The forex strategy that will be described in this article is not one of the commonly used forex trading strategies. It involves the use of the complex indicator known as the Ichimoku Kinko Hyo. I call this a complex indicator because it has 5 components, and each of these components can be used for several different trade strategies. Some of these strategies complement each other, while other strategies derived from one or two components of the Ichimoku are quite distinct from the other components.
The strategy described here is known as the TK cross, or the Tenkan Kijun Cross strategy. It utilizes two components of the Ichimoku Kinko Hyo indicator. These components are the Tenkan line (or Tenkan Sen as sen means line in Japanese), and the Kijun line. These two lines are plotted at a specific time period ahead of the price action, usually 26 periods ahead. The two lines are also known jointly as the Senkou Span A line. The Senkou Span A line, along with the opposite line known as Senkou Span B, forms a border for the Kumo, which is the cloud component of the Ichimoku Kinko Hyo indicator. A look at the chart below will show the various components of the Ichimoku Kinko Hyo:
The bases of trading the TK cross are:
a) Trend change: This is typified by the actual TK cross itself. This is a situation where the Tenkan line crosses the Kijun line, and the direction of the cross is an indication of where the trend of the asset is headed.
b) Kumo Reinforcement: What is the Kumo reinforcement? This is a confirmation of the TK cross provided by the position of the price action of the currency pair relative to the Kumo (cloud). The Kumo functions as a support for a bullish trade, or resistance for a bearish trade. This will be seen in the chart examples for the long and short trade setups to be shown below.
The presence of the Kumo in conjunction with the Tenkan and Kijun lines, presents one of those situations where another component of the Ichimoku cloud is adding some value to the core components used in executing a trading strategy.
Before we go into the strategy proper, let us examine each of the components of the Ichimoku Kinko Hyo indicator used in trading this strategy.
The Kijun Sen
The Kijun sen (Kijun line) is visible on the MetaTrader platform as a blue line when the Ichimoku indicator is applied to the chart. The Kijun line’s direction and angulation is an indication of the direction and strength of the trend of the currency pair. If it has a sharp angulation, it shows a strongly trending market. If it is flat, it shows a currency pair in a range-bound situation. In between these two ends of the spectrum are various levels of angulation which all give an indication of how the trend is for the currency pair in view.
The Tenkan Sen
The Tenkan line is coloured red on the Ichimoku indicator when applied to the MT4 chart. be default on the MT4 chart. This is the leading indicator and because it takes the highest and lowest price points over the last 9 periods and smoothes the data out, it functions just the way a MACD indicator functions.
The use of the Tenkan sen in the strategy has to do with its angle of cross. The more sharply the Tenkan line crosses the Kijun line, the better the signal A lazy cross does not produce bankable signals. Sharpness of the Tenkan line’s cross over the Kijun line is an indication of the market momentum.
In summary therefore, we need the Kijun line to make a sharp angulation to indicate a radical change of trend, and we need the Tenkan line to cross the Kijun line sharply, showing that there is enough momentum from traders driving the trend change to produce a tradable signal.
The TK Cross Strategy
When we put this all together, we have the TK cross strategy which is as follows:
Go LONG on the currency pair when the Tenkan line crosses the Kijun line from down to up, with a sharp angulation and when the price of the asset is above the Kumo, since the Kumo acts as a price support. This is seen below:
Here we can see that according to our entry guidelines, there was only one good entry point for a long trade on the asset. There were other opportunities along the way but these did not conform strictly to our entry guidelines. It is always important to follow the rules. If these are not followed, then there will be issues.
Go SHORT on the currency pair when the Tenkan line crosses the Kijun line from above to below, with a sharp angulation and when the price of the asset is below the Kumo, since the Kumo acts as a price resistance. This is depicted below:
Here we see three possible areas where the trader could have gone short on the asset. The second and third circles show clearly that after periods of brief upward retracement on the asset, there were other opportunities to re-enter short trades as long as the prevailing bearish sentiment in the market continued to take hold of the asset being traded.
There will be times that the trader is presented with false signals, especially when the TK cross occurs on the wrong side of the Kumo or when the cross occurs inside the Kumo. This is seen on the chart shown below, which shows correct crosses that present good signals, and crosses that present false signals that should be ignored.
On this chart, we see 3 TK cross setups. A and C show bearish TK cross signals, while B and D good bullish TK cross signals.
If we look closely at the Tenkan-Kijun cross setups at points B and C, we see that the crosses either occurred in the Kumo (point C) or on the wrong side of the Kumo (point B), thus negating these signals.
The only correct signal is seen at point A, which shows a bearish TK cross which occurred below the Kumo. Everything about this cross was good. The TK cross occurred below the Kumo, angulations were sharp, angle of TK cross was sharp (showing good market momentum) and we see that the downtrend persisted for some time, providing good trading signals that would have made the trader some good money if it was utilized.
The TK cross is a good strategy to use. It is one of the various strategies that can be picked out from the Ichimoku cloud, showing very clearly that there is no need for traders to get confused when they see this indicator used on the chart.
There will be other practical demonstrations of strategies derivable from the Ichimoku Kinko Hyo in the days to come.
The author’s views are entirely his or her own.