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Trading with ICHIMOKU September 8, 2009

Posted by ilmusaham in Shared Lessons Learned, Trading Resources, Useful Tools, from CLUB.
Tags: , , ,
2 comments

Lesson from Djoni Agus:

  • June 10th 2008:  STRONG SELL SIGNAL
  • March 18th 2009:  STRONG BUY SIGNAL, golden cross above the Kumo
  • Sept 07th 2009: WEAK SIGNAL, golden cross still above the Kumo

ICHIMOKU_JKSE_JUNE_1008_MAR_18SEPT07

Ichimoku AFL, source: Amibroker AFL Library

—

_SECTION_BEGIN(“IchimokuBrian20080624″);
/*
ICHIMOKU CHART
A bullish signal occurs when the Tenkan-Sen (RED line) crosses the Kijun-Sen (BLUE line) from below.
Conversely, a bearish Signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above.
Support and resistance levels are shown as Kumo (or clouds). The Kumo can also be used to help identify
the prevailing trend of the market. If the price line is above the Kumo, the prevailing trend is said to be up,
while if the price is below the Kumo, the prevailing trend is said to be down. The default colour here for the clouds is
light blue – but the hue, etc, parameters can be adjusted to suit the user’s display.
The theory is that the bullish signals are strong when the TL,SL cross occurs above the cloud; it is medium within the
cloud, and weak if it occurs below the cloud. These are shown here as green solid up arrows, green up triangles and hollow
indigo up arrows respectiveley.
Conversely, the bearish signals are said to be strong when the cross is below the cloud and weak when above. These signals
are plotted as down red arrows or triangles, or brown hollw down arrows.
As an attempt at clarity on a cluttered plot, all signal arrows, etc are plotted within the clouds (rather than near the
candles as is normal). The user can also toggle between a candle plot or a line plot of the close price, to reduce
the clutter somewhat.
A final feature of the Ichimoku chart is the VIOLET line, or Chikou Span (or Lagging Span). It is said that this line
indicates the strength of the buy or sell signal. If the Chikou Span is below the closing price and a sell signal occurs,
then the strength is with sellers, otherwise it is a weak sell signal. Conversely, if a buy signal occurs and the Chikou
Span is above the price, then there is strength to the upside. These considerations could  be coupled with the other
signals, if desired, but this has not been done here.
Final Comment: This program produces quite a pretty graph – but I have not so far been impressed with the signals!
I have seen many weak signals followed by strong moves and strong signals followed by weak moves. Typical of technical
analysis I guess. If anyone finds the Ichimoku approach useful I would be keen to hear about it.
*/
SL = ( HHV( H, 26 ) + LLV( L, 26) )/2;// standard, base, or kijun-sen line
TL = ( HHV( H, 9 ) + LLV( L, 9 ) )/2;// turning, conversion, or tenkan-sen line
DL = Ref( C, 25 ); // delayed close price, or chikou span
Span1 = Ref( ( SL + TL )/2, -25 ); //Span1 and Span2 define the clouds
Span2 = Ref( (HHV( H, 52) + LLV(L, 52))/2, -25);
CStyle = ParamToggle(“Showcandles?”,”N|Y”);//Choose Candle or Line for Price plot
hue = Param(“Hue”,140,0,255,1);
sat = Param(“Sat”,100,0,255,1);
bri = Param(“bri”,220,0,255,1);
MaxGraph = 8;
Refline = (Span1 + Span2)/2;
Graph0 = Refline;
Graph0Style = 16;//No line plotted, used as a reference line for arrows etc.
if(Cstyle )
Plot(C,”Price”,colorBlack,styleCandle);
else
Plot(Close,”Close”,colorBlack,styleThick);
Plot(SL,”SL”,colorBlue,styleThick);
Plot(TL,”TL”,colorRed,styleThick);
Plot(DL,”DL”,colorLime,styleThick);
PlotOHLC(Span1,Span1,Span2,Span2,”Cloud”,ColorHSB(Hue,sat,bri),styleCloud);
above = IIf(TL>Span1 AND TL>Span2,1,0);
within = IIf(TL>Span1 AND TL<Span2,1,0);
below = IIf(TL<Span1 AND TL<Span2,1,0);
Buy = Cross(TL,SL) AND (DL>Close);
Sell = Cross(SL,TL) AND (DL<SL);
StrongBuy = Buy AND above;
MediumBuy = Buy AND within;
WeakBuy = Buy AND below;
StrongSell = Sell AND below;
MediumSell = Sell AND within;
WeakSell = Sell AND above;
IIf( (StrongBuy),PlotShapes(shapeUpTriangle*StrongBuy,colorGreen),0);
IIf( (MediumBuy),PlotShapes(shapeUpArrow*MediumBuy,colorGreen),0);
IIf( (WeakBuy),PlotShapes(shapeHollowUpArrow*WeakBuy,colorIndigo),0);
IIf( (StrongSell),PlotShapes(shapeDownTriangle*StrongSell,colorRed),0);
IIf( (MediumSell),PlotShapes(shapeDownArrow*MediumSell,colorRed),0);
IIf( (WeakSell),PlotShapes(shapeHollowDownArrow*WeakSell,colorBrown),0);
_SECTION_END();

Parabolic SAR Tutorial April 21, 2008

Posted by ilmusaham in Trading Resources.
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The Parabolic SAR (Stop And Reverse) was developed by J. Welles Wilder Jr. and is described in his book New Concepts in Technical Trading Systems.

This is a time/price indicator, first introduced by Wilder and the term ‘parabolic’ comes from the shape of the curve (resembling a parabola) created on the chart.

Sometimes called a reversal system, the Parabolic SAR allows the trader to follow the dots (stop and reverse level) in an upward or downward trend until a SAR point is reached and the trend reverses.

It is primarily used in trending markets and is based on always having a position in the market. This is where the term ‘SAR’ comes from – stop and reverse.

The indicator may also be used to determine stop points and to estimate when to reverse a position and take a trade in the opposite direction.

Parabolic SAR is more popular for setting stops than for establishing direction or trend. Wilder recommended establishing the trend first and then trading with Parabolic SAR in the direction of the trend.

The interpretations in brief are -

  • If the trend is up, buy when the SAR moves below the price. This will be the stop level below the current price, which will move up every day (if trading daily bars) until activated (when price falls to the stop level).
  • If the trend is down, sell when the SAR moves above the price. This will be the stop level above the current price, which will move down every day until activated (when price rises to the stop level).

Example of what SAR looks like.
Forex

How it works

The first entry point on the buy side is considered when the most recent high price has been broken and it is then that the SAR will switch to under the most recent low price.

As the price rises the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. This is the acceleration factor. The SAR level starts to move a little faster as the trend develops and the dots soon catch up to the price action.

Presuming there is an uptrend, the dots (SAR Level) will be below price. As time goes on the distance between the price and the SAR level will decrease, until eventually the market will pullback and touch the SAR level. When this happens the SAR Level (dots) will move to above the price.

The main drawback to this indicator is that although it works extremely well in markets with a dominant trend, it fails miserably in horizontal or choppy markets.

Another downside is that when price does not develop consistent trends, it creates a jerky SAR which makes it difficult to enter and exit.

The following example illustrates the above characteristics –

Technical Analysis

It is beyond this lesson to give the exact calculation of the acceleration factor and it is not really necessary to know the formula as most charting services now incorporate the system in their indicator range.

My Use Of SAR

So far so good. The indicator is simple to trade and is very visual so it’s easy to know when you should be short or long. If the SAR points (dots) are above the market you should be short and if they are below the market you should be long.

Here’s the problem as I mentioned before, as a stand alone method it does not perform well.

Now you may be asking, if there is so much whipsaw and the method isn’t reliable, why mention the indicator at all? Good question and here are two reasons I still like to look at the indicator.

The indicator can be very effective if a filter of some sort is used. In the example below of the eur/jpy, I have used a MACD as a filter. If we were long the market, then only long signals would be taken and the short signals ignored as long as the filter (MACD in this case) has given a buy signal and remains in buy.

If a short signal is triggered but the filter (MACD) remains in buy, you could close the position and wait for the next long signal. The reverse is true for short positions.

Online Trading

You could use any oscillator you feel comfortable with or even trend lines.

Another very good use of SAR indicator is for placing your stop loss. Sometimes it can be very difficult to find a good place to put your stop.

With the SAR indicator you will always know exactly where to place a stop and because it accelerates every day it helps you lock in profits.

It also gives the move enough room for market corrections without taking you out of the position.

I like this particular method if I have a long-term position, which I only want to check once a day. I can quickly check how the position is performing and then move my stop accordingly.

I am sure you can find many other uses for the SAR indicator and its well worth playing around with the parameters to see if it can be added to your trading arsenal.

Good Trading

Mark McRae

Source: traderssecretcode.com

Pivot Point Trading Tutorial April 9, 2008

Posted by ilmusaham in Trading Resources.
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You are going to love this lesson. Using pivot points as a trading strategy has been around for a long time and was originally used by floor traders. This was a nice simple way for floor traders to have some idea of where the market was heading during the course of the day with only a few simple calculations.

The pivot point is the level at which the market direction changes for the day. Using some simple arithmetic and the previous days high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.

The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.

Before I go into how you calculate pivot points, I just want to point out that I have put an online calculator and a really neat desktop version that you can download for free HERE

If you would rather work the pivot points out by yourself, the formula I use is below:

Resistance 3 = High + 2*(Pivot – Low)
Resistance 2 = Pivot + (R1 – S1)
Resistance 1 = 2 * Pivot – Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot – High
Support 2 = Pivot – (R1 – S1)
Support 3 = Low – 2*(High – Pivot)

As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

A perfect set would be for the market to open above the pivot level and then stall slightly at R1 then go on to R2. You would enter on a break of R1 with a target of R2 and if the market was really strong close half at R2 and target R3 with the remainder of your position.

Unfortunately life is not that simple and we have to deal with each trading day the best way we can.

I have picked a day at random from last week and what follows are some ideas on how you could have traded that day using pivot points.

On the 12th August 04 the Euro/Dollar (EUR/USD) had the following:
High – 1.2297
Low – 1.2213
Close – 1.2249

This gave us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

Have a look at the 5 minute chart below

pivot point

The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3.

There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.

The Breakout Trade

At the beginning of the day we were below the pivot point, so our bias is for short trades. A channel formed so you would be looking for a break out of the channel, preferably to the downside. In this type of trade you would have your sell entry order just below the lower channel line with a stop order just above the upper channel line and a target of S1. The problem on this day was that, S1 was very close to the breakout level and there was just not enough meat in the trade (13 pips). This is a good entry technique for you. Just because it was not suitable this day, does not mean it will not be suitable the next day.

pivt point channel

The Pullback Trade

This is one of my favorite set ups. The market passes through S1 and then pulls back. An entry order is placed below support, which in this case was the most recent low before the pullback. A stop is then placed above the pullback (the most recent high – peak) and a target set for S2. The problem again, on this day was that the target of S2 was to close, and the market never took out the previous support, which tells us that, the market sentiment is beginning to change.

pivot point pullback

Breakout of Resistance

As the day progressed, the market started heading back up to S1 and formed a channel (congestion area). This is another good set up for a trade. An entry order is placed just above the upper channel line, with a stop just below the lower channel line and the first target would be the pivot line. If you where trading more than one position, then you would close out half your position as the market approaches the pivot line, tighten your stop and then watch market action at that level. As it happened, the market never stopped and your second target then became R1. This was also easily achieved and I would have closed out the rest of the position at that level.

pivot point brakeout

Advanced

As I mentioned earlier, there are lots of ways to trade with pivot points. A more advanced method is to use the cross of two moving averages as a confirmation of a breakout. You can even use combinations of indicators to help you make a decision. It might be the cross of two averages and also MACD must be in buy mode. Mess around with a few of your favorite indicators but remember the signal is a break of a level and the indicators are just confirmation.

pivot point advanced

We haven’t even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.

Good Trading

Best Regards
Mark McRae