Ichimoku Ecourse [PDF]

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TABLE OF CONTENTS Lesson 1) Introduction to the Candlesticks Chart .......................................................... 5 Construction of the Candle Line ........................................................................................ 8 Lesson 2) The Individual Candles ....................................................................................... 10 The Shadows ........................................................................................................................... 21 Lesson 3) Two Candles Patterns ......................................................................................... 30 The Checkmate Principle ................................................................................................... 30 The Bullish Engulfing Pattern .......................................................................................... 32 The Dark Cloud Cover ......................................................................................................... 41 Piercing Pattern ..................................................................................................................... 45 The Harami .............................................................................................................................. 50 Lesson 4) Three-Candle Patterns........................................................................................ 53 The Morning Star .................................................................................................................. 53 The Evening Star ................................................................................................................... 56 Lesson 5) Principles of Trading ........................................................................................... 59 Risk-Reward ............................................................................................................................ 59 Stops ........................................................................................................................................... 64 Lesson 6) Indicators ................................................................................................................. 65 Confluence................................................................................................................................ 65 Change of Polarity................................................................................................................. 66 Internal Trend Line .............................................................................................................. 66 Head and Shoulders ............................................................................................................. 67 Oscillators................................................................................................................................. 68 Ichimokucloud.com - All Rights Reserved

4 Divergence ............................................................................................................................... 71 Bollinger Bands...................................................................................................................... 73 Fibonacci Retracements ..................................................................................................... 75 Lesson 7) The Ichimoku System.......................................................................................... 78 The Tenkan-Sen ..................................................................................................................... 79 The Kijun-Sen ......................................................................................................................... 80 The Chikou Span .................................................................................................................... 83 The Ichimoku Cloud ............................................................................................................. 84 Calibration................................................................................................................................ 86 Lesson 8) How to Use the Ichimoku .................................................................................. 88 The Kumo ................................................................................................................................. 88 The most important trading strategy! ......................................................................... 97 Lesson 9) The Advanced Trading Strategies................................................................ 101 The Relative Tenkan/Kijun Cross ................................................................................ 101 The Kumo Breakout ........................................................................................................... 106 The Kijun-Sen Cross ........................................................................................................... 109 Lesson 10) Money-Management and the Kelly Criterion ....................................... 121

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5 Lesson 1) Introduction to the Candlesticks Chart

LESSON 1) INTRODUCTION TO THE CANDLESTICKS CHART Hi! My name is name and I am going to teach you in this course how to make money trading Forex utilizing the Ichimoku. First, we are going to learn about how to profit in the Forex markets with Candlesticks. Later, I will teach you how to use the Ichimoku System profitably and successfully, with a slight addition I have made to that framework. Forex trading has become the most popular form of trading recently, and there are several reasons why. 1. Few markets are monitored – few pairs 2. Leverage 3. Easy to set-up an account The highest amount of speculators is in the Forex markets, and the standard way people chart in the Forex markets is by using the Candlesticks. However, most people make several mistakes while reading the markets with the Candles, and I am going to teach you how to do it properly, and profit from their mistakes. Candles are geared for short-term trading, from intraday to a couple of weeks. They have become so popular in the Forex markets that there are hundreds of books that will teach you how to use them. And let me tell you something, most of them will teach you the wrong way to use it. The Candles are said to have been developed by 18th century legendary rice trader Homma Munehisa. He came from Sakata in Japan, and he traded in the Ojima Rice market in Osaka during the Tokugawa Shogunate, and his trading success led to him becoming an honorary Samurai. Ichimokucloud.com - All Rights Reserved

6 Lesson 1) Introduction to the Candlesticks Chart He described the market as the rotation of the Yang (a bull market) and Yin (the bear market) and claims that within each type of market, we can see a glimmer of the other type. If you think you’re a successful trader, you have no idea how much money he made. He made more than $100bn in profits at today’s prices, some years earning over $10bn. For its reliability, this style of charting has become very popular in all markets. From stocks trading to the Forex markets. I will teach you specifically how to use the Candlesticks charts to profit in Forex in this first part of the book. In the second part, I will teach you how to use the Ichimoku in conjunction to the candles in order to profit even more! This book will give you the tools necessary for you to make as much money as you want! Even though some books you can buy on the subject will give you the basic insight into the Candlesticks, the authors usually don’t teach you the strategies, tips and secrets to the Candles. I will teach you everything I know. I won’t hold anything back. And this is why this course is so valuable. I will reveal all the best strategies that both institutional traders and the best traders in the world use to profit from Forex. And let me tell you an insider secret: a lot of people are misusing the candles. They think they know what is going on, but they truly don’t. The Japanese use a lot of metaphors while teaching the candlesticks, and I will try to be as faithful as I can, so you can actually learn how to think like the great master traders in the world. Not just know what they know, but think how they think. I will also give you tens of real-world examples, so you can get all the patterns ingrained in your mind. First, I am going to teach you how to create the candlestick lines and how to read them instantly. There is a lot more information in a single Ichimokucloud.com - All Rights Reserved

7 Lesson 1) Introduction to the Candlesticks Chart candlestick bar than most people imagine. You are going to learn how to find the balance between the bears and the bulls in the market easily. Second, we are going to learn how to read the candle patterns, and how to use them correctly. They are the real power behind the candlesticks. Third, and this you are not going to find anywhere else, you are going to find out about the differences between Forex and non-Forex candlestick trading. And this is where most people make their most costly mistakes. Fourth, you are going to learn how to create your trading strategies, and how to combine the candlesticks with western indicators. Fifth, you are going to learn about how to successfully trade intraday Forex with candlesticks. And then we are going to learn about the Ichimoku System and how this complete course into the Japanese trading secrets will increase your understanding of the market. By understanding this course completely, you will be able to: Spot market turns before the competition Know when to act on a candlestick signal, and when not to act on the signal Know which trades to avoid – by using probabilistic analysis Analyze the situation completely, not only the candlestick signals Learn how to use the Ichimoku System Learn how to trade profitably with the Ichimoku System Learn my modified trading strategies for the Ichimoku System, and how they will give you the most bang for the buck Learn how to increase your money-management skills effortlessly

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8 Lesson 1) Introduction to the Candlesticks Chart So essentially, by the end of this course, you will be able to trade like a pro. And not just any professional trader, but you will be able to trade better than most pros in the world. Let’s begin.

CONSTRUCTION OF THE CANDLE LINE I know that a lot of you already know all about this, but it doesn’t hurt to go through it again. This is the foundation for this whole course, and everything will be based on this first lesson and drawing the candlestick line. Here’s a simple diagram where you can see all the components of the Candle Line:

The candlestick line is made of four data points: Open Ichimokucloud.com - All Rights Reserved

9 Lesson 1) Introduction to the Candlesticks Chart Close High Low The Real body is made of the Open and the Close, it is the relationship that forms the real body. The white real body means that the Close is higher than the Open; conversely, if the close is lower than the open, the real body is black. By the way, you can use candlesticks at all time frames. I would suggest you look at daily, 60 minutes, 30 minutes, and 15 minutes. If you trade a lot intraday, and your holding period is very small (3 hours or less) you could look at 60 minutes, 30 minutes, and 15 minutes. The reason why some candlestick signals are constructed differently in the Forex market is because the market is always open, but we will look into that later. The lines above and below the real body are called the shadow; they are called upper shadow and lower shadow. The high of the upper shadow is the high of the session, while the low of the lower shadow is the low of the session. One benefit you’ll be walking away with at the end of this course, is by combining the candlestick patterns with a couple of western indicators and the Ichimoku System. You will walk away with an incredible amount of knowledge, that you can’t find anywhere else. Let me tell you a secret: everything you do with a bar chart you can also do with candlesticks. If you learn the candles, you can use the bar chart too! And this is why, if you have used the bar charts for most of your life, you can now add the visual insight of the candle sticks into your analysis. Let’s take a look at each individual single candles now.

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10 Lesson 2) The Individual Candles

LESSON 2) THE INDIVIDUAL CANDLES The Japanese would say that the real body is the essence of the body movement. They say that the candlestick color is the force behind the move. If we have a long white body, the bulls are the majority. And if we have a long black body, we have a bearish majority.

But realize that the real bodies are in constant change, and as they grow wider the prior trend is gaining strength, and as they get smaller, the prior trend is losing strength.

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11 Lesson 2) The Individual Candles Until you get the Spinning Tops, candle lines with small bodies. Realize that as the real bodies get smaller, we are learning very subtle information about the market. We are learning that the market may be gaining, but it might not have the strength we need in order to make those big bucks.

The limit for the length of the real bodies is the Doji, or the small crosses. As they get a little bit bigger, we find the Spinning

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12 Lesson 2) The Individual Candles Tops:

For instance, see in the example below how when the market started losing its momentum, the candles got smaller and smaller. All you could see was spinning tops or Doji. Whenever I take screenshots from my software, you will see colored candle lines. I do this so you can get accustomed to both color sets, white and black or green and red.

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13 Lesson 2) The Individual Candles

Can you see that even though the market had a negative trend, its trend began to lose strength? You could even see some strong bull real bodies out there. The bear’s control of the market is getting weaker and weaker. Look at the rounding bottom of the candle lines in the chart, I would definitely buy in this position because I also have a clear stop-loss, the smile.

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14 Lesson 2) The Individual Candles

Now let’s take a look at Doji. A Doji is when the opening and close is the same, and they are very good at showing trend reversals. It is often a turning point, because Doji means that the market is tired. A lot of people make the mistake of thinking that when the market is Bull, and a Doji appears, you have to short it. That’s completely wrong. The Doji doesn’t mean that the market is dead, it just means that the market is tired and could be taking a breath before continuing its run. Don’t make this mistake. Here’s an example of that mistake:

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15 Lesson 2) The Individual Candles

See? If you had shorted when you saw the Doji you would lose a lot of money. Just take the Doji as a signal that the market may be changing its trend, not that the market is DEAD or BULL. Take it as if the market is turning neutral. With all technical analysis, we are thinking of the probability set of each event occurring: a trend-reversal, a big run-up, etc. You have to realize that all the Doji is telling us is that the probability of the market going in the other direction increased a little bit. That’s it. And in there is a point I’d like to make here: In the Forex market, you are not going to be seeing perfect Dojis like the one I just showed you. You will most likely be seeing very thin bodies. Consider that as a Doji, for the purposes of your technical analysis.

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16 Lesson 2) The Individual Candles And even though I will teach you this in depth later, you have to realize that you should always look for confirmation for the candlestick signals. Don’t go around buying a trade because you saw a single signal, always wait for the confirmation. I know that some people don’t like to wait for the confirmation for taking the trade, because usually the profit potential is smaller. But you have to understand that it also increases your risk. I’ll later explain it with a little bit of math why I think that it is best to wait for confirmation. And what about the fundamentals? I will dedicate an entire chapter about this later on, but just realize that the price will always reflect the fundamentals. Therefore, if you see an unusual move in the markets, it is probably because the fundamentals have changed. Just realize this, and know that sometimes you will enter a trade and the fundamentals will change while you’re with the open trade, so if you see an unusual movement in the opposite way you want, you should cut your position from your books. And remember, as long as the real body is really small, take the small Spinning Tops and the Doji as the same signal. Let me point out to you the difference between two Dojis, right before I explain to you the role of the Shadow.

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17 Lesson 2) The Individual Candles

In this instance, what we see is that even though in both situations a Doji occurred, in the first one the Upper Shadow was a lot higher than the Lower Shadow in the second situation. What does it mean? Well, think of it this way: In the first situation, the market tried to go even higher but it didn’t accept the new higher levels. While on the second situation, it tried to go up and down, but it formed a Doji in between. I would be a lot more worried about the first situation, because the market didn’t accept the new high levels than in the second situation. Even though both are Dojis, the first situation carries a lot more risk if you are bullish than the second one if you’re bearish. Let’s see an example of all of this I have been teaching you:

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18 Lesson 2) The Individual Candles

First Lesson: Not every Doji means a trend reversal. See B and D. Second Lesson: Sometimes a really thin body gives the same signal than a Doji. See C. Third Lesson: Look at the Long Shadow in B. What does this means? It means that the market is still not sure about the new lower levels, the market is not strong enough. Fourth Lesson: Look at the Long Shadow in A. The market rejected higher levels, again. I am showing you this so you can realize that in Technical Analysis, price is king. Even if you had the perfect analysis, it doesn’t matter unless you have correctly predicted the market. And the Doji is not the best indicator of a reversal, it is a good one, but alone it doesn’t carry a lot of strength.

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19 Lesson 2) The Individual Candles

Here you can see that the Doji is confirming the resistance lines. It is useful to realize that the candlestick lines can be confirmation for other technical indicators, including support and resistance analysis. And how do you use the Doji as resistance? Unless the Doji closes above the highest high near it, it is unlikely that the market has strength. But that doesn’t mean that because the Doji closed below the resistance, that the market is weak. It just means that the market has lost its steam. I will repeat this over and over until you have this tattooed to your mind, because I don’t want you making the same mistakes as most candlestick chartists. Let me give you an example of resistance change because of the Doji:

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20 Lesson 2) The Individual Candles

Create resistances as you always do it: the highest high is the new resistance. And remember, let the market prove to us that the bulls are in control of the market: if after a Doji, in the next session the market closes above it, it is a very good signal that a breakout is happening. And before we go further, please understand that you should always take a look at two characteristics when analyzing a candlestick chart: always look at both the shape of the candle, and the trend preceding it. Let’s take a look at an example illustrating this principle.

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21 Lesson 2) The Individual Candles

Let’s take a look at the first situation, as you can clearly see, the market was neutral right before it. When I mean preceding trend, I mean the 3-4 ticks before the Doji. So when the Doji happened, it didn’t tell us much. At the second situation, look to the preceding bear trend and how in the session preceding the Doji, the market tried to go deeper but didn’t find the strength to do it. Then, the Doji had a higher low than that preceding session, which showed us that the market was tired of getting bear. The next tick what happened? The market had a slight up-tick. And what about the third case? The market was clearly on an uptrend, and it lost strength as we can see by the Doji. Then the bears controlled the market for a couple of ticks, before the uptrend continued. Remember to always see the candles in the context of the session. Don’t look at a Doji and automatically short it. Or automatically buy the trade. Look at the whole, instead of looking at only these little signals.

THE SHADOWS The Japanese would say that the longer the shadow in relation to the real body, the weaker the signal. Ichimokucloud.com - All Rights Reserved

22 Lesson 2) The Individual Candles For instance, a big upper shadow in a big white real body is a worse signal than if the real body had no shadow at all. Conversely, a big lower shadow in a big black real body is a worse signal than if the real body had no shadow at all. Example:

As you can see, the second candles are worse than the first ones, always. They are always sending a weaker signal than the first ones. Why? Well, because the market didn’t have the strength to close at its high (or low). The shadow is measuring the psychology of the markets and their strength, just like the real bodies. The upper shadow suppresses the rally. They become important whenever they are confirming a support or resistance area. If a lot of long upper shadows are near the same resistance area, but they are not able to close at the high, this means that the market may not be ready to break that resistance. The market is rejecting higher levels. Let’s take a look at how the shadows would influence our analysis of a trend. Take a look at the example below:

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23 Lesson 2) The Individual Candles

Both trends had the same open and the same close. The second, however, has a bigger shadow. Which one do you think is the most trustworthy trend? The first one, of course. In the second case, the market didn’t have the strength to go higher and just came back in. This means that the bulls still do not have a lot of strength in the market, therefore, it is riskier than the first case. So a bearish shadow, is a whenever there is a cluster of big upper shadows. Here’s an example:

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24 Lesson 2) The Individual Candles

In the first case, you can clearly see the bunch of upper shadows and you can even create a resistance line over there. In the second situation, you can clearly see that the bottom shadows have a bullish trend, and they are huge too. That is a bullish sign. Let’s take a look now at how the bearish cross creates the resistance, here’s an example of that:

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25 Lesson 2) The Individual Candles

As you can see, the resistance is always at the highest high, it doesn’t matter what the other shadows are saying. Even though I said that single shadows are not important, as always, every rule has an exception. In shadows, this means that you see either a Hammer or its bear counterpart, a Shooting Star. And this is the same in Forex and Non-Forex Here’s how a hammer looks:

The Hammer is a one-sided shadow, and the hammer is a very long lower shadow candle, and the real body can be white or black, and the important thing is: its shadow has to be at least 2-3 times bigger than the real body. It can have a tiny upper shadow too, at most around 10% the lower Ichimokucloud.com - All Rights Reserved

26 Lesson 2) The Individual Candles shadow. The hammer doesn’t mean that the market is going to rally, you should just think of it as a new support. Here’s an example:

What you should do is, if you buy this hammer your best stop loss would be on that support line that I just drew. And what about the shooting star? Here’s an example of the shooting star, and you will see that it looks pretty much like an inverted hammer. It can also have a small lower shadow by the way. The color of the real body, again, doesn’t matter.

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27 Lesson 2) The Individual Candles

That is just a small example of what a Shooting Star looks like. And it usually signals that the rally might be losing its strength. Not surprisingly, the Shooting Star is a resistance area. So, if there is an extremely long shooting star and by the time it is formed, and you have a bad risk-reward, don’t do the trade. Remember how to ignore a trade? You ignore it if it has a bad riskreward. So what would you do? Well, put an alert on the resistance and if the prices ever go near the resistance but don’t have the strength to breakout, you can short the trade. Now let’s talk about High Wave Candles. The high wave candle is a combination of the Hammer and the Shooting Star, what you get is this:

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28 Lesson 2) The Individual Candles

They have very long shadows both above and below a small real body, and the color doesn’t matter. What does it mean? It means that the market rallies, but by the end of the session it pulls back. The market is really confused, and doesn’t know what it wants to do. So what we do is compare the High Wave Candle with the prior candle. For instance:

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29 Lesson 2) The Individual Candles

Did the market have a sense of direction prior to the High Wave Candle? Sure it did. The candle before had a long real bullish body. What does it mean? It means that the trade went from a bullish, to a neutral. Use the top as its resistance area, as usual. These are the last single candles that we are going to study. Let’s move forward now, towards the patterns.

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30 Lesson 3) Two Candles Patterns

LESSON 3) TWO CANDLES PATTERNS Let’s take a look now at the trading patterns that you will constantly see when analyzing your candlestick charts. But first, I want to talk to you about the Candlestick Chart as a system. The Candles were not designed to work alone, they were designed to work together with other indicators, therefore, the candlestick chart is not a system. It should be used as a PART of a system. In this book, we will use all these candlestick principles together with the Ichimoku System in order to make our biggest gains. We will also use a couple of western indicators in order to assist us with our market predictions. I will repeat again, candlesticks are not a system. They can only be used in conjunction with another system. Remember that, as we follow through with our course.

THE CHECKMATE PRINCIPLE The checkmate principle is not really a candlestick pattern, but we are going to be using these candles to see how the market reacts instead of how it should react. A Bearish Checkmate is a series of tall white candles followed by black candles. A Bullish Checkmate is the opposite. Let’s take a look at one example:

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31 Lesson 3) Two Candles Patterns

As you can see, we were had a long white candle, followed by a small black candle, then another big white candle followed by a big black candle, followed again by a big white candle and so on… As you can see, this is a bearish checkmate. What happened is, the market began losing strength. Let’s take a look at a bullish checkmate now:

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32 Lesson 3) Two Candles Patterns

As you can see from both areas, the bears had the market but started losing control. This is a bullish checkmate. What are you supposed to do when you see a checkmate? I don’t mean just a single bar in a different color, bu this alternation of bars going on and on… You should cut back on your bear position, and in the first case, you should cut back on your bull position. Making money is also a matter of managing risk, and it just got riskier and riskier as the market was being checkmated. Let’s take a look now at the first pattern, the Bullish Engulfing Pattern.

THE BULLISH ENGULFING PATTERN Because the Forex market is open 24 hours a day, the bullish engulfing pattern is slightly different in Forex than it is in Non-Forex Markets. That is because the close is always the same as the open in the next candle. Here’s an example so you can see what I mean exactly:

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33 Lesson 3) Two Candles Patterns

This is the Bullish Engulfing Pattern. As you can see, the second white candle’s real body completely engulfs the first candle’s black real body. This is why it is called the Bullish Engulfing Pattern. Even if it is just a pip or two of a difference, it is already a Bullish Engulfing Pattern. Here’s an example taken from a real trading session:

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34 Lesson 3) Two Candles Patterns And the smaller the first bar, the better. It is a signal that the bear market is losing strength. As a side note, in non-Forex, you want to see the open lower than the previous close. Here’s how you would create a support based on the Bullish Engulfing pattern, and also notice how the first candle of the pattern is a high wave candle. This gives even more strength to the signal that the bears are losing the market.

But how do you trade with it? You measure the risk-reward. If you put in a stop right below the support, you have a pretty good risk-reward ratio. Here’s how I am looking at it:

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35 Lesson 3) Two Candles Patterns Let’s take a look at a different example so you can completely understand this pattern:

Here you can see two bullish engulfing patterns in a row, and both first candles were High Wave Candles. What does this teach us? It teaches us that the bear market is losing strength and it gives more strength to the pattern. Now what about the Bearish Engulfing Pattern? Well, as you can see it doesn’t change much:

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36 Lesson 3) Two Candles Patterns

But now, the market was in a bullish trend and the bearish engulfing pattern occurred. Remember that for every pattern, you must see the preceding trend too. Here, the bulls have been taken over by the bears, at least momentarily. Let’s take a look now at a real example from a trading session, and see how the analysis would proceed:

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37 Lesson 3) Two Candles Patterns

As you can see, the first candle of the Bearish Engulfing Pattern was again a very high wave candle. Again, this signals to us that the trend is losing strength, giving strength to our theory that the market will turn bear. How can we add even more strength to a Bearish Engulfing Pattern? Take a look at this case:

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38 Lesson 3) Two Candles Patterns

First, look at the number of candles that the Bearish Engulfing Pattern is eating up. 3 whole candles, and almost a fourth one. That is a very strong signal. Now take a look at the previous candles, all of them have very long shadows, giving us the signal that the trend may be losing its strength. Just because the bearish engulfing pattern is this strong, it doesn’t mean that the sky is falling down. But the chances of we making money with the trade just increased by a lot. Don’t think that because the black candle in the bearish engulfing pattern has engulfed 3 candles, it means that the market is 100% certain to go down. Think that the probability of the market turning has increased, and more than if the black real body had engulfed just a single candle. And remember that the trend preceding the bearish engulfing pattern has to be bullish, and conversely, the trend preceding the bullish engulfing pattern has to be bearish. Let’s see an example of one of the many mistakes that rookie traders make: Ichimokucloud.com - All Rights Reserved

39 Lesson 3) Two Candles Patterns

As you can see, it looks exactly like a bearish engulfing pattern. Except that, there is no definite preceding trend. The market is slightly checkmated, and doesn’t know where to go for at least the past 9 candles. Don’t short unless the preceding trend is clear. Here’s an example of both Engulfing Patterns:

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40 Lesson 3) Two Candles Patterns As you can see, as with every trading opportunity, sometimes the engulfing patterns don’t exactly work as expected. Even though eventually the market did go bullish in the first situation and in the second situation the market went into a down trend, never treat any pattern with certainty. Let’s compare now two situations, this one:

And this one:

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41 Lesson 3) Two Candles Patterns What is the difference between those Engulfing Patterns? Can you see the size of the relative sizes of the real bodies in the first case? Wouldn’t you say that the white real body is really big compared to the black real body in both Bullish Engulfing Patterns? What about in the second situation? Can you see how in the first and second case, we had two candles of slightly the same size? You should always be more confident of the first situation than in the second situation: the bigger the relative size between the candles of the Engulfing Pattern, the better. Related to the Engulfing Pattern, we have the Dark Cloud Cover.

THE DARK CLOUD COVER Here’s the Dark Cloud Cover:

The Dark Cloud Cover is characterized by the fact that the second candle in a bullish trend opens at the same level as the prior candle, but the black real Ichimokucloud.com - All Rights Reserved

42 Lesson 3) Two Candles Patterns body closes deeply into the long white candle, at least more than half the white real body. Here’s a trading example of the Dark Cloud Cover:

As you can see, the market was bullish but then the Dark Cloud Cover occurred. Remember that you can only take in consideration any signal or pattern, if you have the correct preceding trend. The dark cloud cover is a sign of uneasiness at a high price, as the Japanese would say. The high of the dark cloud cover should be a resistance, as you can see here:

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43 Lesson 3) Two Candles Patterns

Let’s see another trading example of the Dark Cloud Cover and its use as a resistance area:

As you can see, the resistances worked flawlessly. Even though eventually the market did break through them, it required an incredible amount of strength. You have to treat the dark cloud cover the same way you treat the bearish engulfing pattern: if the market was in a bullish trend, it is now slightly neutral. This doesn’t mean that the market is going to fall, but it adds to the case. Ichimokucloud.com - All Rights Reserved

44 Lesson 3) Two Candles Patterns And what is wrong with the two patterns below? Why aren’t they dark cloud covers?

As you can see, there is no trend at all in any of these ‘dark cloud covers’. You have to remember that the preceding trend is as important as the pattern itself. Here’s an example of where the trend is right, but the size of the real bodies is wrong:

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45 Lesson 3) Two Candles Patterns And even though in the first situation the candle looks like a shooting star, its lower shadow is bigger than it should be. Remember how we want to use the candles as a tool to see if the market is shifting psychology? What does this mean? It means that the first candle of the dark cloud cover should have a long white real body, it should not be a spinning top. For instance:

As you can see, both real bodies are relatively small, and the market is trendless. This is not a dark cloud cover, because there is no definite trend and the first real body is not long. The market didn’t shift psychology, it didn’t change the way it thought. What we want to see is real shift in psychology. Let’s see now the bullish counterpart of the Dark Cloud Cover, the Piercing Pattern.

PIERCING PATTERN Here’s the Piercing Pattern:

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46 Lesson 3) Two Candles Patterns

As you can see the piercing pattern occurs, when in a downtrend, the white real body of the candle is bigger than half the black real body of the preceding candle. Let’s take a look at a trading example:

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47 Lesson 3) Two Candles Patterns As you can see, this is a very strong Piercing Pattern. We had a very long black real body, with very long shadows, preceding a long white real body candle. Here we have an example of the Piercing Pattern as a support area:

And as you can see, you should always use the low of the piercing pattern as the support. Let’s take a look at a couple of complete examples now, and I will point out everything you have learned so far.

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48 Lesson 3) Two Candles Patterns

First we can see a clear Piercing Pattern and in the second situation we can see the market breaking through the support line of the Piercing Pattern with a hammer, followed by a bullish engulfing pattern. Here’s another example with a couple of patterns you have already learned to spot:

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49 Lesson 3) Two Candles Patterns

As you can see, you can already spot a lot of patterns in any given trading situation. Right next to the shooting star, there is a pattern that looks like a piercing pattern. However, the market was in an uptrend. What about the support levels in the situation above, and the riskreward analysis? It is simple, and you have learned how to do this too.

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50 Lesson 3) Two Candles Patterns

As you can see, the risk-reward profile is pretty good. Let’s take a look now at the Harami.

THE HARAMI The Harami has a very specific definition: it is a very small real body following a very long real body. The second real body has to be with the opposite color, and can be a spinning top or a doji. The Harami usually means that there is a change in the flow of the market like most two candle patterns, so you must always be aware of the Harami. Here’s how it looks:

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51 Lesson 3) Two Candles Patterns

However, it doesn’t have such a strong support/resistance importance as the Engulfing Patterns, the Piercing Pattern and the Dark Cloud Cover. Here’s a real trading example of the Harami:

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52 Lesson 3) Two Candles Patterns As you can see, it has to be a very small real body and a very long prior real body. In this case, we had a bearish harami, let’s see a bullish harami now:

You can also see in this case that the second candle was also a high wave candle, followed by another high wave candle and a doji. This is definitely a signal that the preceding trend is losing strength. Consider the strength of resistance as going down, from the Engulfing Pattern to the harami. You shouldn’t even use the harami as a resistance area, it is not needed. After learning about single candle patterns, and two candle patterns, let’s move on to three candlestick patterns now.

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53 Lesson 4) Three-Candle Patterns

LESSON 4) THREE-CANDLE PATTERNS Let’s expand our knowledge now of candlestick patterns by taking a deep look at the three-candle patterns. We will first learn about the morning star, and then we will take a look at the Evening Star.

THE MORNING STAR Whenever the market is going south, and we find a very long black candle followed by a small real body candle (usually black in Forex, but it can also be a very small white candle) followed by a very long white candle, we have the morning star. Here’s the ideal morning star:

However, it can also look like this:

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54 Lesson 4) Three-Candle Patterns

The important thing is that the second candle must be deep in the first black real body. The Morning Star can be seen as a Bullish Engulfing Pattern that is also a part of a ‘delayed’ Piercing Pattern. Here’s how the ideal morning star looks in a trading session:

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55 Lesson 4) Three-Candle Patterns And here’s how the second type of Morning Star looks on the Forex market:

Is the third candle deep into the first candle’s black real body? Yes. Is it preceded by a spinning top or a doji? Yes. Is it preceded by a bearish trend? Yes. So we have a Morning Star. Now let’s take a look at how the morning star can confirm a support area for us:

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56 Lesson 4) Three-Candle Patterns

As you can see, we now have a pretty well defined support area to trade. If the prices go down to that levels again we can confidently trade them. You should always use the lowest low of the candlestick patterns in order to create your support area. Now let’s take a look at the next pattern, the Evening Star.

THE EVENING STAR Everything that applied to the Morning Star still applies to the Evening Star. Here’s how the ideal Forex Evening Star looks like:

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57 Lesson 4) Three-Candle Patterns

It is the exact reflection of the Morning Star. Let’s see a real Forex Market example for it:

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58 Lesson 4) Three-Candle Patterns I won’t say much about it, because it works exactly like the Morning Star, except that it turns the market bear.

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59 Lesson 5) Principles of Trading

LESSON 5) PRINCIPLES OF TRADING Let’s talk now about the principles you should always have in mind when you trade. I know it may sound boring, and you want to learn how to trade with the Ichimoku, but we have to talk about this before we go on. First, I’m going to talk about Risk-Reward. You should never forget about it when trading, never. This is because you may have a “perfect” signal, but with a crappy risk-reward you are not getting the odds necessary for you to make money consistently. Second, I’m going to talk about stops, and why you should always use them. Then, in the next chapter, I’m going to talk about indicators and how to use them with the candlesticks. Afterwards we can go on into the Ichimoku System, which is made of a set of indicators.

RISK-REWARD Okay, how do we find the risk-reward ratio and how exactly do we make decisions based on our analysis? Well, we first find our support areas, then we find our resistance areas and then we analyze if the trade makes sense or not. I would say that you should always assume a probability of the trade working at around 60%, just to make sure that you get at least a good riskreward ratio whenever getting into a trade To analyze the risk-reward, you will need to use everything you have learned so far, in order to create the support and resistance areas. Let’s take a look at 4 examples, before we move on to other matters.

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60 Lesson 5) Principles of Trading

Here, we can see a bearish engulfing pattern that followed a piercing pattern. As you remember, the high of the bearish engulfing pattern is the resistance, and the low of the piercing pattern is the support. As you can see, the risk reward profile in this case looks very good: When we short it on the bearish engulfing pattern, we have a lot to gain but very little to lose (just the high of the high wave candle). This would be a very good trade. And what about this one?

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61 Lesson 5) Principles of Trading

As I pointed out in the picture, again, the risk-reward profile looks very good. Look how little we have to lose if we buy the Piercing Pattern. It confirmed an old support level, and we have a shooting star giving our resistance levels. We can clearly see that in between, the market was slightly checkmated with no real trend whatsoever. Lots of dojis and high wave candles. This is what you should aim for: very little risk, to a high reward in case the trade works out. But what about some examples of trades that do not have a very good risk-reward profile? Let’s take a look at a couple of examples of that now.

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62 Lesson 5) Principles of Trading

As you can see, the risk-reward profile in this case is not good at all. Even though we had a very good morning star, take a look at the downside. And take a look at the reward you are getting. This is a losing proposition, because even if you make a right call, over the long-term you will be losing money with these kinds of bets. Which is why I want you to always remember this concept of riskreward when trading. Suppose I gave you the worst possible signal available, and after some thought you realized that the chance of you making money on that trade was 10%. However, imagine that the risk is 1% of your money, while the reward can be up to 2000%. Would you take it? Of course you would. Because even if you lost money 1, 2 even 3 times, on the long run you would be making a killing on that trade. This is why you should always do risk-reward analysis. Let’s take a look now at another example of a bad trade.

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63 Lesson 5) Principles of Trading

As you can see, we had a couple of high wave candles followed by a piercing pattern. It would usually be a very good situation to buy right? But take a look at the risk-reward profile. It stinks. You are getting pretty much 1-1 odds on the trade. This is another one of those trades that even though the signals appear to be there, the risk-reward profile is just not pretty. If you apply this concept to your trading strategy, whichever it may be, you will be making a huge, huge progress towards great trading. This means that most of the candlestick signals should be ignored; it is wiser to buy a few great trades, than go into a lot of good and bad trades. This also means that depending on where the market goes next, your risk-reward profile gets better and better. I don’t want you to see the signal and forget about them if the riskreward profile is not good, I want you to take notes on them and wait for a Ichimokucloud.com - All Rights Reserved

64 Lesson 5) Principles of Trading better opportunity to buy. You should always be thinking of this concept, whenever you trade. Okay, let’s take a look now at how to set your stops.

STOPS You should always use stops. Even though I am sitting in my trading station all day long, I always set up my stops in the resistance or support areas before my trade. I always give it a little bit of room too, around 4-10 pips. But why do I set stops? I know that most intraday traders want to pull the trigger and exit the trade themselves. The ideal stop is you, of course. The best traders don’t put in stops, they want to exit the trade at the exact moment they choose to. But most of us are not capable of that. We get too attached to some trades, we freeze, and we are prone to psychological mistakes. We can’t just say “I’m wrong, I’m getting out of this trade” easily and without attachment. This is why you should always set your stops, because this way, you are sure to exit the trade at a point you have specified beforehand. Imagine the stop as your car’s airbag. If you make a mistake, it will be there to help you out. Always place your stop (in your mind) before you put in the trade. Always know where it is before you put in the trade, don’t put in the trade and then think about where the stop is going to be. The good thing about setting a stop, is also because you can clearly manage your risk-reward ratio. Before you enter the trade, you must set your stop to know your risk. And where do you put the stops? Well, we learned this already. Just use the support and resistance areas we have already learned about. There is no mystery to it. Let’s take a look now at the indicators. Ichimokucloud.com - All Rights Reserved

65 Lesson 6) Indicators

LESSON 6) INDICATORS Well, as you have already learned everything you should about the basics of trading with candlesticks and how to measure your risk reward, it is time to learn about the indicators that you will be using the most in your life. First, you have to learn that the more indicators, the better. If you learn how to use 15 of the right indicators with great aptitude, is better than learn how to use 2 indicators with the same level of aptitude. And it is the combination of candles and western techniques that will bring you to great trading ability. This will be a very dense chapter, with a lot of examples. Please bear in mind that I will be as brief as I can, without going on and on about a simple point. I just want you to understand this quickly, because in next chapter you will learn exactly how to use the best system around, and we won’t use a lot of this.

CONFLUENCE This is whenever we have one candlestick line confirming another. For instance:

As you can see, we had a morning star that was confirmed by a couple of dojis. Ichimokucloud.com - All Rights Reserved

66 Lesson 6) Indicators

CHANGE OF POLARITY Change of polarity is a term invented by Steve Nison, and it means that that the old support turned into the resistance. For instance:

You can use it to trade as you usually do.

INTERNAL TREND LINE The Internal Trend Line is one of the most used western trading tools. You probably know it already. I’m not a real fan of it, but just so you know, the old support becomes the new resistance as well. Here’s how it looks:

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67 Lesson 6) Indicators

I don’t use it much, but if you like it you can use it to manage your resistance and support areas too.

HEAD AND SHOULDERS The head and shoulders is one of the most used western patterns. And it is called head and shoulders because, well, it looks exactly like that. Here’s an example:

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68 Lesson 6) Indicators

If the market goes below the neckline, you should sell it. Conversely, we have the inverted head and shoulders, which works pretty much the same. Here’s how it looks, now without the lines so you can try to see it clearly:

As I said, it looks exactly like the last one except it is inverted. And remember that now, the position of the neckline is above the pattern.

OSCILLATORS Oscillators are mathematically derived from the prices, this way, they are completely objective. This includes Stochastics, MACD, RSI, etc. Ichimokucloud.com - All Rights Reserved

69 Lesson 6) Indicators When you’re trading, you should be using independent information, to make sure you don’t get confused. For instance, you can use MACD, or RSI. But not both, because they are not giving you any extra information and they would be just confusing you. I will talk a lot about RSI in the next chapters, so let’s just talk a little bit about the applications of oscillators. Essentially, an oscillator is measuring the momentum of the trend. It is trying to gauge if the market is overbought or oversold. I’m sorry about the size of the pictures in this chapter, however, to show you everything this is the only way I can do it. Here’s an example of a Piercing Pattern together with the MACD oscillator:

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70 Lesson 6) Indicators As you can see, the MACD confirmed what the Piercing Pattern was telling us: it is confirming that the market is oversold. Is the market vulnerable? Yes, it appears to be. Now let’s take a look at another candlestick line trade in conjunction with an oscillator so we can gauge the power of the trade.

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71 Lesson 6) Indicators As you can see, in the first situation the market appeared to be oversold, and the piercing pattern worked perfectly. However, on the second trade it also worked perfectly but the oscillator didn’t work that well. Why? Well, as you can see, the slight downturn of the market was only two ticks long, and the oscillator didn’t give too much strength to that signal. This means that the momentum is also measured by the oscillator.

DIVERGENCE Divergence is whenever the market makes a new low, but the oscillator doesn’t makes a new low. Or, conversely, if the market makes a new high but the oscillator doesn’t show it as a new high. For instance, here’s how a negative divergence would look like:

As you can see from the trading example below, there is a clear divergence between the oscillator and the price movement. The oscillator already had turned positive, while the price movement was still making lows. This is exactly what positive divergence means. Ichimokucloud.com - All Rights Reserved

72 Lesson 6) Indicators

And here’s an example of negative divergence:

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73 Lesson 6) Indicators

Also, it is very important for you to use candlesticks in conjunction with the oscillators. Don’t buy by only looking at the oscillator, always look at the candles in conjunction with it. Let’s take a look at the Bollinger Bands now. It is one of my favorite indicators to use, and I recommend you learn how to use it. And it is perfectly fine to use with oscillators.

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74 Lesson 6) Indicators Bollinger bands, as you probably know, are lines two standard deviations above and below from the moving average. As the market gets less volatile, the bands shrink and as it gets more volatile it expands. It is another way to gauge overbought and oversold, but this is a separate tool from oscillators, so you can use it in conjunction with them. They work very well as overbought and oversold indicators, because we know exactly when the market is getting a little bit overextended. Here’s how it looks, and a simple case study about it:

What is the pattern that happened in the first arrow when the prices touched the Bollinger Band? A piercing pattern. Look now at the second one, it Ichimokucloud.com - All Rights Reserved

75 Lesson 6) Indicators is a Bearish Engulfing Pattern. Look at the third one, it is another piercing pattern. Even before the arrows, you can see a shooting star crossing the Bollinger band. What is going on there? It is showing us that the market is overextended in all cases. But how do you trade with it? Do you need more signals? NO! You have to think about the Risk-Reward of the trade. Always think of it even before you think about entering a trade.

FIBONACCI RETRACEMENTS Another very useful technique used in the markets are the Fibonacci retracements. It is very simple, it basically plots lines correspondent to 38.2%, 50% and 61.8% from the top price. For instance:

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76 Lesson 6) Indicators

Even though the hammer confirmed the Fibonacci Retracement, I still wouldn’t trade on it. It is too much of a weak signal, and the risk-reward isn’t that good. You can use the Fibonacci Retracements in conjunction with other indicators, but don’t use it alone with candlesticks. If you do, you will get burned very often. Now what if we get something like this?

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77

Well, that is a little bit different. You can see a variation of an evening star, with a doji right in the middle of it, and a shooting star confirming the Retracement. That is a better trade than the past one, especially because of the doji, evening star and shooting star variation. And also look at the Risk-Reward ratio, we have a solid stop right above the Fibonacci Retracement with the doji’s high. Okay, now that we have learned a lot of ways to see trades in a different light, let’s go to the meat of the course: the Ichimoku System, and why after learning it you should forget almost everything you have learned up to here.

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78 Lesson 7) The Ichimoku System

LESSON 7) THE ICHIMOKU SYSTEM In this chapter I am going to teach you the intricacies of the most powerful system ever invented by a trader, the Ichimoku System. Here’s a picture of the system. Just noticed how it timed the market beautifully.

Right before the market had a huge run, it gave me the signals I needed in order to make the big bucks. Can you see how the cloud was beginning to open up, and suddenly the price slightly touched the cloud? At the same time, the purple line (the Tenkan-Sen) crossed the blue line (the Kijun-Sen) signaling even more strength in the market. Right after the price touched the cloud, if you bought the trade, you could have made a boatload of money. This is the system I’m going to teach Ichimokucloud.com - All Rights Reserved

79 Lesson 7) The Ichimoku System you, and there’s a lot more to it. You will use this in conjunction with everything I have taught you previously, and it will make a difference. This is the real deal, it’s almost like ‘cheating’ the market. Now, let me explain exactly how the Ichimoku Kinko Hyo works. It literally translates to “Equilibrium chart at a glance”. Even though it may seem slightly chaotic, it is not. You’ll learn how to read all the five lines and the cloud at a glance, by the end of the next chapter. Just a simple look at the chart will give you the best understanding of the current trends in the market. You’ll learn its strength, its momentum and the ‘feeling’ of the trend instantly. I also want you to keep this to yourself, don’t tell all your friends. If you do that, our golden goose is going to get killed. You have to think about the Ichimoku as a system that tries to show you whether the market is at equilibrium or not. And if not, you’ll know exactly which direction the market is going to. And you’ll be laughing all the way to the bank. There are 5 lines, or components, to the Ichimoku System. Let me teach you how they are created, so you can understand the mechanics behind the system. To make money, you have to understand everything you do. And this is no different. Making money isn’t hard, but you have to know what you’re doing.

THE TENKAN-SEN The Tenkan-Sen is calculated by the following formula: (Highest High + Lowest Low)/2 for the last 9 periods. You may think that it is very similar to the moving average. However, it is the average between the highest high and the lowest low in the window. So there is a big difference, in that if the market doesn’t know where to go, the Tenkan-Sen will be completely flat for the period. If it is flat, it is because the price is in a short-term equilibrium. This is why most other traders lose

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80 Lesson 7) The Ichimoku System money, they don’t see the equilibrium. They think that the market is always going somewhere. And trust me, most of the times it is not. You can see it in this picture:

Look at the Purple line. That is the Tenkan-Sen. It doesn’t know where to go, because neither does the market. It is a lot less reactive than the simple moving average, so it is a very good conservative line. It represents a better estimate of the actual price equilibrium. Do you get it? The good thing about knowing when the market is in equilibrium is because we don’t want to have any false buys or false sell signals when trading. If it is flat, we know that in the past 9 days the market is showing no trend at all.

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81 Lesson 7) The Ichimoku System The Kijun-Sen is calculated using the following formula: (Highest High + Lowest Low)/2 over the past 26 periods. Look, it is very similar to the Tenkan-Sen, and it is one of the true hearts of the Ichimoku Kinko Hyo system. If conservative traders like to use the moving average, we will use both the Tenkan-Sen and the Kijun-Sen. The Kijun-Sen provides us with the same information than the Tenkan-Sen, but on a longer time-frame. Check out the blue line, we can see that it shows the same behavior as the Tenkan-Sen.

It becomes flat when the market is not doing much, when it is basically just random-walking without any true trend. Don’t do the same mistake that those broke traders in Wall-Street do all the time: The price may be moving, but it may be going NOWHERE. Don’t try to follow a trend too closely, sometimes the price will be going nowhere and if you trade, you’ll lose money. Lots of it.

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82 Lesson 7) The Ichimoku System Because the Kijun-Sen uses a longer time-frame, it is a very good shortterm indicator of the trend of the market. It is not jumpy and it will tell you when the market is not reacting. If there is a new highest high, the Kijun-Sen will spike up, so you can actually follow the trend of the market by following the trend of the Kijun-Sen. Moreover, if the angle of the Kijun-Sen is getting steeper, the trend is getting stronger. If the angle gets flatter, the trend is weakening. You can easily see that here:

Can you see how the Kijun-Sen got very steep? Look at the blue line. It is usually unreactive, but suddenly it shot up like a rocket. The Kijun-Sen is a very good indicator of the price equilibrium, even better than the Tenkan-Sen, because of the longer period. I will explain it to you later how we may use it to trade, how to find equilibrium points and how to use it as a stop-loss and as an entry point. And don’t trust any other system. There is another point to the Kijun-Sen. If it becomes flat, it transforms itself in an attractor to the price. If it stays flat for long enough, the price will Ichimokucloud.com - All Rights Reserved

83 Lesson 7) The Ichimoku System go towards it, no matter what. It’s all about the moving average the Kijun-Sen is calculating.

THE CHIKOU SPAN The Chikou Span is the current closing price time-shifted backwards into the past, by 26 periods. The Ichimoku has these unique features that you will not find in any other charting system. The rationale is pretty simple: we can quickly compare today’s prices with those of 26 periods ago, and by doing that, we get a better sense of the trend of the market as a whole. Think of it as your best trading memories. You should always compare them to your current trading, to make sure you’re going in the right direction. If the current price is lower than the price of 26 periods ago, we know that the market is bearish. And we can expect, depending on the other factors of the system, a high probability of the market going even more bearish. We can easily see the trend with the Chikou Span.

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84 Lesson 7) The Ichimoku System Conversely, if the current price is higher than the price of 26 periods ago, we know the trend and we know that there is some high probability of the gaining even more ground.

Even though the trend may seem obvious here, sometimes it won’t be that obvious. So you must use the Chikou Span. It also has other uses, but we will discuss them later when talking about trading strategies. You’ll mostly use it to confirm your trading calls.

THE ICHIMOKU CLOUD The Ichimoku Cloud has two parts, both the Senkou Span A and the Senkou Span B. This is the foundation to the Ichimoku System. While we could use eachother separately, their real power comes when we can grasp their dynamics in the Kumo. Ichimokucloud.com - All Rights Reserved

85 Lesson 7) The Ichimoku System We calculate the Senkou Span A by doing the following: (Tenkan-Sen + Kijun-Sen)/2 time-shifted into the future by 26 periods. We calculate the Senkou Span B by doing the following: (Highest High + Lowest Low)/2 for the past 52 periods time-shifted into the future by 26 periods. Each of these lines has a powerful meaning. By using the average between the Tenkan-Sen and the Kijun-Sen time-shifted into the future, the Senkou Span A can quickly give you the power to see the support and resistance from 26 periods ago, and compare it with the current spot price.

The Senkou Span B, on the other hand, lets you see the longest-term equilibrium. So you can quickly make more informed decisions about the trade.

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86 Lesson 7) The Ichimoku System

These two lines are not supposed to be used alone. Always remember, they are only useful together. The cloud is the heart of this system, and if you master it, you’ll be able to make fortunes trading Forex. And it is easy to learn it too.

CALIBRATION Like every system, this one has to be calibrated according to the market you are playing. In a faster market, you would want to cut down the periods. For instance, in times that the market is experiencing unusual external stress. While if the market is sleeping like a baby, not seeing a lot of changes, you should extend the periods in order to profit the most from those longerterm trends.

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87 Lesson 7) The Ichimoku System But the standard, and the settings that I use the most, is the 9 – 26 – 52 combo. You should burn these numbers in your mind, because they could bring you more money than any other three numbers in the world.

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88 Lesson 8) How to Use the Ichimoku

LESSON 8) HOW TO USE THE ICHIMOKU Now is the time to learn how to use the system. And there are several parts to it. First you have to learn how to use the Kumo.

THE KUMO One of the Kumo’s most important aspects is the fact that it can provide you with the best support and resistance system. If you use still use trendlines, stop. Look, I’ve tried hundreds of methods to find the correct support and resistance in Forex, and most of the times, I got burned. Even though the techniques from the Candlesticks were pretty good, I feel it is my duty to tell you that this system will almost work like a crystal ball, as soon as you begin to use it. Just imagine the inside cloud as the only place you have no idea what is going to happen, it is too cumbersome to try to figure out exactly how the price is going to react in the middle of the cloud. But you know one thing: If it breaks the cloud, it will keep on going. And going. And going. Look in the picture below how the prices ride the cloud, it is absolutely amazing.

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89 Lesson 8) How to Use the Ichimoku

And it just blows the traditional chartists out of the water. You’ll be basically ‘cheating’ your way out of losing trades. By figuring out in advance whether the market is breaking the support or the resistance. Some chartists would lose all this money by not figuring out that the true support was still below the prices.

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90 Lesson 8) How to Use the Ichimoku

I don’t even know how some people make money without using the Ichimoku. It is so simple, yet so powerful, that I find it strange that not a lot of traders use it. I’ve made a killing with it. Another problem that usually makes traditional chartists lose a boatload of money is when the price is in the middle of the cloud and, because they can’t see it, they go long thinking that the resistance has been broken. But it hasn’t, the price is in the middle of the cloud and it is too risky to go long or short in this situation. Just check out the following picture and you’ll clearly see what I mean, the traditional chartist would have gone short on the trade, however, he would have lost everything pretty quickly. He didn’t realize that the price trend was not yet defined. The price touched the Senkou Span B and reacted faster than any chartist could see.

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91 Lesson 8) How to Use the Ichimoku

This is the power of this system. And we are just getting started. But what about the relationship between the price and the Kumo? Well, if you haven’t realized until now: if the price is trading above the Kumo, what we are seeing is a bull signal, because obviously, the current price is higher than the historical average.

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92 Lesson 8) How to Use the Ichimoku

In the same way, when the price is trading below the Kumo we are in a bear market. The first step in analyzing any trading situation is to see the relationship between the price and the Kumo. When you do that, you’ll have the necessary market trend information. Something that can be hidden with other methods. Here’s an example of a bear market:

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93 Lesson 8) How to Use the Ichimoku

Don’t trade unless your trade agrees with the Price-Kumo relationship. Don’t go long if the relationship is bearish. You may make 2 pips, but you’ll lose 50. Just go short and ride the trend. It is always better to ride the trend, than to try to time the market perfectly. Another very important factor you must take in consideration is the Kumo’s depth. It can vary immensely, and you have to know exactly what it means. If the market is too volatile, the Kumo will open up; conversely, if the market is not volatile at all, the Kumo will close up. But why is that? Remember what the Senkou Span A and the Senkou Span B represent? The Senkou Span A represents the average between the Tenkan-Sen and the Kijun-Sen. But the periods for the Tenkan-Sen and the Kijun-Sen are different, they are respectively 9 and 26 periods. So when you average it, you are finding the middle point between the longer average and the shorter average. While the Senkou Span B represents the average of the highest high and the Ichimokucloud.com - All Rights Reserved

94 Lesson 8) How to Use the Ichimoku lowest low for the past 52 periods. When you take the difference between both, you are basically measuring the local volatility against the longer term volatility. So the Kumo will expand and contract based on the volatility of the market. And what does that mean to you? Well, if the Kumo is very thick, and you’re long in a position that is breaking through the resistance, you should go long as soon as it breaks through the Kumo. Whenever the price breaks through a thick Kumo, it will gain momentum very quickly and rapidly. For instance, here we can see both a very strong short and a very strong buy signal:

In the first situation, the price broke through a thick Kumo and tried to beat the new resistance. But because the Kumo is too thick, it didn’t have the strength to break through. If you had shorted the trade as soon as the price came below the Kumo, you would have made a killing. Why would you short it? Because you know that the Kumo is very strong, and it would be very hard for it to come back up. Ichimokucloud.com - All Rights Reserved

95 Lesson 8) How to Use the Ichimoku Similarly, on the second moment, the price stayed with the Senkou Span B for a couple of seconds as it tried to break the resistance. As soon as it did, the market had a huge run-up. It is that simple to make money by trading the Kumo. And we are just beginning. As you can see, the Kumo also has a sentiment. It has a natural bias, sometimes bullish, sometimes bearish. It has a bullish sentiment when the Senkou Span A is above the Senkou Span B. And conversely, it has a bearish sentiment when the Senkou Span A is below the Senkou Span B. Why is that? Well, in the first case, the faster average is trading above the longer-term average. And in the second, the opposite is happening. It is that simple. Here’s an example of a bearish Kumo:

And here’s an example of a bullish Kumo:

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96 Lesson 8) How to Use the Ichimoku

Don’t trade on the Kumo’s sentiment alone. It is not a good strategy and you’ll lose money if you do it. The Kumo’s sentiment is just another piece of the puzzle. You should use it only as confirmation, not as the primary driver for your trades. There is another aspect of the Kumo that you have to understand in order to grasp the magnitude of the effectiveness of the Ichimoku. You’ll often see flat tops or flat bottoms on the Kumo. If you see a flat Senkou Span B, you have to think of it as having the same effect as the flat Kijun-Sen. It is an attractor to the price that is in its close proximity. Why? Because the Senkou Span B is the price-equilibrium for the past 52 periods. The price will always want to go there, if the equilibrium remains for long enough. In a bullish trend, the flat Senkou Span B will result in a flat bottom Kumo, while in a bearish trend it will result in a flat top Kumo.

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97 Lesson 8) How to Use the Ichimoku Beware of the pull of the Senkou Span B on the prices, most likely the prices will ride the flat bottom or top, so you must choose the entry or exit point carefully. Here you can see an example of what can happen if you don’t respect the flat Kumo, you can go short at the exact wrong moment and lose your money fast. Remember that even though the price has crossed the cloud, because the Kumo has a flat bottom it still exerts a lot of pressure and pull over the price.

THE MOST IMPORTANT TRADING STRATEGY! Now let’s get to the meat of this course. I’ll give you all the best trading strategy for this system. The other ones I’ll give you in the next chapter as reliable, but are not as reliable as this strategy. This is the most traditional strategy within the Ichimoku framework, and all serious practitioners should completely understand it. Ichimokucloud.com - All Rights Reserved

98 Lesson 8) How to Use the Ichimoku If the Tenkan-Sen crosses above the Kijun-Sen, we have a bullish signal. If the Tenkan-Sen crosses below the Kijun-Sen, we have a bearish signal. The strength of the signal depends on the the relationship between the price and the Kumo. Here’s how it works: Strength Bullish Cross Strong Cross Above Kumo Neutral Cross Inside Kumo Weak Cross Below Kumo Chikou Above Cross Span Means Stronger Signal

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Bearish Cross Cross Below Kumo Cross Inside Kumo Cross Above Kumo Below Cross Means Stronger Signal

99 Lesson 8) How to Use the Ichimoku As you can see, in the point A we have a Neutral Bullish Signal, and in point B we have a weak Bearish Signal. Now you have to check the relationship between the cross and the Chikou Span. It is that simple. What is the point of entry? This is pretty easy to see: an order is placed when the cross has been solidified. Just be careful of any resistance near the cross. And remember that if the cross is solidified while the price is leaving the Kumo, there is a high probability of a strong movement. What is the exit point? There are several different exit points, however, the easiest exit point you can take is whenever there is a reverse-cross. Just remember that your own money-management skills will be the primary driver of the exit point. If you want to exit as soon as you make 85 pips, do it. If you want to take a little bit of volatility and ride the trend, do it. Follow your usual strategies when exiting. Similarly, there is no stop-loss strategy. Take the profits when you have reached either your personal goals, or the cross has reversed itself. Don’t try to over-ride the trend, it will come back to bite you in the ass if you do. For instance, here’s a simple trade that could have made you 117 pips in a day, easily.

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100 Lesson 8) How to Use the Ichimoku

And all I had to do was to buy when I saw the cross, and sell when I saw another cross. No big deal. The price was above the Kumo, giving me even stronger bullish signals.

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101 Lesson 9) The Advanced Trading Strategies

LESSON 9) THE ADVANCED TRADING STRATEGIES Let’s take a look now at our advanced trading strategies.

THE RELATIVE TENKAN/KIJUN CROSS Let’s get it started then. This first strategy is very similar to the Tenkan/Kijun Cross, however, now I will teach you the secret exit strategy that is at the heart of all the advanced strategies I am going to teach you. You have to learn not only when to buy, but more importantly, when to get out. As with the Tenkan/Kijun Cross, as the Tenkan crosses above the Kijun you should go long. And if it crosses below the Kijun, you should go short. The strength of the signal depends, again, on the relationship between the cross and the Kumo. This will be true for all our strategies. However, the heart of this new advanced trade is the exit strategy. We are going to use a popular oscillator to give us the exit strategy: The Relative Strength Index. I know, it may sound old and boring. That’s what I thought, too, when my mentor taught me this secret for the first time. I was wrong. So very wrong. Sometimes, old is good. And in this case, I’ll show you exactly why the Relative Strength Index will give you the best exit strategies. Look at the following bullish example, and I’ll explain what I did there.

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102 Lesson 9) The Advanced Trading Strategies

The entry point is when the Tenkan-Sen crosses the Kijun-Sen right? Entry Point: At Point A, the cross had a weak bullish signal. However, because the depth of the Kumo is very thin, I went ahead and bought the trade. Exit point: At point B our exit strategy was triggered. Now here’s what I have to explain to you; this is our bullish exit strategy: 1

Whenever the RSI falls 10% or more.

2

If the RSI falls down less than 10% and when it runs up it doesn’t break the peak-resistance.

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103 Lesson 9) The Advanced Trading Strategies This is exactly what I did there. The RSI fell a little bit, and then gained back again but didn’t have the strength to break through the peak. That is my signal to sell. It showed weakness, and we never like weakness in a bull market. My next entry point was the other cross, on point C. However, this time we were very confident: it was a strong bull signal above the bullish Kumo. That is a very easy trade. Again, I used the exit strategy on point D, and didn’t lose a single pip. This is gold. I will give you 3 more examples so we can get this engrained in your mind. Let’s take a look at another bullish example:

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104 Lesson 9) The Advanced Trading Strategies Again, as you can see, the strategy works like a charm. This may be the easiest way to make money with the Ichimoku. You bought it at point A, as you saw that very strong bullish signal with a bullish Kumo. After we reached point B, our exit strategy was triggered and we exited perfectly. My Mentor once said to me that if he could choose only one trade, he would choose the Relative Tenkan/Kijun Cross: it is easy to apply and extremely reliable. For those on the outside, it looks like you have a crystal ball. Now let’s look at bearish examples. The entry point: The Tenkan crosses the Kijun down. What about the bearish exit signals? Here’s the strategy for the bearish Relative Tenkan/Kijun Cross: 1

Whenever the RSI gains 25% or more.

2

If the RSI gains less than 25% and when it goes down it doesn’t break the inverted-peak resistance.

Let’s see an example:

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105 Lesson 9) The Advanced Trading Strategies

We got in fast and left the trade even faster. This trade alone is worth a fortune, and it only took us a little bit less than 5 hours to go in and out of it. As you can see, at point A we had our very strong bearish signal, and it was below a bearish Kumo. At point B, our exit point was triggered and we didn’t lose a single penny. The perfect kill. Now I’ll show you another example of a very strong bear signal, below the bearish Kumo:

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106 Lesson 9) The Advanced Trading Strategies

As you can see with this trade, our strategy worked perfectly again. And we managed to make 437 pips in less than 7 hours. This is what I call the perfect storm: a bearish Kumo, triggering a bearish cross and the thickening of the Kumo right after the trade started. That looks perfect to me. I hope that by now you can catch all these little details. Let’s take a look at the next strategy now.

THE KUMO BREAKOUT The Kumo Breakout is one of the most reliable strategies in our system. The exit strategy is exactly the same as the exit strategy for The Relative Tenkan/Kijun Cross. Ichimokucloud.com - All Rights Reserved

107 Lesson 9) The Advanced Trading Strategies What do I mean by Kumo Breakout? Well, as soon as the price breaks through the Kumo, you enter the market in the direction of the break. You just have to be careful about one thing: if the Kumo has a flat top or bottom, you have to respect it and think twice before trading. Also remember to think about the Kumo’s Sentiment. If the sentiment is bearish, and the trade is bearish, it is a very good sign. Conversely, if the sentiment is bullish and the trade is bullish, a good trade may be developing. Here’s an example of a Bullish Kumo Breakout:

Let’s see everything that makes this a good trade: 1. Bullish Kumo 2. Near a Very Steep Tenkan/Kijun Cross Ichimokucloud.com - All Rights Reserved

108 Lesson 9) The Advanced Trading Strategies 3. No Flat Top 4. The Chikou Span is Crossing Up 5. The Relative Strength Index is Bullish This trade can be as easy as running through a check-list, and yet, you have just made 1042 pips. Easily and quickly. Now let’s take a look at a bearish example:

This is a very weak bear Kumo Breakout. Even though we managed to make 59 pips, I wouldn’t have taken this trade if the Tenkan/Kijun Cross hadn’t just happened. This added strength to my belief that it was a good trade. Ichimokucloud.com - All Rights Reserved

109 Lesson 9) The Advanced Trading Strategies

THE KIJUN-SEN CROSS The Kijun Sen Cross is probably the most popular trade in the Ichimoku System, and it is one of the most reliable trades too. It happens when the price crosses over the Kijun-Sen. If the price crosses from the top down, it is a bearish cross. If the price crosses from the bottom up, it is a bullish signal. As with all Crosses in the Ichimoku System, it’s relationship to the Kumo is essential to the classification of the strength of the strategy. The classification is exactly the same as with the Tenkan/Kijun Cross. Here’s a table, so you can refresh your memory: Strength Bullish Cross Strong Cross Above Kumo Neutral Cross Inside Kumo Weak Cross Below Kumo

Bearish Cross Cross Below Kumo Cross Inside Kumo Cross Above Kumo

Let’s see a couple of examples so we can get the hang of it. I will also tell you why some of the weak trades work, and why some of the good trades don’t work. Get ready to go deep into the Ichimoku. Here’s an example of a strong bullish Kijun-Sen Cross:

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110 Lesson 9) The Advanced Trading Strategies

Can you see the Kijun-Sen Cross? We made a lot of money in a single trade that lasted slightly less than 40 minutes. The Kijun-Sen here has a very good shape. As you can see, the Relative Strength Index was already pointing out to us that it was going to be a very good run. As soon as the prices broke through the flat Kijun-Sen, we had our trade ready. It is that easy. Our exit point was calculated as usual, with the Relative Strength Index. Now let’s look at another example:

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111 Lesson 9) The Advanced Trading Strategies

This is a weak Kijun-Sen Cross trade. Even though we manage to make 24 pips in 40 minutes, it was riskier than usual. I only entered this trade because the RSI showed me a lot of strength. Weak crosses need other types of confirmation from outside the Ichimoku System. Let’s take a look at a Bearish example now:

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112 Lesson 9) The Advanced Trading Strategies

Here’s what I call a weak bear Kijun-Sen Cross. What are the reasons that made me enter the trade? Look at the sky falling RSI. Look at the trend in the Tenkan-Sen. However, sometimes I would pass on trades like these. I really don’t like weak crosses unless I have some good reasons to enter the trade. Let’s take a look at another Bear example, but a very strong bear example:

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113 Lesson 9) The Advanced Trading Strategies

The difference between the last weak bear cross, and this strong cross is remarkable. At the same time as the prices were crossing through the KijunSen, a Tenkan/Kijun Bearish cross happened, and the prices broke through a Kumo. The RSI was falling like a kamikaze. This is a perfect storm. Whenever you have the opportunity to take a trade like this, do it. The probability of losing money is greatly reduced. Let’s go back to a bullish example. I am mixing the examples up, because I hope that by changing the example type all the time you will learn how to trade the Ichimoku in every situation possible.

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114 Lesson 9) The Advanced Trading Strategies

Can you see the strong cross? Easy money. The Kijun-Sen was already trending upwards, and as the price broke through, I saw this huge spike in the RSI and I knew that this trade would make me money. Always look for other indications that the trade will work. In this case, it was the RSI spike and the Kumo-Cross that had happened just a tick before the actual trade. Again, I used our standard exit strategy. Let’s take a look at a weak bullish example now:

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115 Lesson 9) The Advanced Trading Strategies

Well, as you probably can see now, I only entered the trade because the RSI was showing me the strength I needed to make a couple of pips, fast. Even though the Bullish Tenkan/Kijun Cross happened before my exit point, I don’t like to break my own exit rules. As a guideline, you should never stay longer or go out earlier than your exit strategy dictates. It will make you lose money in the long run, I guarantee it. Let’s take a look at a couple of perfect storms now, so you will never miss one of these. I will use examples I have used before, and comment on every factor that influenced my decision to take the trade.

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116 Lesson 9) The Advanced Trading Strategies

Look at this beauty. What a great day. What do we have going on for us? A) A Tenkan/Kijun Strong Bullish Cross B) A Kijun-Sen Strong Bullish Cross C) A Bullish Kumo Sentiment D) A Spiking RSI Whenever you take trades like these, you can rest assured that you will make money. All you’ll need to do is to ride the trend, and that is it. With the Ichimoku, you will not have to trade 20 times every minute. You can take a break, get some tea and go back to work. It won’t affect your profits that much, compared to other systems. Ichimokucloud.com - All Rights Reserved

117 Lesson 9) The Advanced Trading Strategies Let’s take a look at a bearish perfect storm now:

Before you read my checklist, try to see everything that matters, and try to think for yourself why this is a great trade. Go on, don’t be scared… I’ll help you out in a bit. Got it? Alright, here’s everything I see in the trade, and I hope you will see that too: A) A Tenkan/Kijun Strong Bearish Cross B) A Kijun-Sen Strong Bearish Cross C) A Bearish Kumo D) A Bearish RSI Trend Ichimokucloud.com - All Rights Reserved

118 Lesson 9) The Advanced Trading Strategies Can you see how easy this trade is? I can teach this to a 7-year-old and he will make more money than most traders out there. And I’m not even kidding. What about some examples where the Kijun-Sen Cross didn’t work? Just as important it is to make money, it is to not lose money.

There you go, an example (it was very hard to find one by the way) where the Kijun-Sen Cross did not work. Neither did the Tenkan/Kijun Cross Right after the Kijun-Sen Cross. If you took that trade, you would lose 16 pips until the exit strategy worked. Why is that? Well, for starters, the Kumo Sentiment was turning Bullish right with the trade. Secondly, look at the trend of the Kijun-Sen. You were trading against the trend of a ‘long’ term average. Thirdly, you were trading against the Bullish Tenkan/Kijun Strong Cross. Even if the cross was reversing itself, you would not know at that time. Ichimokucloud.com - All Rights Reserved

119 Lesson 9) The Advanced Trading Strategies Can you see how many factors make this trade a very bad one? The Ichimoku is a very unique system, and just one line should never tell you what to do. Look at the whole. Let’s look now at a Bullish Kijun-Sen Cross that didn’t work:

Okay, you just lost 31 pips in less than 25 minutes. Why was that? There are several factors that are giving you a good signal for the trade. Firstly, there was a Bullish Kumo Breakout. Secondly, the RSI was trending up. Thirdly, there was a strong bullish Kijun-Sen Cross. So why didn’t it work? The Kumo Breakout was not strong enough, can you see the bearish sentiment of the Kumo? Can you also see that the top of the Kumo was flat, went down a step and continued flat?

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120 Lesson 9) The Advanced Trading Strategies Secondly, you didn’t wait for the Kijun-Sen Cross to solidify. If you had waited just a tick more, you would see that the Tenkan/Kijun Cross Bearish was going to happen and you would be out of the trade as quickly as you could. Thirdly, the Kijun-Sen was flat. Remember how the Flat Kijun-Sen is an attractor for prices, like a magnet? That is exactly what happened there when you had that bullish signal. The market was going sideways, and you wanted to trade, this is why you lost 31 pips in 25 minutes. I think I have covered the most important strategies in the Ichimoku System. Let’s now take a look at how to deal with money management, as we conclude our studies about the Ichimoku System.

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121 Lesson 10) Money-Management and the Kelly Criterion

LESSON 10) MONEY-MANAGEMENT AND THE KELLY CRITERION You have probably heard about the Kelly Criterion by now. I will try to give you a quick lesson about it, in order to teach you how you should implement it when using our system. This Criterion was developed by John Kelly and implemented in gambling and investing by Edward Thorp. The Kelly Criterion is the strategy that will maximize your wealth over the long term. It beats any other money-management system, and this is why we are going to use it. Did you hear the stories about the MIT Blackjack team beating the casinos and making millions of dollars? They were using the Kelly Criterion in order to optimize their betting size and guarantee that their bankroll was growing as fast as possible. And if it’s good enough for those MIT graduates, it is good enough for us. The only problem with the Kelly Criterion is that the volatility of your total bankroll will not be minimized. Unlike Markovitz’s theory on minimizing risk while maximizing returns, the Kelly Criterion only tries to maximize your return. Some prominent economists have written peer-reviewed articles arguing against the Kelly Criterion, because they think that Markovitz’s approach to portfolio management is the optimum one. I say that they should all go back to their caves, while we make the money. And I can talk bad about them, because I am an economic enthusiast myself, albeit a renegade. Ichimokucloud.com - All Rights Reserved

122 Lesson 10) Money-Management and the Kelly Criterion They are always arguing about the stupidest things you’ve ever heard. I won’t bog you down with the details, but let me tell you that most of the things that economists study, have no correlation with the real world of money making. Some claims have been made that even Warren Buffett and Bill Gross use the Kelly Criterion money management system. That is enough to tell me that this system is very good. If the richest man in the world uses it, it can’t be as bad as those economists say it is. It will not minimize the volatility of your portfolio; in fact the volatility will be quite big. What the Kelly Criterion will tell you is how to choose the optimum ‘bet size’ against a set of probabilities and returns. For instance, it will tell you exactly how much you should bet if your chances of winning are 51% and your payoff is 2-to-1 in order to maximize your long-term return. And one good thing about the Kelly Criterion is that it will never let you go bankrupt. That is because the bet size is scalable; it will always be a fraction of your bankroll and not a fixed amount of money. This way, if you lose money the Kelly Criterion will tell you t0 decrease your bet size as you no longer have the opportunity to invest what you used to. It is a very good money management system because of this, as it will prevent you from going crazy and betting more than you should in a single trade. However, you must be aware that if you use the full power of the Kelly Criterion system, your bankroll will probably suffer huge losses and equally huge wins. The volatility might be huge. Ichimokucloud.com - All Rights Reserved

123 Lesson 10) Money-Management and the Kelly Criterion This is why the Kelly Criterion is supposed to be a long-term money management system. Rather than blowing all your money away in a single trade, deposit more money in your account, and blow it all again, the system assumes that you keep track of your bankroll over time, and that you adjust your bet sizes accordingly. Another problem with the Kelly Criterion is that, having to do the math all the time, in order to figure out the exact fraction of your bankroll you should invest might scare you. This is why I did all the math for you. In the last page of this chapter, you will find a table with both the Ichimoku System signals, and how much you should invest in the trade. This way, you don’t need to pull your calculator all the time. You can just take a look at the table and you’ll quickly know exactly the fraction of your bankroll you should invest. You should understand the Ichimoku System if you want to use my money management system, because you will be constantly checking for the signals necessary for you to choose the optimum bet size. Before we start, I just wanted to tell you that money management alone will not bring you incredible results, but it will help you maximize your gains and minimize your losses. So your first goal is to understand exactly how to make the most amount of money by using the Ichimoku System, not how to use the Kelly Criterion. After you have mastered the Ichimoku, then you can focus on the money management aspect of trading. Okay, let’s begin. I know that you might not be very familiar with math; however, I feel that you should know at least the basics of the mathematics of the Kelly Criterion in order to know what you’re doing with your money. Ichimokucloud.com - All Rights Reserved

124 Lesson 10) Money-Management and the Kelly Criterion The Kelly bet, or the fraction you should invest into each trade is given by

Where f* is the fraction of your bankroll, b is the payoff odds you’re receiving, p is the probability of winning and q is the probability of losing (1p). E is how confident we are in our trading abilities (a modification I made). What is that formula telling us? I don’t care, and neither should you. It won’t add to your money making skills. That formula is a tool, and should be used as the tool it is. As of today, I would advise you into using E=0.3 for now and as you get better, you can increase it. Use at most an E=0.8, it will be safer for your bankroll this way. Okay, how about some real numbers now? To use the Kelly Criterion, we have to estimate the winning percentage of the strategy we are utilizing, and our odds. I will use standard odds of 2 to 1, because it is safe enough and I believe that on most cases, this is how much you would get, double of what you are risking, especially on Forex Trading. If you want to change this, you can. Just use the spreadsheet I gave you to change the odds. Now, what about the specific strategies? How much should you invest in each of the Ichimoku Strategies? I will create a small table, so you can find out the probability of winning with our system (this is all estimated from past trades and my experience). You will find on the table the following: Number of signals – The number of signals that the Ichimoku System is giving you. For instance, if you see both a Tenkan/Kijun Cross and a Kijun-Sen Cross, that would be two signals. Ichimokucloud.com - All Rights Reserved

125 Lesson 10) Money-Management and the Kelly Criterion But there are a couple of subtleties in the system, so I have created another table so you can calculate the number of signals easily. Probability of Winning – This is the probability of you entering a winning trade. It obviously depends on the number of signals, and it is in direct relationship with them. Probability of Losing – This is the probability of you entering a losing trade. It can be seen as the complement of the Probability of Winning. And it is in inverse relationship with the number of signals you’re getting.

Number of Signals 1 2 3 4 5

Probability of Winning Probability of Losing 48% 52% 57% 43% 62% 38% 69% 31% 76% 24%

I am making your life as easy as it is humanly possible. Okay, now that we have the probabilities we should use with the Kelly Criterion, how about the number of signals? Well, I have created this kind of system in order to make your life as simple as possible. When I say the number of signals, I mean the number of trading signals you are receiving from the Ichimoku in a given trade.

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126 Lesson 10) Money-Management and the Kelly Criterion Here’s a way to think about it: Suppose in the same trade, you had both a bullish Kijun-Sen Cross and a bullish Tenkan/Sen Cross. How many signals are you getting? Two signals, of course. It is that simple. I have also separated the number of signals by the kind of cross that is happening. For instance, if you have a bullish Kumo sentiment, a strong bullish Kijun-Sen Cross and a strong Tenkan/Kijun Cross, how many signals are there? Only three? Wrong! There are in total five signals. You forgot to count both strong factors that add up to the trade. I have also created a table for the number of signals, so you can easily see how many signals you are getting in every trade you enter. Strategy Relative Tenkan/Kijun Cross Kijun-Sen Cross Kumo Breakout Bull(Bear) Strategy + Bullish(Bearish) Sentiment Two Bull(Bear) Strategies + Bullish(Bearish) Sentiment Two Strategies + Different Sentiment

Weak 1 1 1 2 3

Neutral 1 1 1 3 4

Strong 2 2 1 4 5

2

3

4

Now you just have to plug in the numbers. I made all this Kelly Criterion money management strategy as easy as I could for you. What most people would tell you is to simply find out what is the statistics of your winning percentage and go from there. But that would send the wrong message: the message that every trade you get in has the same probability of success. Ichimokucloud.com - All Rights Reserved

127 Lesson 10) Money-Management and the Kelly Criterion We know that this isn’t true. So I created this complete personalized system, and it can only be found in this course. Let’s see an example now:

By using our table, we can see that we have two strategies at work on the weak side, but the sentiment of the Kumo is inverted. So we only have 2 signals. By checking our Probability Table, we have a 55% chance of making money here. Using the Kelly Criterion, we have that the fraction of our bankroll that we should invest is 9.75% of our bankroll. But how would that translate in terms of Forex trading? Ichimokucloud.com - All Rights Reserved

128 Lesson 10) Money-Management and the Kelly Criterion Well, you should invest up until your margin is 9.75% of your bankroll. So that in case you lose, you can only lose 9.75% of your bankroll. It’s easy right? The Kelly Criterion is very useful, and will help you increase your bankroll quickly and easily. You might get some volatility, but you will also get the best exponential growth rate on your money. I know, this was a quick chapter, but I have given you a complete system for money management. It may seem simple, but the mathematics behind it is very complex. I could talk about this for ages with you, but I’d rather give something you can use today.

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129 Conclusion

CONCLUSION I hope you utilize all the techniques I have taught you as you progress into becoming a true Ichimoku Trader. If you want to know exactly what will make you the most money in the long run, here is a small list: The Relative Tenkan/Kijun Cross coupled with Candlestick Patterns Risk-Reward Analysis Money Management That is it. That is all you need to know in order to make a lot of money with this system. Now go trade.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THESE METHODS MAY HAVE WORKED IN THE PAST, PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A RISK OF LOSS. A LOSS INCURRED IN CONNECTION WITH TRADING FOREX CONTRACTS CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY RISKY AND SHOULD ONLY BE UNDERTAKEN BY INDIVIDUALS WITH ADEQUATE RISK CAPITAL. ANY ADVISORY OR SIGNAL GENERATED BY ICHIMOKUCLOUD.COM IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY. ANY TRADES PLACED UPON RELIANCE ON WWW.ICHIMOKUCLOUD.COM SYSTEMS ARE TAKEN AT YOUR OWN RISK FOR YOUR OWN ACCOUNT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. WHILE THERE IS GREAT POTENTIAL FOR REWARD TRADING FOREX, THERE IS ALSO SUBSTANTIAL RISK OF LOSS IN ALL TRADING. YOU MUST DECIDE YOUR OWN SUITABILITY TO TRADE OR NOT. FOREX RESULTS CAN NEVER BE GUARANTEED. THIS IS NOT AN OFFER TO BUY OR SELL FOREX CONTRACTS.

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