In todays article, we present another forex trading strategy based on the Ichimoku Kinko Hyo, which is based on the break of the cloud or Kumo. In one of the other article written about the Ichimoku in which we described the TK cross, we identified the Kumo as a key factor within the Ichimoku Kinko Hyo indicator, in which it acted as a support/resistance structure in the context of the cross of the Tenkan sen and Kijun sen.

In this strategy, the Kumo is being used to trade currencies for what it truly is: a support-resistance structure which must be broken either to the downside or to the upside for a selling or buying signal to occur respectively. So essentially, the Kumo Break strategy is a breakout strategy used to trade currencies.

THE KUMO: WHAT IS IT?

The Kumo is the cloud component of the Ichimoku Kinko Hyo. It is made up of the cloud proper, and is bordered by the Senkou span A below, and the Senkou Span B above. A break of the Senkou Span B is an indication that a bullish breakout has occurred. A break of the Senkou Span A is an indication of a bearish breakout of the asset. Once the price has broken either to the upside or downside, the Kumo is going to reject any attempts by the price of the asset to return to its original position. That is why we call the Kumo a support-resistance structure, acting as a new resistance for a downside break of the Senkou Span A and a support for the Senkou Span B.

When the Kumo is acting in this role, its thickness determines the ease with which it can be broken. A Kumo is more easily broken when it is thin than when it is thick.

TRADING THE KUMO BREAK

How can traders trade the break of the Kumo? In order for this to happen, there are parameters that must be taken care of.

a) Is the break a true break or a false break?

b) What is the strength of the Kumo break? Is the break going to last long enough to produce some bankable pips?

c) Is the market trending or in consolidation?

Point A

A true breakout is seen when the candlestick in question either breaks above and closes above the Senkou Span B (a bullish breakout) or breaks and closes below the Senkou Span A (bearish breakout). If the candlestick in view merely breaches the corresponding Senkou Spans but ends up retreating into the Kumo, this is a false break and should not be traded in any way. If the price is in the Kumo, it is consolidating and will go nowhere.

Point B

A break of a thick Kumo is more likely to produce bankable pips than a break of a thin Kumo. Furthermore, when the price action of the asset attempts to retreat to where it came from and is rejected by the Kumo acting in a reverse role, then the break is a strong one that is more likely going to result in bankable pips.

Point C

A break of the Kumo to the opposite side is more likely going to produce a good trading opportunity if the market is trending. If the market is consolidating, then the break is not going to last. The trader can detect when a market is trending by scrolling through the charts to see the immediate past price action. If this occurs in a tight range, then the market is consolidating.

The chart below demonstrates a classical Kumo break, which in this case was from the downside to the upside.

If we use our criteria for trading the Kumo break to assess this trade, we can see that all the parameters were obeyed.

a) The market was trending. When we look at the fact that the chart is a 4hour chart (which is a medium term price chart that does not have as much market noise as lower time frame charts), and the strong previous downtrend that existed followed by a trend reversal leading up to the break of the Kumo, we can see that this is a bankable trade.

b) The Kumo was fairly thick. The thicker the Kumo that is broken, the more likely that the asset will move in the direction of the breakout for some time. Usually, the price of the asset will attempt to return to where it is coming from. If the Kumo is thin, it will be easy for the price action to break back to previous positions, thus negating the signal. But as we can see from our example, the thick Kumo (now acting as a support) was able to resist two attempts by the currency pair to return to the other side of the Kumo. Indeed, trades placed directly on the Senkou Span B in this situation are the most likely to succeed. If you read our article on how to trade breakouts, it becomes easier to understand this trade situation.

TRADE STRATEGY

The Kumo break strategy can be traded on the 1 hour, 4 hour and Daily charts. It requires no indicators, but a cross of the Stochastics at oversold or overbought levels can indicate areas to buy and sell at the break of the corresponding Senkou span lines.

Long Entry

Wait for the asset to break through the Senkou span B and attempt a return downwards. When the candle bounces off the Senkou span B at the same time that the Stochastics is oversold, enter long. Set a few pips below the Senkou Span B as the stop loss and set the take profit target as desired.

Short Entry

Wait for the asset to break through the Senkou span A and attempt a return upwards. When the upward return of the candle is rejected at the Senkou span A at the same time that the Stochastics is overbought, enter short. Set a few pips above the Senkou Span B as the stop loss and set the take profit target as desired.

As with all strategies described, it is up to the trader to pull up the Ichimoku indicator and use it on the different charts and time frames to see which ones will be the most suitable for profit expectations and trading targets. By and large, this is an easy strategy to trade.