Article Summary: Trading in the direction of price action in relation to the cloud is the fundamental lesson of trading with Ichimoku. However, knowing what side of the trade to be on isnt the whole story. It helps to know when a good time to enter is and a simple price action tip can help you find good times to enter in the direction of the trend.

When Ichimoku was created by Guichi Hosada and introduced in the 1960s, the indicator was meant to make price action easier to read. The three tenets of Ichimoku is that by applying the indicator to your charts, you can easily recognize the primary trend, find support and resistance, and clearly understand when a market is reversing away from its primary trend.

However, once youve identified the trend, your job is only half-way done. Once youve recognized price in relation to the cloud to identify the trend on your proper chart you need to find when is a good time to enter. Price action can help you see strong entries.

Using Fractals to Identify Likely Swings

Fractals are a readily available and default tool on most charting platforms that you can apply to any chart and one I often apply to mine. In short, a fractal on the chart is a change in behavior with an arrow to mark where a short term extreme has been made. Fractals can be extremely useful to the trader who knows the overall trend but doesnt recognize a good time to enter their trade.

Learn Forex: Fractals Highlight Turning Points on the Charts

(Created using FXCMs Marketscope 2.0 charts)

Youll quickly notice there are two arrows peppered throughout this chart. The blue arrows are called Up Fractals and let you know that the highlighted bar contains the highest high of the two bars to the right and two bars to the left. The red arrows are called Down Fractals and let you know that the highlighted bar contains the lowest low of the two bars to the right and two bars to the left.

As a trend trader utilizing Ichimoku, theres a specific way to utilize fractals. With the other Ichimoku rules in place for entering in the direction of the trend, Fractals will highlight a turning point around a major form of support or resistance on the chart. This will let you know that price action around major points on the chart are being rejected and can give you more confidence in your future trades.

Learn Forex: Fractals Combined With Ichimoku to Highlight Price Action Pivots

(Created using FXCMs Marketscope 2.0 charts)

In closing, fractals can help you find when price above the cloud has likely stopped falling. This will allow you to catch the bounce in the uptrend once a likely bottom has formed. This is a high probability place to be as a trader and why fractals can be a helpful addition.

Ichimoku Trade: Sell EURGBP as EURGBP Fully Broke Daily Cloud

(Created using FXCMs Marketscope 2.0 charts)

Ichimoku Trade: Sell EURGBP Based on Cloud Break

This trade does not have the Lagging Line Signal but Main Points Are Present

Stop: 0.8615 (Resistance with Top of Cloud)

Limit: 0.8300 ( Profit Target Greater In Pips than Stop Exit & At Monthly S1 Classic Pivot )

-Price is below the Kumo Cloud

-The trigger line (black) is below the base line (light blue) or is crossing below

-Lagging line is below price action from 26 periods ago

-Kumo ahead of price is bearish and falling (red cloud = bearish Kumo)

-Entry price is not more than 300 pips away from base line as it will likely whip back to the line if we enter on an extended move.

When employing Ichimoku to spot good entries in the direction of a strong trend. cloud breaks provide an entry point with limited risk and high reward as a trend shift is signaled. Some traders choose a trailing stop and now limit so that they can capture the trend while limiting their risk. Because of the point of entry, if price remains below the cloud and begins to move in the direction of our trade you can move the stop manually to limit your risk.

Happy Trading!

—Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

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