Intraday Trading: Ichimoku and the ATR Indicator
There is the old trading parable about fishing and revenge. You are out at the fishing hole. The big one gets away, and you throw. You will run out of money before a guru runs out of indicators…
Michael Covel
Trend Following: Learn to Make Millions in Up or Down Markets
A dozen familiar trading pairs, a summary of the latest news, a cup of freshly brewed coffee, and then some. This is how the average morning of the intraday trader starts off. The tactics of intraday trading are rightly considered some of the most difficult, like scalping, which requires the maximum involvement of the trader and does not tolerate rash decisions made on emotions.
The basic principle of intraday trading is that all positions are opened and closed within one day. As a rule, intraday traders work with leverage on the short time frame with familiar pairs and use stop-loss and take-profit orders. Some traders who work with charts are guided by candlestick analysis. After hundreds of hours of practice, intraday traders can simply glance at the most significant combinations. Others make forecasts based on the divergence of the candlestick chart and the MACD indicator, while others yet follow horizontal support and resistance levels.
However, there are often no significant levels of support and resistance within the framework of a daily trading session, and then the trader’s task is to find local points from which the market will go up or down. In the case of intraday trade, it doesn’t matter what the investment attractiveness of an asset is in the long run, since the graphical or technical analysis of a specific graph comes to the fore.
Ichimoku Indicator — Instant Presentation of the Balance Chart
The Ichimoku Indicator (Ichimoku Cloud or Ichimoku Kinko Hyo) is an indicator well known to many traders, but not often used in intraday trading. And that’s a pity, because it’s one of the few indicators that displays the market trend, support and resistance levels, and entry and exit points on the same chart.
“Ichimoku Kinko Hyo” can be translated as “an instantaneous representation of the balance of the chart.” It was developed by Japanese analyst Hosoda (Ishimoku Sanjin), who, in the 1930s, developed this indicator to analyze the stock markets. Even though, initially, this tool was intended for slower markets, it is also effective on modern exchanges.
The Ichimoku indicator combines a number of approaches for forecasting price movements, where each line is the middle of the price range for a certain period of time.
- Tenkan-sen (conversion blue line): shows the average value of the price for the first period of time (usually period 9), defined as the sum of the maximum and minimum during this time divided by two.
- Kijun-sen (the main dark red line): shows the average value of the price for the second period of time (counted over 26 periods).
- Senkou Span A (leading span 1 — dark green): shows the middle of the distance between the previous two lines, shifted forward by the value of the second time interval (26 periods).
- Senkou Span B (Leading Span 2 — light red): shows the average price value for the third time interval, shifted forward by the value of the second time interval (52 periods).
- Chinkou Span (retarded swing — light green): shows the closing price of the current candle, shifted back by the value of the second time interval.
The distance between Senkou Span A and Senkou Span B is shown on the graph in green or red and is called a “cloud.”
- If the price of the asset is in the “cloud,” the market is considered non-trend; Senkou Span A and Senkou Span B form the support and resistance levels.
- If the price is above the cloud, the upper line forms the first support level, and the second one forms the second support level.
- If the price is under the cloud, the lower line forms the first resistance level, and the upper one forms the second.
- If the price breaks the bottom line of the cloud down, it is a signal to sell. If the top line is up, then it’s a signal to buy.
Kijun-sen (the main dark red line) shows the market movements. If the current price is above this line, the uptrend is likely to continue. The price crossing this line indicates a possible change in the market trend.
Tenkan-sen (conversion blue line) is used as an indicator of the market trend. A rising line indicates a bullish trend, a fall indicates a bearish trend, and a flat indicates that the market has entered the channel.
The intersection of the Kijun-sen (dark red) and Tenkan-sen (blue) lines is often used as opening or closing points for positions. If Tenkan-sen crosses Kijun-sen, it is a signal to buy, and if the opposite happens, it’s an indicator to sell.
All indicators built on averaging values linearly depend on the time frame for which they are built. With a decrease in the timeframe, the predictive ability of such indicators decreases because small time frames reflect short-term price changes, which are filled with market noise, and averaging data with a greater measure of chaos generates mixed results. Thus, given that the Ichimoku indicator consists of moving averages, one should exercise extreme caution when using it with small time frames.
In intraday trade, this indicator can be used effectively as a filter for trend movements. In a large timeframe, Ichimoku helps filter out false signals on the minute chart. For example, if the price on the hourly chart is higher than the Ichimoku (up-trend) dark red lines and a sell signal is generated on the minute chart, the trader should skip the deal.
In addition to the timeframe, there is another important factor that influences the predictive ability of moving averages: volatility. In a flat market, the frequency of moving average false signals increases. Thus, in order to increase the ratio of winning signals, one needs to filter only the zones of the volatile market. There are a number of indicators for this, but the Average True Range is considered to be one of the simplest and most effective.
ATR — A Filter For Volatile Market Zones
The Average True Range (ATR) is based on the average span of a candle over a certain period. The indicator shows the change in asset volatility without taking into account the direction of price movement. However, this is enough to get an idea of the current state of the trend.
If the market is in a flat state, the indicator shows low values, and the indicator begins to grow sharply at the beginning of a trend. Oftentimes, the ATR is at its maximum values at the end of the trend, which is associated with panic on the exchange.
According to a number of traders, combining Ichimoku and the ATR begets high efficiency. When trading by trend, you should obey two rules when entering a trade on a small time frame:
- The ATR must be above the threshold value, which signals market volatility.
- The Ichimoku indicator should be in the trend range.
As displayed in the graphic, the signals in the Xena Exchange terminal often duplicate the information provided by the indicators. However, we recommend using several tools for different timeframes at the same time to filter out false signals, as well as testing the effectiveness of indicators using paper trading.
The original story was published on the official Xena Exchange blog
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