Forex trading can be an interesting way to play the markets. But trading currencies can be risky and confusing, especially if you’re unfamiliar with the strategies that are often discussed within forex trading.
There are a few basic forms of Forex trades-long and short. But once again, if you are unfamiliar with reading the markets, choosing which trade form may work for you could be super-challenging.
With so many different strategies, you may be inundated with information. Perhaps one of the most popular might be the Ichimoku price theory. This is one part of the Ichimoku trading system, which includes the time theory, wave theory, and the theory we will be looking at in this article.
What Is The Ichimoku Price Theory?
This theory was first published in the 1960s by a journalist in Japan named Goichi Hosoda. Before this, most traders utilized the standard candlestick chart, but with the introduction of this system, they were given more data which allowed for a more in-depth analysis of the markets.
The Ichimoku price theory takes a collection of indicators and analyzes them to allow the trader to find the support and resistance levels along with the direction said currencies are trending.
Utilizing several different calculations, the theory produces several averages and places them on a chart. These points, along with the calculations derived from the formula, produce a shaded area known as the Ichimoku cloud (Mitchell, 2021).
Basic Formulas & Price Measurements
When it comes to the formulas for calculation, there are three main price measurements that can be used when choosing to analyze the markets with the Ichimoku price theory. Here are the three price measurements (2nd Skies Trading, 2013):
- V calculation = B + (B – C)
- N calculation = C + (B – A)
- E calculation = B + (B – A)
In order to use these calculations, you have to understand the indicators first. There are three main types of indicators- equilibrium lines, Ichimoku cloud, and lag. When you start using the Ichimoku price theory, the very first indicators that you will look at are the equilibrium lines. These can be easily broken down into a fast and slow line.
Many traders will use these two lines and their average to predict not only momentum and pivot but also support and resistance.
This shaded area between the two lines is what can be called the Ichimoku cloud. This section is an indicator used when it comes to the average price over a specific time period. Understanding this metric can be important when a trader is looking to predict where the currency or stock is going to go in the future.
The last line used in the Ichimoku price theory is what can be called the lag line. This metric can be used not to trade but rather to analyze patterns and ensure the trend the traders predict is accurate.
The line takes the most recent closing price and projects what those prices would have been before this moment. This is why it’s perfect for analyzing and confirming trends.
How To Use The Signals
Once you have used the Ichimoku price theory and analyzed the numbers and charts, you will look at three different things in order to use the signals to your advantage.
The first is going to be a trend. By utilizing the equilibrium lines, you’ll be able to analyze the trend and the direction it is headed, and the rate of change. This will allow you to make smart decisions when it comes to your trades.
After that, you’re going to want to look at both the equilibrium lines and the cloud in order to really be able to analyze the support and resistance of these potential trades. When doing this, you want to look for a flat and long cloud that will lead you to stronger support and resistance.
Lastly, you’re going to look at volatility. In order to do this, you’re going to look at the width of the cloud itself. If you have a wide or deep cloud, this will lead to increased volatility and an uncertain gross. However, on the other hand, a narrow flat cloud will lend itself to being analyzed as a more stable market to complete your trade.
A Quick Summary
Though there are more metrics in this system than the traditional candlestick chart, it offers a broader and more comprehensive look at the markets. This will allow any Forex trader to be able to predict trends and make smart trades that yield better returns. With a little bit of practice, every trader can master this system and reap its benefits.