Cloud Charts Trading Success with the Ichimoku Technique Hardcover (David Beckett Linton, 2010)

Dow Theory

Ichimoku Chart with line names

Trend

Trend is your friend, don't trade against it.
You can only truly know a top or bottom retrospectively.
Higher highs and higher lows are what we expect in an uptrend.
Lower highs and lower lows are what we expect in a downtrend.It is likely that 3 or more trends are acting on prices at a given time.
Always try to identify the key levels, or areas, of support and resistance for prices.
Continuation patterns occur more frenquently in line with the trend than reversals.
The move in price out of a pattern is often similar in magnitude to the move into the pattern.
Prices will revert to the mean during the trend.
Volatility in prices after a long period of trending is normally a sign of a trend reversal.
Volume is best represented as a cumulative line, look for divergence with the price chart.

Moving Averages

Price crossing a moving average is an earlier riskier signal.
Two or three moving averages crossing on another give more reliable signals.
Common periods are 14, 20, 50, 60, 90, and 200.
Fibonacci numbers - 13, 21, 34 often work well.
Identifying the cycle period is helpful to ensure your averaging period is close.
Optimising averaging periods in back-tests is a way to establish which periods work best.
Moving averages are useful for trend definition on the price chart.
Moving averages can be used on indicators, such as On Balance Volume, to generate signals.
Moving average bands and Bollinger Bands can be used to identify if prices are overbrought or oversold.
Bollinger Band squeezes can help identify and impending dramatic moves in prices.

Indicators

Periodic indicators are generally used to identify price movement changing speed.
The methods for selecting indicator periods are the same as with moving averages.
Always relate indicator signals to the price chart to establish how well they have worked.
Unlimited proprietary indicators can be derived from virtually any formula and back-tested.
Look for divergence between indicators and the price chart for a warning for price trend changing.
Divergence is useful in providing clues for the direction of breakouts for prices from a sideways trading range.
Relative Strength charts can isolate the effect of an underlyinf market to show and instruments true performance with the effect of that market.
Relative Strength charts can be analysed in the same way as price charts.
Seasonality charts take an average forward to provide a possible roadmap of prices going forward.
Correlation between instruments should be plotted historically to understand if it is unusually high or low and how it is changing.
Log scale charts are best used for very long term charts or where prices have changed dramatically.
Flipping your charts upside down can help to remove any bias you might have.
The golden ratio can be used to project price retracement and price targets from a measured move in prices.

Points and Figure charts

There is no time axis on a Point and Figure chart - the x-axis shows number of reversals.
The box size defines the sentitivty of a Point and Figure chart.
Moves of one box are marked with the prevailing trend, 3 boxes against the trend for a reversal.
Unambiguous buy signals are given with a break above a previous up column (Xs).
Unambiguous sell signals are given with a break below a previous down column (Os).
Objective 45 degree trend lines define an unambiguous trend state.
Buy and sell signals should be taken with the confirming trend and ignored countertrend.
Vertical price targets can be projected from appropriate thrust columns.
Targets pointing to the same price point (clustering) increases the likelihood of them being met.
Risk reward ratios can be calculated with targets and stops.
Other indicators and log scales charts can be use with Points and Figure charts.

Candlesticks

Candlesticks are shown as hollow on up days and solid on down days.
Gaps occur where there is no overlap in the trading range on the previous day.
Island reversals are where a candle is marooned with gaps either side at a top or a bottom.
Doji at the end of a run in prices indicate indecision and a potential reversal.
A Morning Star after a downtrend signals the potential beginning of a new uptrend.
An Evening Star after an uptrend signals the potential beginning of a new downtrend.
Morning Star Doji and Evening Star Doji are stronger patterns.
Engulfing patterns are signalled by tall counter trend candles 'engulfing' a smaller candle.
Dark Cloud Cover and Piercing patterns are simply countertrend candles after a run in prices.
Marubozu are very tall candles where the midpoint may serve as support of resistance later.
It normally pays to wait a candle for the pattern to be confirmed.
Candles can be combined such as Heikin-Ashi.
Candle Volume Charts represent volume using proportionally wider candles.
The candlestick Chart is the normal way price is shown on a Cloud Chart.

Cloud chart

Turning Line - midpoint of the high and low of the last 9 sessions.
Standard line - midpoint of the high and low of the last 26 sessions.
Cloud Span A - midpoint of turning line and standard line shifted 26 bars forward.
Cloud Span B - midpoint of high and low of last 52 sessions shifted 26 bars forward.
The Lagging Line - the price line (close) shifted back 26 bars.
Configure your Cloud Charts in a way that they are closest to you.

Reading Cloud chart

Prices above the cloud means a bullish picture.
Prices below the cloud means a bearish picture.
Prices in the cloud are bullish if they came from the bullish zone.
Prices in the cloud are bearish if they came from the bearish zone.
Historically thick clouds after a run in prices might signal an imminent trend change.
Price crossing the cloud is an earlier but less reliable warning of a trend change.
The lagging line crossing the cloud is the main signal of a trend change.
Prices and the lagging line will often find support or resistance on the cloud edges.
The cloud spans crossing may be a sign that the trend is changing.
The turning line crossing the lagging line a long way from the cloud is a potential signal.
Cloud Charts don't work particularly well in sideways price congestion zones.
You may change the construction periods, but it is not recommended.
Cloud Charts will normally define a new trend earlier than it becomes clear using trend lines.

Patterns

The Ichimoku wave principle uses the letters I, V, N, P, Y to identify patterns.
Basic price targets may be projected from the V and N patterns.
The time high and low points should occur may be projected.
Cloud Charts already provide price levels at future times with the cloud.
Point and Figure price targets are likely to produce better results.

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