Written By Tyler Yell, Forex Trading Instructor
Article Summary: Trends that are bullish by their very nature tend to appear overbought and the bearish trends appear oversold. However, in the heat of the moment, it is often difficult to decide if price is too far away from a good entry or not. This article will show you in the light of Ichimoku how to find if the entry you’re considering is over extended. Knowing this information will help you limit the painful experience of buying at the top or selling at the bottom.
New traders often fear entering a trade as the move has peaked. As you can imagine, this healthy fear can help you being cautious and on the lookout for when a move has overextended so as to make the entry time no ideal. Please understand that an overextended move doesn’t mean that the trend will full reverse or is done, but rather that a correction is likely and we should avoid entering on an extension.
2 Step Process for Entering a Trade with Ichimoku
This checklist will let us know if we’re looking at a high probability buying opportunity (opposite applies for sell trades):
-Price is above the Kumo Cloud
-The trigger line (black line on my chart) is above the base line (baby blue line) or has crossed above
-Lagging line is above price action from 26 periods ago (above the cloud is the additional filter)
-Kumo ahead of price is bullish and rising (displayed as a blue cloud). This is currently not fulfilled.
Once we find an entry as highlighted on the timeframe of our choosing by the rules above, we can turn to the Average True Range (ATR) to keep us from entering on an extended move. The ATR measures the average range of a fixed number of periods to help you understand current volatility. Therefore, if the ATR is 100 pips over the last 14 periods, then we can expect a move in the neighborhood of 100 pips today.
Learn Forex: The Trend Is Great If You’re Already in but the Risk Profile Is Too High to Buy Now
http://media.dailyfx.com/illustratio..._Picture_2.pngPresented by Marketscope ChartsIt’s All about Risk: Reward or Risk Adjusted Entries
The main reason why we want to focus on ATR is due to the importance of risk to reward ratios, Quite simply, if price is a multiple of 2x the ATR from the preferred and entry we’re focusing on the Base Line, then it’s likely that price is due for a quick correction which we could then provide an entry.
To elaborate on this concept, it’s important to understand that we don’t know what will happen tomorrow but we must put the odds in our favor as much as possible and know what we will do when the future unfolds. If the daily ATR over 14 periods (standard average) is 150 pips and we see price 300 pips away (2XATR) from the base line (key timing line when trading Ichimoku) then we can wait for a correction before looking to enter the trade. At the level of 2X ATR on the time period you’re focused on, you’ll often notice profit taking in the direction of the trend as the trend stalls temporarily.
Learn Forex: 200% of ATR Helps Us See When Price Is Further Than We Prefer For a Safe Entry
http://media.dailyfx.com/illustratio..._Picture_6.pngPresented by Marketscope ChartsIchimoku Daily Chart Trade: Buy USDJPYon Base line cross off Bullish Hammer Candle at Cloud Base
http://media.dailyfx.com/illustratio..._Picture_7.pngPresented by Marketscope ChartsIchimoku Trade: Buy USDJPY near 99.34 as price would be crossing above the Base Line as all other rules above are aligned on the chart
Stop: 97.50 (bottom of the cloud and recent price action wick)
Limit: 103.50 (as of current price, sets our limit greater than our risk in pips)
The rules for a buy trade have been listed above if you need a refresher of what constitutes a high probability trade. As some of you know, Ichimoku was created as a way to understand when a trend was present and as a complement to candlestick analysis.
This is a heavy news week for JPY so keep an eye on the economic calendar if you prefer to incorporate fundamentals with your trading.
Happy Trading!
--Written by Tyler Yell, Trading Instructor
