FuturesTechs Blog

Let’s go back to basics: technical analysis is the study of market action, i.e. the interactions of buyers and sellers. Rather than the merits of what is being bought and sold, we analyse these interactions in search of patterns and trends that will identify profitable opportunities.

But the information available to the technical analyst does not need to consist merely of price movements; technical data is anything related to market action. The level of participation in the market, then, is also an important component of this data. We measure it by the number of stocks or futures contracts which are traded over any given period, and call it volume. The reason for the name is fairly simple: in a trading pit, it would be directly proportional to the noise!

Volume is available for nearly any market, except for Forex, whose decentralised structure makes a measurement impossible!

So what’s useful about volume?

Volume tells us where the majority of people are taking and covering their positions, so has big implications in terms of market memory.

For example, suppose that during a rally in a stock we notice that there is a price range where volume is particularly high. What does this mean? It means that there are particularly many positions originating and closing here. Going foward, then, there are lots of participants who have a “stake” in this particular price region.

If the price gets back here, people who bought in the first time might use this as an opportunity to pick up more of the stock at what they still consider to be good value. This is manifested in the price finding support here instead of falling back down.

On the other hand, what happens if sellers do come out in enough force to take us through this region? In that case, anybody who went long there is now offside and may be tempted to exit their positions. Lots of stops can get triggered, resulting in an acceleration of the decline.

So that’s the significance of volume: it tells us where most people are taking their positions. You could almost say that the market “remembers” levels in direct proportion with the level of volume seen when it trades around those levels.

Volume has long been a key component of technical analysis. One of the tenets of Dow Theory is that “Volume must confirm the trend”. High volume demonstrates mass participation in a move, and hence widespread acceptance of the new price levels. Price moves without volume were subject to suspicion, since it was possible that only a small number of rogue traders were moving the price. In that case the price  would revert back to where it came from as soon as they stopped participating.

It should be noted that sometimes, volume will be so light that the relevance of the price levels becomes negligible. This is true, for example, in the overnight session for the Agricultural commodities. Here’s a sample:

While the overnight price action will be visible to traders, some of whom may give it some small consideration, the volumes are so small that the levels can generally be ignored.

One common way in which volume is used is in the confirmation of price patterns. This is in the same spirit as Dow Theory: just as volume should confirm a trend, it should equally confirm a reversal or continuation pattern.

For example, consider the famous Head and Shoulders pattern. This begins with a series of higher highs and higher lows, a classic Dow Theory uptrend. But then we get a high below the prior high, and then a fall through the “Neckline” connecting the previous two lows.

There are definite patterns in volume which we may seek to accompany the Head and Shoulders. These may not always appear, but that’s ok: volume is only an additional piece of the jigsaw, and not the most important piece of evidence we look at when analysing the markets. Volume is always secondary to price. That said, we are encouraged when we see volume acting in a way that confirms the price action: for a Head and Shoulders pattern, that means cooling off as the market runs into resistance, and then expanding as the market decisively changes direction.

The above Head and Shoulders pattern for Silver shows volume declining on each successive peak, and then expanding as it completes the pattern with a severe breakdown.

Volume can also be incorporated into momentum indicators, usually in combination with some price information.

For example, “On Balance Volume” (OBV, see below) is a type of running sum of the volume. The trick is that we add the volume when the market has gone up, but subtract it when it goes down.

We can treat the OBV like any other indicator: adding moving averages, trendlines, etc. The trendline added to OBV above illustrated how the market was struggling.

So that’s an overview of Volume: as a core componenent of technical analysis, it confirms trends and price patterns, and can be incorporated into momentum indicators. An essential tool of the technician and trader!

Graham Neary, MSTA (graham@futurestechs.co.uk)

The latest appearance by Clive on CNBC:

Bar charts were the most popular way of depicting price movements until Japanese candlestick charts invaded Western technical analysis during the 1970s, but are still as useful as they’ve ever been.

They depict the same information as candlesticks, merely presented in a different way. They have their own terminology, and are most commonly used in conjunction with classical chart patterns like the Head and Shoulders and Triangle (though candlesticks are equally adept at displaying these).

In this article we’ll take a look at some bar patterns and see how they compare to the candlestick patterns you’ll find in our daily reports.

First, the basics: what do they look like? The show the day’s range with a vertical line connecting the high and the low. A little bar to the left of this line is shows where we opened, and another little bar to the right shows the close. Graphically:

With this understood, let’s compare how the same information looks in bars and candlesticks:

It should be clear that the only difference is in the presentation. Any pattern in bars or candlesticks can be expressed equivalently in the other format. Now for some patterns:

Ringed Highs and Lows

These are simple reversal patterns used to identify entry points. The Ringed High is formed when a sequence of higher lows is broken with a lower low, whilen the Ringed Low is the converse: a sequence of lower highs is broken with a higher high. They work across any timeframe.

Example of a Ringed Low:

We buy when the latest “lower high” is broken to the upside.

Example of a Ringed High:

We sell when the latest “higher low” is broken to the downside.

Note that the open and close (little bars on either side of the vertical line) are irrelevant when it comes to this pattern. We’re only looking at the highs or lows.

Reversal Day

There are competing definitions for this term, but we’ll accept the one found in Technical Analysis of the Financial Markets by John J. Murphy (New York Institute of Finance). A top reversal day is formed in an uptrend when we get a bar with a higher high but a lower close. The bottom reversal day is formed in a downtrend when we get a lower low but a higher close.

Here’s an example of top Reversal Days in Bobl futures. The first one wasn’t followed by an immediate change in trend, only a day of weakness. The second one, though, was fully confirmed (demonstrating this this pattern, like all others, is not infallible!)

The pyschology behind this pattern is fairly simple: market participants saw the trend continuing intraday with an expansion of the range in the direction of that range. This wasn’t followed through, though, and the close was actually lower than the previous day’s (or higher, in a downtrend).

Key Reversal Day

This is a more extreme version of the Reversal Day mentioned above.

In passing, let’s say what the Outside Day is. This is a session whose range completely surrounds the range of the previous day, i.e. we have a higher high and a lower low. Similarly, the Inside Day has a range entirely within the previous one.

The Key Reversal Day is an Outside Day with a lower close when we’re in an uptrend, or a higher close when we’re in a downtrend.

Equivalently for a downtrend: the open is lower than the previous day’s close, but the close is higher than the previous day’s high.

(Note: some sources have slightly different requirements for the Key Reversal Day, but let’s leave this confusion to one side!)

The following 2-bar pattern would a be a Key Reversal bottom in a downtrend:

The idea is that the market started out in line with the prevailing trend (the above second candle even gapped lower than the first one). This early positivity is reversed, though, and we end up closing the day in the opposite direction, finishing past the extremes of the previous session.

The Key Reversal Day is related to the Bearish Engulfing candlestick pattern and it wouldn’t be very far wrong to say that the Engulfing Pattern was the candlestick analysis equivalent of the Key Reversal Day.

This market topped out with a Bearish Engulfing Pattern that also qualifies as a Key Reversal Top.

Summary

Let’s summarise all of the patterns explained in this article:

Ringed High: sequence of higher lows, broken by a lower low.

Ringed Low: sequence of lower highs, broken by a higher high.

Reversal Day (Top): day with a higher high but a lower close (in an uptrend).

Reversal Day (Bottom): day with a lower low but a higher close (in a downtrend).

Outside Day: a higher high and a lower low than the previous day.

Inside Day: a lower high and a higher low than the previous day.

Key Reversal Day (Top): Outside day that closes lower (in an uptrend).

Key Reversal Day (Bottom): Outside day that closes higher (in an uptrend).

We mostly focus on candlestick analysis in our research, but also try to take note of significant bar chart patterns formed in the markets we cover. As with all techniques, bar charts are not infallible but, with some experience, domake it easier to read the markets  To read our daily research of the futures and FX markets, please sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)

Here at FuturesTechs we are constantly evolving our product, and in recent years we have added a merry band of private customers and ‘at home’ traders to our following via our website members area.

One request from a good few of our less experienced members is for a bit more clarity as to our current thinking about short term trend, and preferably something visual. So we have devised the coloured bar that you can see next to our levels on the left. We will release this new innovation on Monday 16th November.

You can see there are three colours on display: Green, Grey and Red.

If we are in the green zone the market is bullish technically. In the grey zone the technical outlook for the markets is neutral or uncertain. In the red zone the technicals are bearish.

These “skews” are short term outlooks. The medium and long term pictures may differ. We have decided that the profile of our average customer is short term, so this is the most useful timeframe for a tool of this type.

So let’s think about how different looking SkewBars should be treated.

To the left is an example of a SkewBar that’s more or less all green, with only a dash of red at the bottom. This means that the market is very bullish, and that you probably want to be buying it! We suggest that you trade “to the long side”, looking to try and buy dips to support levels, or buy breakouts through resistance levels. If you were scanning through each of our reports looking for something that might be worth a buy this is the sort of SkewBar you’d be looking for.

Stops can be placed below any support level, of course, but it’s only when we move out of the Green area that the short term skew changes from bullish.

In this case there is no Neutral Zone, the market flips straight to bearish below 120.98.

In this SkewBar the market is pretty neutral, only turning bearish if we break below bold support at 121.63. The neutral skew stays in place until we get all the way up to 123.04. It is only above here that the bulls regain control of things.

In Neutral markets you should can trade in either direction but don’t hold too much conviction. Many traders like neutral conditions as they can do plenty of lower risk “range” trades, trying to do more trades but take smaller amounts of money each time.

You may want to try and “play the range” by buying at the bottom end of the grey band, selling if and when the market gets near the top.

If we then break out of the range by moving into the red or green zones then things have changed and playing the range is no longer the game in town.

Our last example SkewBar is a bear market, and this doesn’t change unless we get above 123.04. Even above here the market only turns neutral. There is no green portion on our SkewBar at all, which means the bulls don’t even get as look in!

We hope this new innovation is a helpful visual addition to our reports. It has been suggested to us that sometimes the reports can be a little ambiguous, and while we try not to send mixed messages sometimes that’s just what the market conditions are. Hopefully the SkewBars will give a little more clarity.

To all our long term readers we’d like to point out that nothing’s changed with this innovation with respect to how we analyse the markets, we’ve just added a bit of colour, if you like!

As always your feedback would be most welcome. info@futurestechs.co.uk

With this article I will introduce Point and Figure charts: how to understand them, and how to recognise some simple patterns. My main source will be Jeremy du Plessis’ The Definitive Guide to Point and Figure, which you might be interested to purchase from the Global Investor Bookshop (in association with FuturesTechs).

Point and Figure is a very old method of charting price action, which originated when traders were simply recording the prices as they saw them happen: 14.50, 14.55, 14.60, 14.55, etc.

This gradually evolved to the point where traders were filling out boxes on a graph corresponding to price levels which the market had crossed, moving to the right each time that the price retraced over an old price level. Eventually, we got the modern Point and Figure chart.

Here’s the most recent NASDAQ chart:

As indicated, the X’s are drawn when the price has increased, while the O’s are drawn whenever the price has decreased.

In the example above the intervals used are just a point wide (the “box sixe”), meaning that we change from X to O (or O to X) and move to the next column whenever the price moves by just a point in the opposite direction to the previous move.

That makes this a very short-term chart, of course. With one-point reversals happening all the time, a couple of hours’ trading will quickly fill up the chart.

The two ways we can make it longer-term are:

• Increase the box size
• increase the reversal size

Increasing the box size should be obvious enough; instead of recording 1-point movements, we’ll record 10-point movements, for example. Here’s the first chart modified in this way:

These boxes stretch back a couple of weeks now, instead of a couple of hours.

Now let’s change the reversal size, the size of the reversal which needs to take place before we change between x’s and o’s and move into the next column. This is measured in terms of boxes, and is set to 3 in the below chart:

The above chart stretches back a couple of days. For a bigger picture view combining both changes, we could require 3-box reversals for 10-point boxes, i.e. requiring 30-points reversals before changing direction on the chart. The below chart represents the price action of a year:

One thing you might have noticed at this point is that we don’t really have a proper time axis. That’s true. While it’s true that time is progressing as we move from left to right on the chart, it’s not doing so on a constant basis. The chart only moves right when we get a sufficiently large change in direction (as defined by our parameters). The chart only changes when the price does. So, instead of being a traditional time vs. price chart, Point and Figure is instead an original way of drawing the price action.

We’re going to look at some patterns now, focusing on charts with 3-box reversal sizes. Any box reversal size can be used, and some care should generally be taken to choose the one that leads to the most favourable chart for the desired timeframe.

That said, we usually don’t like to use 1-box reversals. Charts look very different with 1-box reversals, being of a much shorter timeframe and with very different-looking patterns. Much of the difference is related to the fact that a 1-box reversal chart can have columns with just a single entry of , i.e. when we get two reversals in quick succession.

Check out the Difference between the CAC futures charts below. The top is a 10 x 1 (10 points, 1-box reversal) chart, while the bottom is 10 x 3.

Besides being of a much shorter timeframe in the same space, we can see that the one on the top does indeed have many columns with just a single X or O.

The advantage of sticking with reversal sizes of 2, 3 and more, is that we get to take advantage of the resulting asymmetric filter. The chart is biased to ignore movements in the opposite direction to the prevailing trend that do not satisfy the box size criterion. While a move of, say, 10 points in the prevailing trend will be charted, a move in the other direction won’t be plotted until it reached, say, 30 point.

So let’s have a look at some simple patterns.

The double-top buy is seen when the price reverses off a high, then comes back and breaks through it on the second attempt. It’s an awkward name since the Double Top bearish reversal pattern in mainstream bar/candlestick analysis, but the context is usually clear enough. Here’s an example of it in an uptrend:

Equally, the double-bottom sell occurs when we get the creation of a lower low:

These can be reversal or continuation patterns, depending on the previous trend. As continuation patterns, they tend to be a little more reliable (in accordance with the general principle that trends have a universal tendency to continue!)

In a similar vein to the above, we can have triple-top buy and triple-bottom sell signals. Indeed, we can have any number of tests before the breakout, with all manner of compound patterns.

The first of these buy signals comes after a failed attempt by the bulls to break through the previous highs (indeed, the correction causes a failed reversal triple-bottom sell signal. Our bias is to trade with the prevailing trend, so hopefully we would not have seized on that false signal):

In our next post on this topic, I’ll cover a selection of more advanced patterns and have a look at the price targets we can derive from them.

For now, this has been an introduction to Point and Figure charting. If you have any questions or comments, please don’t hesitate to get in touch. To subscribe to our daily technical analysis of the futures and FX markets, please sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)

One of the premises of tecnical analysis is that price patterns tend to repeat themselves. But what are these patterns? Today, we’re going to lookat reversal patterns, i.e. where a change of trend is indicated.

Perhaps the most famous of these is the Head and Shoulders pattern.

Here is the Dow weekly candlestick chart, showing how this topped out in 2007.

The general picture behind the Head and Shoulders is as follows: we start off with an uptrend, which proceeds as normal creating higher highs and higher lows.

The initial warning sign is a failure to create a higher high. This is the top of the “Right Shoulder” on the above chart.

Our technique then is to connect the two most recent lows. This isn’t a proper trendline (which should really connect three points) but instead is the “Neckline” of what is still only a potential Head and Shoulders pattern.

The Head and Shoulders pattern is completed by the break through the Neckline. Sometimes, the bulls will have a go at recapturing it, just as they did in the case of the Dow. What really strengthens the bear story, and is something you can look for, is if the broken Neckline then turns resistance. This happened with the Dow, making this a textbook case of the Head and Shoulders pattern.

Note that the Neckline was broken briefly on the retest; the danger of getting a false signal in this way is limited by placing certain conditions on what sort of a break is required. For example, demanding two consecutive closes above the Neckline (the “Two Day Rule”) would have prevented us from getting whipsawed by thinking that the Head and Shoulders pattern was being negated.

The above chart shows the standard method for constructing measuring targets with the Head and Shoulders pattern. Find the height of the head and then target that distance below the Neckline, measuring from where it broke (so we would target the red horizantal line in the above case).

The Inverse Head and Shoulders is based on the same idea, reversing a downtrend. Here’s Light Sweet Crude Oil changing direction in this way in 2007. Observe the broken Neckline providing support twice:

Now let’s look at Double Tops and Double Bottoms. The Double Top is formed when, in an uptrend, we run into resistance twice at the same level. We then fall through the intermediate low, completing the pattern and providing a sell signal. The broken Neckline can turn resistance, as it did with the DAX futures between 2007 and 2008; see the weekly candles chart below

Here’s an example of a Double Bottom, this time on a bar chart. It’s Vodafone at the bottom of the bear market in 2009, finding support at the same level twice, then beating the intermediate high and continuing the move.

In this case, our measuring target would be similarly calculated as with the Head and Shoulders patterns, i.e. the height of the pattern projected from the breakdown point. In this case, it’s 123.60 plus 12.40, i.e. 136.00.

Here’s an example of a Spike, or V-Reversal.

The Spike is really just the name for a market which reverses direction without giving any proper clue in tertms of hte preceding pattern that this was likely. This is the market turning “on a dime”, and the most difficult to trade.

The only clue at the top of the above chart that Wheat was turning was the “Harami Cross” candlestick pattern at the top (that’s the Doji contained within the range of the long green candle). When a Spike happens, our only recourse is to short-term signals such as candlesticks.

Finally, here’s a Saucer Bottom in Corn futures (the Saucer Top is the equivalent reversal of an uptrend). This is the opposite to the Spike, the price very gradually changing direction.

As technicians we much prefer to see a Saucer Bottom or Top than a V Reversal, with the slow move giving us lots of time to change skew.

Volume

One thing we haven’t mentioned much so far in this article is the role of volume in all of these patterns. Volume - the level of trading activity taking place over any period - is an essential component of technical analysis and an important part of pattern recognition.

The general principle is that volume accompanies movements with the trend. In terms of trend reversals, then, we should see the volume faltering during those final movements with the old trend, and eventually picking up as the new trend takes over.

In the case of the Head and Shoulders pattern, for example, volume should be weakest during the Third Shoulder, as enthusiasm for the dying bull market begins to evaporate.

A distinction can be made here between tops and bottoms. It is generally recognised that volume is not so important for tops as it for bottoms: at tops, market can “fall of their own weight” with buyers simply failing to show up, and volume not increasing.

Bottoms, on the other hand, generally involve mass participation, with active buyer enthusiasm being the main driving force behind the move.

Variations

There are several variations on the patterns mentioned here, in particular the Complex Head and Shoulders, the Triple Top and Triple Bottom. The Triple Top and Triple Bottom are fairly self-explanatory, while the Complex Head and Shoulders generally involves multiple shoulders on one or both sides of the Head.

The principles of volume analysis and the measuring techniques for these patterns are much the same as for the patterns already described here.

Conclusion

These patterns, without being infallible, help us to map out major changes in trend. They are generally medium and long-term patterns, with their significance and measuring targets in proportion to their size.

We incorporate these patterns into our daily analysis of the futures and FX markets. If you would like to sign up for a trial of our services, click here. For a free trial, click here.

Graham Neary MSTA (graham@futurestechs.co.uk)

Whether you are Spread Betting, trading CFD’s, or trading DMA Futures, you need an edge.

Trading is tough, and managing your emotions is one of the toughest things you will have to learn in order to make a success of trading for a living.

The human brain is wired up all wrong for trading, in fact.

By nature we will take a profit too early (GREED kicks in and we snaffle up the winnings on the table), whereas if a trade goes into the red we won’t get out. Instead we’ll start to cross our fingers and hope that it comes back. As the trade goes further into the red pride gets in the way even more, and we allow the situation to get even worse. We FEAR booking a loss, and seeing that loss crystallise on our account, so we sit tight even more (or even worse we add to the losing position), waiting for it to come back (actually HOPING it will come back), except it probably won’t.

“The first cut is the cheapest” is a phrase commonly used by Professional Traders. When I go into my professional clients’ trading rooms I see stickers on traders’ screens with phrases like “get out of bad trades” and “run the winners”.

To become a successful trader you need to rewire your brain almost, and teach yourself to have the DISCIPLINE to get out of bad trades early on, and run the good trades as long as possible.

How can you do this? By using the charts.

You can use Technical Analysis to:

• Trade in the direction of the trend.
• Look for buying or selling opportunities
• Set clear targets and stops, preferably with a decent risk/reward (ie put on trades knowing where you’re going to get out, and knowing that the possible loss will always be much less than the potential profit)
• Trade at the important technical levels, and not in “no mans land”.

All of this will help you to manage your emotions. Only the very best traders in the world can ELIMINATE emotion. Most of us will have to content ourselves with finding a way of REDUCING the emotional side of things in order to help us make better trading decisions.

If you’re a novice at trading and/or technical analysis you will need some help with this, and FuturesTechs can provide you with the levels to trade around, as well as offering market leading guidance and analysis on a daily basis.

Professional Traders have been using our service for years as an essential part of their daily routine.

YOU now have the chance to enjoy the same advice on a daily basis.

Click here to subscribe (your maximum commitment only has to be 1 month, or £57.50)

Or if you’ve never seen our service before, click here to request a no obligation Free Trial.

Have a good week,

Yours,

The FuturesTechs Team

Ichimoku Charts are a tool many traders swear by, and which we may occasionally use as an ingredient in our daily analysis. This article explains the basics.

The main source I’m using will be “Ichimoku Charts” by Nicole Elliott, an excellent book which you can purchase from the Global Investor Bookshop by clicking here.

Part I: Construction

We start with the humble Japanese candlestick chart, the type that you will see on our reports every day. Replete with patterns, it is the building block of Ichimoku. Note that we generally only use daily charts for Ichimoku, although that’s more a product of convention than for any other reason.

Next, we add some special moving averages, with periods nine and twenty-six. These don’t use the close, as would normally be used in the West, but the “mid-price”, i.e. the price halfway between the high and the low of the period in question.

This mid-price is used to calculate each of the Ichimoku lines (except one) and is a convention passed on by the Japanese.  Similarly, the choice of 26 for the longer moving average is based on the length of the standard Japanese business month.

Now for some terminology: the nine-day moving average is called Tenkan-sen (the “Conversion Line”) while the twenty-six-day moving average is Kijun-sen (the “Base Line”). We can use these like we would any other pair of moving averages (see the previous blog tutorial).

Next, we add the defining feature of Ichimoku charts: the cloud. Here’s the complete picture:

The pink line at the top of the shaded cloud area in the centre of this chart is called Senkou Span A (”Leading Span A”), and is calculated as the average of the two special moving averages we had already added to the chart. As the average of two moving averages, it is thus a kind of weighted moving average, giving greater emphasis to the recent prices.

The other line forming the cloud is called Senkou Span B and is the average of the highest price of the last 52 days and the lowest price of the last 52 days. Since we aren’t necessarily expanding the 52-period range all the time, this regularly stays constant day-to-day (you can see how it has flat periods in the above chart).

Both of these lines are plotted 26 days ahead of the market. This means that for the current day, the positions of these lines are calculated using the data available 26 days ago. In other words, the current price is compared with what the weighted moving average and the longer-period range were 26 days ago, not what they are now.

Note also that the prices used here are the Japanese “midpoint” prices, not the close as might be expected in Western technical analysis.

The observant will notice that apart from the moving averages and the cloud lines, there is another line included in the chart above. This is the brown line (colours may vary) which is at the top of the chart during the middle of the pictured timeframe, and is the Chikou Span (”Lagging Span”). It is simply the daily close, plotted at a delay of 26 periods - hence why it “lags”. Each candle’s close, therefore, is plotted against the candle 26 days previously. Note that the Chikou Span is the only line in the Ichimoku chart which uses the closing price in its calculation.

Part II: Analysis

We can take Ichimoku Analysis to almost any level of depth, but the key ideas are as follows:

A. Moving Averages

These are used like the ordinary moving averages are used in traditional Western analysis: as support and resistance levels, getting a bullish message if the price is above the moving averages, or bearish if it is below. Also check for bullish/bearish crossover signals as the averages change position (see the previous blog article). A bullish crossover signal is stronger if it is seen above the cloud, while a bearish crossover signal is stronger if it happens below.

B. Ichimoku Cloud

We are bullish when the price is above the cloud, bearish when it is below.

We also use the cloud lines (Senkou Spans A and B)  as support/resistance levels, getting reversal signals when they are broken.

The width of the cloud doesn’t really matter, except insofar as a thicker cloud means that it will take longer for us to reverse skew by a breakout through the opposite side.

On a related note, the colour of the cloud doesn’t really matter either - it just tells us which line of the cloud is on top. In the above chart, red means that Senkou Span A is on top, while blue means that Senkou Span B is on top.

The Dow chart above would have had us thinking bear thoughts first of all as the price dipped below the cloud. Since it didn’t manage to get a close below it, however, we probably wouldn’t have sided with the bulls outright, still waiting for a clean move away from it. When the price soon rallied back above it, we could then have taken an outright bullish skew.

Hopefully, this skew would have been maintained for most of the period shown above. Of course, the candlesticks did give bearish reversal warnings at various points, and there were a couple of short-term corrections. The solution might be to use the candlestick patterns for specific short-term entry and exit points, while using Ichimoku for an insight into the big picture. For those who are investing for the medium to long term, they might ignore the short-term candlestick patterns completely, or use them merely to make small adjustments to their positions or as a minor piece of evidence relative to the longer-term Ichimoku cloud.

The lessons from this are familiar: use more than one indicator, be flexible, and always act appropriately with respect to your investment or trading timeframe.

C. Chikou Span

This last piece of the jigsaw is simply the close mapped 26 days previously. With this, we can check if the recent close is above or below the candle of 26 days ago, and use that as another piece of evidence.

The Chilkou Span is quite easily recognisable, no matter what colour it is on your chart, since it is just the line chart at a lag. We can see it spike upwards in the above when this market broke to the upside in September. It’s not complicated, of course, but simply knowing where you are in relation to the price last month is a useful piece of the jigsaw. It’s bullish if the Chikou Span is above the candle of 26 days ago, or bearish if it’s below the candle 26 days ago, and we get bullish and bearish signals as they change position.

Part III: Conclusion

We’ve explained Ichimoku charts in a nutshell. The cloud is the most important, and the most unique feature, with two lines: Senkou Span A, a moving average which gives greater weight to the more recent prices, and Senkou Span B, the midpoint of a long-term range. We’ll tend to be bullish above the cloud, and bearish below it. We’ll also monitor the action of two special moving averages and the lagged closing price (Chikou Span). There are a host of signals to watch out for, and our conviction to buy or sell is strongest when all of the signals are aligned.

For a more detailed exposition of Ichimoku Charts, see “Ichimoku Charts” by Nicole Elliott. To read the daily technical analysis we produce at FuturesTechs, sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)