By Rob Jones
Trading CFDs is what is generally referred to as directional trading; while one can make money whether the price of the underlying asset goes up or down, this will only happen if the direction of the move can be correctly predicted.
Going long just before a price drop or going short before a price increase will have only one consequence: the trader will lose money.
Technical Indicators – the Ichimoku Kinko Hyo
There are literally hundreds of technical indicators out there that a trader can use to help predict market direction. One of them is the Ichimoku Kinko Hyo, which was developed in Japan during the previous century and which is gaining increasing popularity in the West because of its ability to identify trends.
The Ichimoku is actually a combination of different indicators that together form a formidable asset in many traders’ arsenals. With the help of this indicator it is possible to identify not only whether the market is in an up- or downtrend, but also where the vital support and resistance points can be found.
The indicator consists of five lines: The kijun-sen, tenkan-sen, senkou span A, senkou span B and chickou span. Fig. 11.05(a) is a candle stick price chart of the AUD/USD together with an Ichimoku Kinko Hyo chart
Fig. 11.05(a)
The Ichimoku Cloud is of paramount importance here. When the price is between the upper and lower levels of the cloud, i.e. inside the cloud, it is not recommended that the trader should enter into a new trade.
When the price breaks out from the top of the cloud, such as was the case at point A in Fig. 11.05(a), this confirms that an uptrend is underway. This is a good point to enter into a long CFD trade.
For an exit level the trader then has several choices. He/she can exit the trade as soon as it drops below the red Tenkan Sen line at point C, which acts as primary point of support. A more adventurous trader could hang on until the trade breaks down through the second support level of the blue Kijun Sen at point D, but at this stage a lot of the profit in the trade would already have been lost.
Some traders even wait until the price drops back into the Ichimoku cloud again, but in the above example this would have meant giving up most of the profit the trade offered.
A similar approach is followed in a bear market: go short when the price drops below the cloud at point B; remain in the trade until it turns around and crosses the red Tenkan Sen line at point E (first resistance), or wait for it to cross the blue Kijun Sen at point F (second resistance). If the price turned around between points E and F this would have worked in the trader’s favour, but in this case it would have meant giving up much of the profit the trade offered.
Waiting until the trade entered the Ichimoku cloud again would have resulted in the trade barely breaking even or even making a loss.
Foreign exchange (forex) trading carries a high level of risk and may not be suitable for all investors. The risk grows as the leverage is higher.
investment objectives, risk appetite and the trader’ level of experience should be carefully weighed before entering the forex market. There is always a possibility of losing some or all of your initial investment / deposit, so you should not invest money which is which it can’t afford to lose. The high risk that is involved with currency trading must be known to you. Please ask for advice from an independent financial advisor before entering this market.
Any comments made on Forex Crunch or on other sites that have received permission to republish the content originating on Forex Crunch reflect the opinions of the individual authors and do not necessarily represent the opinions of any of Forex Crunch’s authorized authors. Forex Crunch has not verified the accuracy or basis-in-fact of any claim or statement made by any independent author: Omissions and errors may occur.
Any news, analysis, opinion, price quote or any other information contained on Forex Crunch and permitted re-published content should be taken as general market commentary. This is by no means investment advice. Forex Crunch will not accept liability for any damage, loss, including without limitation to, any profit loss, which may either arise directly or indirectly from use of such information.
Editors’ Picks
AUD/USD stays directed toward 0.6700 after strong Aussie data, weak China's PMI
![AUD/USD stays directed toward 0.6700 after strong Aussie data, weak China's PMI](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/AUDUSD/macro-of-aussie-20-note-8668638_XtraSmall.jpg)
AUD/USD holds higher ground toward 0.6700 in Asian trading on Wednesday. The pair finds fresh bullish impetus after the Australian Retail Sales data beat estimates with 0.6% YoY in May. Weak China's Caixin Services PMI data fails to deter Aussie buyers. Eyes turn to US data and Fed Minutes.
USD/JPY extends gains above 161.50 ahead of US data, Fed Minutes
![USD/JPY extends gains above 161.50 ahead of US data, Fed Minutes](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/USDJPY/five-thousand-japanese-yen-notes-on-many-dollars-background-30615054_XtraSmall.jpg)
USD/JPY trades on a stronger note above 161.50 after reaching a new high for this move near 161.75 during the early Asian trading hours on Wednesday. Market players remain focused on the possible Japanese FX intervention, which could cap the pair’s upside. US data and Fed Minutes awaited.
Gold price remains confined in a range below 50-day SMA, FOMC minutes in focus
![Gold price remains confined in a range below 50-day SMA, FOMC minutes in focus](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/gold-gm187363896-28836378_XtraSmall.jpg)
Gold price continues with its struggle to gain any meaningful traction on Wednesday. Traders seem reluctant and prefer to wait for more cues about the Fed’s rate-cut path. Investors look to FOMC minutes for some impetus ahead of the NFP report on Friday.
Celebrity meme coins controversy continues amid Pump.fun revenue dominance
![Celebrity meme coins controversy continues amid Pump.fun revenue dominance](https://editorial.fxstreet.com/images/Resources/CryptoWorldSEO3_XtraSmall.jpg)
Meme coin generation platform Pump.fun outperformed the Ethereum blockchain in daily revenue on Tuesday after raking in $1.99 million. Following this achievement, a celebrity meme coin based on actress Sydney Sweeney was the subject of controversy after its developers dumped their bags on investors.
Benefit of the doubt: US consumer confidence and elections
![Benefit of the doubt: US consumer confidence and elections](https://editorial.fxstreet.com/images/Macroeconomics/EconomicIndicator/ConsumerSpending/ConsumerConfidence/woman-selling-bread-at-the-bakery-gm469225978-62283160_XtraSmall.jpg)
Despite widespread expectation for the US economy to be in recession in 2024, that fate has been avoided thanks to a resilient consumer. Yet it is difficult to square this undaunted spending with consumer confidence and sentiment readings that are lackluster at best.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.