kijun-Sen), and the opposite for a bearish signal. Then there is the cloud (Kumo), which consists of 2 lines with the area between the 2 lines shaded (blue if bullish, pink if bearish). The Kumo is a potential support and/or resistance area. If price action is above Kumo, we can consider that the pair is bullish and the opposite if below Kumo.
Then there is the Chinkou-Span line (orange), which is nothing more than the current price action plotted 26 periods before. We get a bullish signal if the line is above the then price action, bearish if below the then price action.
We evaluate all these signals and if they all agree the trend is surely bullish / bearish! Due to the lagging nature of crossovers between Kijun and Tenkan lines this is not a fast responding setup to price changes, but we can get early signals of an imminent trend reversal. In example, a reversal of a bearish trend starts when the price action seems not to respect the Tenkan line and closes above Kijun line; then the price will have to close above the Kumo cloud… You can evaluate a possible trend reversal by using in example MACD oscillator: when the bearish trend is coming to an end MACD usually gives some divergences against price action, making higher lows while the price is still making lower lows, so you keep you heads up. Then watch the price action against the Kijun line which should go along with a MACD bullish crossover, in other words the signal line of the MACD goes above MACD itself while MACD is still negative… The reversal is now highly probable and you could pull the trigger. The standard 55 DMA, 100 DMA, 200DMA moving averages are widely used in Forex trading, and act as strong resistance / support levels against price action. On a 4H chart they will become respectively 330 SMA, 600 SMA and 1200 SMA.
I usually fast switch between the 4H chart and the 15MIN chart in order to choose whether to pull the trigger or not, and after having entered the trade I will check both the charts to get hints if the trade is going smoothly, and to evaluate the incoming hurdles (resistances, supports).
Mid to Long term trendlines should be integrated into this trading system as support / resistances, and are useful to spot triangles, wedges, flags and other figures of trend reversal / continuation. I’ll add that Ichimoku is very effective on jpy crosses, but the full technique explained here is effective on every pair.
