The Trend Following Trading Strategy
This trend following trading strategy article will teach you how to use the Ichimoku Indicator to follow trends. You’ll use this indicator to enter and exit trades successfully. Ichimoku Kinko Hyo gauges support and resistance then determines the future price movement. Many traders are intimidated by this new strategy, especially if they have never used the Ichimoku indicator before. Although, despite it’s complexity, the trend following trading strategy is actually easy to learn. With a little practice and patience, it can be a very successful trading strategy. If this strategy is too difficult, try our Parabolic SAR+Moving Average Trading strategy instead.
Ichimoku trading strategies are hard to come by because this indicator is complicated for many traders. This is one of the more advanced ichimoku trading strategies you will find. It is actually very simple to use. You are going to learn about the ichimoku 5 min strategy, ichimoku buy sell signals, ichimoku settings, ichimoku kinko hyo indicator, simple trend following strategy, and more aspects of this special indicator.
Ichimoku Indicator Basics:
Before we get started with this trading strategy, let me explain how this indicator works. There are 5 lines and they are all different colors to make it easy to identify the different lines.
Kijun Sen (blue line): This line can also be called the standard line and even the base line. The way that this is calculated, is by averaging the highest high and the lowest low for the past 26 periods.
Tenkan Sen (red line): This line is called the turning line. The calculation for this line is averaging the highest high and the lowest low for the past nine periods.
Chikou Span ( dark green line): What this line does is give you the closing price of today and is plotted 26 periods behind.
Senkou Span (lime green, orange,): Two lines make up the Senkou Span. The first line (lime green)is calculated by the average of Tenkan and Kijun Sen and is plotted 26 periods ahead. The second line (orange)is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead.
Kumo Area The area in between the two points of the Senkou span is called Kumo. This can be defined as the space between senkou span A and B. The cloud edges identify current and potential future support and resistance points. In the future examples, you can easily identify this by the lime green/orange “cloud.”
Note* These settings are the default settings for this indicator. They can be adjusted but for this strategy, it needs to be used with the default settings.
Below will give you a great visual on what these different lines look like in a chart. As you can see each line is colored to make it simple to identify each of these.
This strategy should be used on higher time frames like the 30 minute,1 hour, 4 hour, 1 day, or even a month! The reason? Well, this particular indicator follows trends so a lower time frame, such as a minute time frame, will possibly give you a false reading. You can also read about Trader Profile Quiz.
So let’s get started on this strategy!
Step One: Using Ichimoku Indicator to Find the Uptrend or Downtrend
Since this is a trend following strategy the first thing that needs to be identified is a trend. Do this on the one day, or four-hour time frame. These time frames will give you the best opportunity to identify a trend.
In the example below, we see an upward trend with three levels of support
Drawing trend lines is one of the simplest ways to find a trend. Draw the trend line where there is support or resistance. The example above has three different levels of support to confirm this uptrend.
This trading strategy will always go in the direction of the trend. So an uptrend will ALWAYS be a BUY. A downtrend will ALWAYS be a SELL. This strategy uses all of these tools to identify if a trend will keep going and gets you into the uptrend or downtrend. Here You can see a funny video about trading levels.
Perfect, let’s move on to the next step.
Step Two: Ichimoku Trading System The Tenkan Sen/ Kijun Sen Lines Cross
This next step using the Trend Following Trading Strategy, I will explain what criteria is needed for a trade entry.
Just to keep you on track, on the Tenkan Sen lines are Red, Kijun Sen lines are Blue. This crossing signal is going to tell you whether there is a strong bullish trend or a bearish trend.
When the Tenkan Sen line will cross above the Kijun Sen line, then this will give you an indication that there is a bullish trend.
You can see in the example below the lines clearly cross which is our indication that this bullish uptrend is strong.
These lines are designed to do that very thing when they cross each other.
After the cross happened the blue line (Kijun) is now below the red line (Tenkan). That means that the trend is going to keep heading upwards. This is not an indication that the trend is breaking.
This was used on a four-hour chart. This chart is the best time frame to use because it gives you a good overall picture of how the last few days have gone as far as it trending.
In this timeframe, The lines need to cross either in the Kumo, which in the picture above is the orange area, or right above the cloud in this example. This was a buy signal because the trend was bullish while the Tenkan Sen line crossed above the Kijun Sen line in the senkou span area (Kumo).
Note* If the lines cross below the Kumo area in an uptrend, do not buy/sell. The opposite can also be applied to a downtrend. If the lines cross above the Kumo area in a downtrend, do not sell/buy. The reason for this is because this would be a weak signal that the trend will keep going up or down. The trade must always be made to go in the direction of the trend.
Recapping our rules using the Trend Following Trading Strategy, these three things must happen in order to enter a trade using the Ichimoku Indicator.
- Identify the trend. This needs to be an upward or downward trend. The trade must go the direction of the trend.
- Tenkan Sen line needs to cross Kijun Sen line.
- When the two lines cross, they need to cross in one of these two specific areas. The first place would be in the Kumo area. The second will depend if its an upward or downward trend. In an upward trend, they need to cross above the Kumo area. During a downward trend, they need to cross below the Kumo area.
The example above shows that if the lines crossed below that Kumo area, this trade would not meet the criteria. But it crossed in the Kumo area so it met the criteria.
Note* This strategy is a trend following strategy. It is to help you identify a trend and identify that the trend will keep going either upward or downward.
Step 3: Determining an entry point Trend Following Trading Strategy
Determining an entry point should be very easy to do now. This is because once the Tenkan sen line crossed with the Kijun sen line either in the Kumo or just above or below on the four-hour time frame.
Now, simply drop down to a one-hour time frame chart and enter the trade. You may check other time frames, but there really is no need since you have already followed the rules to enter the trade on the four-hour time frame. This is just to give you a better perspective on where you are entering.
Step 4: Stop Loss point
Stop loss is always important to have in case the trade goes in the wrong direction and you are now stuck in a pickle whether to end the trade early or end it too late and lose it all!
So we need a stop loss to help us out. Do this on the four hour time chart to see when the last areas of support or resistance were.
There need to be two or more points of resistance or support. In the example below, you see that there were support levels. So in this example, it will go just below them.
Step five: Exit Strategy
The exit strategy using the Trend Following Trading Strategy will wait until and trend starts moving the wrong direction and the lines cross again. It is recommended to monitor this on the one-hour time frame to get the most accurate reading for this particular strategy.
The reason for this is that the trend is most likely coming to an end.
The trend can come back down, but once the lines cross over again it is time to exit the trade.
As you can see in the example the trend was slowly going back down. In the rules of this strategy, you will exit the trade if the lines cross over again.
So a trade may be 2 hours, 10 hours, 3 days or even a week! It depends on what the chart tells you and if it continues to follow the rules of the strategy.
The Trend Following Trading Strategy only uses this one indicator. That makes you focus on this indicator and does not make you have to keep checking others to see what they are telling you. Also, read my personal trading plan reviewed by Kimm Krompass.
It may seem complicated at first with all of the different colored lines, clouds, and so on, however, when you break it down with this simple strategy, it makes it so much easier to understand.
Make sure you remember to only be risking no more than 2% of your account! No matter how confident you are, you should always follow this to maximize your account.
Thank you for reading the Trend Following Trading Strategy that uses the Ichimoku Indicator to help you gain a massive amount of pips at a time!
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