Trading The Cloud – Part ThreeWelcome to Part Three of my Ichimoku trading guide - Trading theCloud. Hopefully by now you will be starting to become familiar with theKumo Cloud and how price reacts to the cloud.What I want to talk about today isHow to use the Kumo Cloudto better measure SUPPORTand RESISTANCE.I will explain what I mean about this in a minute but first look at this
As you can see, on a normal chart price likes to follow basic trend lines.This is the core foundation of basic Forex tradingMost of the time you can draw trend lines on your chart, then justsimply wait for price to break onto the other side of the trend line andopen your trade.A lot of traders trade this way and there is even a few Forex mentoringsites that use this as their core training technique, which is great but itnot as easy as it looks.If trading was this simple we would all be driving fast cars and living inthe Hollywood hills, un-fortunately this isnt the case, we need extrarules and indicators to weed out the real breakouts from the fakebreakouts.For this we can use various extra indicators to find strength ofdirection,moving average, volatility etc.This is why you will read endless websites and forums about whichindicator is best, which works and which doesnt. You can spend days,weeks, months sometimes even years experimenting and testing 1000sof different indicators and tweaking the various different settings beforeyou even get anywhere near predicting price and getting that edge youneed to become a profitable trader. But we dont need toIchimoku does this all for us!I will start by telling you why and most importantly how.One of the Kumos most unique aspects is its ability to provide a morereliable view of Support and Resistance than that provided by all othercharting systems.Rather then providing a single level for Support and Resistance, theKumo expands and contracts with historical price action to give a multi-dimensional view of Support and Resistance.Sometimes the accuracy of the Kumos ability to forecast Support and
Resistance can be incredible like on the chart below.As you can see price has respected the Kumo boundaries on 5occasions, obviously it has broken free of the cloud on a few occasionsbut the picture above gives you an idea of how powerful the Kumo canbe for predicting and re-enforcing support and resistance levels.The lines of the Kumo are very strong Support and Resistance lines, andvisually easy to see and trade. Open up your ichimoku chart on your PCnow and look how price seems to respect the edge and the inside of theKumo Cloud, its nothing short of amazing!You should be starting to build some good knowledge on how the Kumocloud can improve your trading, and how you need this vital tool in yourtrading box, this is only the one part of the ichimoku indicator, and wenot done with it yet.Next I want to look atThe Kumo Depth
When you look at an ichimoku chart you will notice that the thickness ofthe Kumo changes a lot, one minute it can be very thin and flimsy, thenthe next very thick and wide.We can use this as a guide to monitor market volatility, which meanshow much money is in the market and how fast money is moving in themarket,Why is this important?It is important to recognise the volatility in the market because pricewill react differently in a lower volatility market then a higher one.The more money in the market the more orders are made, this meansmore Stop Loss and Take Profit orders are set and placed, whichstrengthens the support and resistance areas on the chart, the oppositegoes for a lower volatility market with less money.Knowing the strength of support and resistance is vital, because this iswhat we look for when either opening or closing a trade, and as welearnt earlier is fundamental in the basics of Forex.
You got all that?...... Good.So what do we need to look for on the Kumo to see if volatility is strongor weak.Look at the chart below.So from a trading perspective, the thicker the Kumo, the greatersupport/resistance it will provide. With this information it can help usmassively with our trading decisions.If price is above a THICK Kumo we know the chances of it breakingback through are significantly less then if we are trading above a THINkumo. so with this in mind you could increase your lot size and be moreconfident about your trade.Another good strategy would be to place your stop loss behind the thickKumo, because we know that there is a good chance price will struggleto break through.
Looking at the chart above, you can see as price has moved up, we haveplaced the Stop Loss behind the thicker Kumo, this is a great way tomanage your stops as you know its unlikely that price will break backthrough.Now lets take a look at a THIN Kumo.
A THIN Kumo means low volatility, this is something to watch out forwhen you have any open trades, price wont respect a thin Kumo and ishighly likely to break through to the other side.If you have a trade open I would highly recommend closing your tradeeither once the Kumo gets thinner or when price first breaks through.In future posts I will go into great detail about the various strategies andtechniques, but for now I want you to start to understand the differencebetween THICK and THIN Kumos and how they effect price and yourtrading, and also how the Kumo is perfect for spotting Support andResistance lines.Ok we have covered quite a lot in this lesson so I will end this post here.Keep an eye on the site for the next lesson and the final lesson on theKumo cloud.... for now at leastUntil next timeChris(Admin)