$EURUSD Trade Update
On 12/1 we entered our short position in EUR/USD at 1.5077. On 12/4 we got a topping tail and the bears began what has turned into a nice move to the downside. The goal is to ride this trade to an ultimate target below the March lows at 1.2455. We should be getting close to a pullback from the oversold daily chart which should set up another nice shorting opportunity. From a risk management perspective I’m going to try something new in hopes of adding a new tool to my arsenal. Below is a daily Ichimoku chart of the EUR/USD. I have never personally used this type of charting to manage a trade but I spent the weekend looking at quite a few charts and I’ve been impressed with it’s trend following abilities.
The yellow line on the chart is the Tenkan Sen (“Turning Line”) and it measures the average of price’s highest high and lowest low for the last 9 days. Using the average high and low factors in any recent volatility, or lack there of, as opposed to using a simple moving average that only uses the closing price.
The blue line is called the Kijun Sen (“Standard Line”) and it uses the same calculation as the Tenkan Sen except we use 26 days instead of 9.
The purple line is called the Chikou Span (“Lagging Line”) and it is nothing more than the current close shifted 26 days in the past. The purpose is to quickly see how today’s price action compares to the price action of 26 days ago, which helps in determining the trend.
Last but not least is the Kumo (“Cloud”). Above the Kumo is bullish, under the Kumo is bearish and inside is neutral. The boundries of the Kumo act as strong support/resistance and I found it facinating how often these areas line up with other methods for calculating support/resistance such as pivots and Fibonacci levels. The thicker the Kumo the stronger the support or resistance. The Kumo is also projected 26 days into the future which provides another tool for forecasting.
There really aren’t a lot of resources on the subject of Ichimoku charting but I found this site helpful if you’re interest in more info.
There are many different ways you can use Ichimoku in your trading plan. The method I am going to employ utilizes three different areas of the Ichimoku chart: the Tenkan Sen, the Kijun Sen and the Kumo. Since I am already short EUR/USD I will use these areas to manage the trade and re-enter if stopped out. The Tenkan Sen is currently the first focus area since it is closer to price than the other two. When price breaks above this line I will exit 1/3 of my position. Before I go much further let me define what a break means in my trading plan.
This approach can be used for any indicator that is drawn on a price chart. The goal is to avoid being head-faked and stopped out too early. The example in figure 1 is on a long trade. If price breaks below the Tenkan Sen (yellow line), or whatever indicator you are using, you don’t exit the trade right away. The bar labeled ’1′ is the first bar that breaks below the Tenkan. Now we have an area that if violated we take our stop, which is right below bar number 1. As you can see bar number 2 trades down to the low of bar 1 but never violates it. It’s not until bar number 3 does price finally hit our stop. A lot of the time the stop is never hit and we are able to ride the trade much further as you can see in figure 2.
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| Figure 1 | Figure 2 |
So back to the trading plan. If prices breaks the Tenkan (yellow) per the above rules we will cover 1/3 of the position. The same goes for the Kijun (blue), a break of this line and we exit another 1/3. The final 1/3 is closed when price breaks the farthest side of of the Kumo (cloud). Until the trade is fully exited by a break of the Kumo the plan calls for adding back any position that was previously stopped out using a combination of Ichimoku and swing highs. More on that later…
To make things even easier I’ve modified the Ichimoku indicator in the thinkorswim platform to place arrows at these breaks as well as trigger an alert. Here is the code. Copy and paste it into a new indicator. If you notice any bugs let me know.
Filed Under: Forex • Trading Education
