Determining Profit Targets with Ichimoku Trend Trades

[RichardCox 10]

The Ichimoku Kinko Hyo is technical indicator used in price analysis which helps traders to gauge changes in momentum and to stop potential areas of support and resistance. The indicator itself is made up of 5 individual lines, called the Kijun-Sen, Tenkan-Sen, Chickou Span, Senkou Span A, and Senkou Span B. The main purpose of the Ichimoku Kinko Hyo is to allow traders to quickly identify trend direction, underlying momentum and potential turning points (support and resistance) in future price action. One thing that separates Ichimoku analysis from most other forms of price assessment is that it can be used as a stand alone tool (without signals from other indicators).

 

The word "Ichimoku" is Japanese and loosely translates to "one look" or “at a glance,” and this is highly important for understanding what exactly the indicator aims to accomplish. While the visual appearance of the indicator looks complicated when first introduced, most of the mystery is quickly cleared up once each of the 5 lines are understood. The Ichimoku indicator is meant to give traders the ability to quickly assess key elements at work in the market, literally with a single glance at your price charts. Once we have a basic understanding of the Ichimoku indicator, we can start to look at some specifics for managing trades. Here, we will look at one of the most critical elements of position management: identifying profit targets.

 

Managing Parameters with a Diverse Trading System

 

Ichimoku offers a very diverse trend following trading system which can aid traders in finding places to enter and exit positions, and these will generally be found as trends are changing course. When trades are proceeding in a favorable (profitable) direction, it is important to have a good idea of when to close the position so that those initial profits are not given back if prices show a sharp reversal. The profit targets that are outlined at the beginning of any trade need to show certain relationships with the potential for risks (risk to reward ratio), and this area is specifically defined by the level used for stop loss placement.

 

Generally, traders need to see a risk to reward ratio of at least 2:1 (or 3:1) before considering that trade as being financially viable. Ichimoku is great for determining areas for stop losses but when looking for levels for profit exits, traders can use price pivots as a way of determining when positions should be closed. When developing an Ichimoku strategy for exiting profitable trades, it is important to look for ways that allow you to capture as much of a trending move as possible.

 

It should also always be remembered that exit strategies are not static and can be altered as the trade progresses. One useful way to alter trades in these ways can be to use methods of scaling, which essentially means that the position is exited in parts (and not all at once). For example, if we are in a forex trade that is three lots in size, we might choose to close one of those lots while leaving the other two lots to run further. This method allows traders to capture small profits while still maintaining exposure to the original position.

 

Adding Pivot Points

 

When dealing with Ichimoku strategies, Pivot Points can be added to buy (for example, prices breaking above the cloud) and sell signals (prices breaking below the cloud). In the first pictured example, we can see a situation where a strong buy signal is being generated: Price activity is seen rising above the Ichimoku cloud, the Chikou Span is seen above the cloud, and the Tenkan crossover underneath the Kijun line in a space that is above the cloud:

 

Now that we have an example of a buy signal, we need to know how to manage the position as it runs into profitable territory. Here, it should be remembered that Pivot Points are measured using the high, low and close of the previously charted period. The numbers associated with the Pivot Point are calculated by adding the high, low, and close, and dividing this number by three. Support and resistance levels that are created using these points are based on variations of these 3 levels, and these areas can be used for exiting buy positions (resistance) and for sell positions (support). Pivot Points do not need to be calculated manually, as this is a common feature of most regularly used trading stations.

 

Combining Signals

 

While there are many Ichimoku traders that use the indicator by itself, there is nothing to say that other signals cannot be added and used for determining the best time to exit profitable positions. After adding Pivot Points to the Ichimoku chart, trader can look for prices to move to the next important support level (for short positions), or resistance level (for long positions). Traders can then opt to scale out of positions (taking partial profits) and move stop losses on the remaining exposure to the break even point. This ensures a profitable trade that still has the opportunity to run further if the favorable trend movements continue. Alternatively, positions can be closed entirely, removing the risk of giving back previously accumulated gains.

 

When looking to add Pivot Points to your charts, there might be a few different options, but the most commonly used measurement is the “Classic” Pivot Points (many traders view these as being most reliable). As a strategy measure, many traders will use monthly Pivots for trades made using daily charting time frames. These wider time frame Pivots tend to have better results as they are more commonly viewed.

 

In the second attached graphic, we can see the setup for a sell position, with the stop loss placed just above the top of the cloud (a significant point of technical resistance, the breach of which would suggest a bullish trend change). On the chart, this resistance level is marked in green. The basis for the bearish bias can be seen in the price as it breaks below the cloud along with the failure seen in the Ichimoku lagging line (shown in the yellow circle). In order for the trade to be acceptable, we will need to see a profit target at least two times the pip value of the distance between the entry point and the stop loss. In this chart example, the profit target is placed in the low 0.8000s, at a Pivot support level in the path of the larger trend. This is shown with the second (lower) red line. Notice, however, that an initial profit target can be found at the first Pivot support (the first red line). This area can be used to scale out of some of the bearish position (at a profit) and to move the stop loss for the remainder of the position to break even.

 

Trade Summary: Rules for Setup and Management

 

• First, prices should be seen below the Ichimoku cloud
  
• The trigger line (shown in black) crosses below the Ichimoku base line (shown in blue)
  
• The lagging line drops below the price
  
• Future price cloud shows trend direction (downward for bearish trades, upward for bullish trades)
  
• Pivot support levels used as bearish profit targets, Pivot resistance levels are used for bullish profit targets
  
• Consider scaling when using multiple Pivot Points