Trading Forex with Kijun-Tenkan Cross
Judging by the name of this technical article, one should already know that we’re talking about two of the Ichimoku Kinko Hyo elements: The Tenkan and Kijun line.These two lines are being represented with the red and blue colors, with the Tenkan being the red one and the Kijun the blue one. Before going ahead and reading this article in order to see how to interpret the Kijun-Tenkan cross, please refer to the other article that refers to the Ichimoku indicator here on our Forex Trading Academy project.A bearish environment is being defined with the cloud being bearish, Tenkan moving below the Kijun and price being below all three elements. The opposite is true as well: a bullish environment is defined with the cloud being bullish, the Tenkan line is moving above the Kijun and price is above all three elements. This means that in a bullish environment as showed by the Ichimoku, the first bearish sign that shows the overall bullish sentiment is about to change is when the Tenkan (red line) is moving below the Kijun (blue line). Such a cross represents a warning that the bullish trend is about to end or simply it may be a fake move. More about this to be covered a bit later in this article.
Trading the Kijun/Tenkan Cross
The Kijun/Tenkan cross is of extreme value to Forex traders as it is visible and one cannot miss it. For this reason, attaching the Ichimoku indicator to a chart should act as being always on the alert for when the trend is going to change. The previous article dedicated to the Ichimoku indicator showed that the cloud will anyways tell traders that conditions are about to change. This is true, but there is no exact entry level, only to go back in time for twenty-six periods in order to find a good entry. A good entry is not a great entry, though! Such a great entry is to be found by correctly interpreting the Kijun/Tenkan cross.
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Spotting Kijun/Tenkan Crosses on a Chart
It is very easy to spot such a cross as these are two simple lines. In a way this cross resembles how the moving averages are crosses as well, and the golden and death crosses discussed on the moving averages article are very good and similar examples with this one. The chart below shows the EURUSD on the four hour’s time frame and as you can see the price is moving all over the place, with both bullish and bearish short-term trends forming. What we’re going to discuss on this time frame is valid for swing trading (keeping positions open for a medium-term horizon, starting from a few hours up to a few days or weeks), but the way we’re going to try to pick a trend is valid on all time frames.
In this chart, there are no less than eight Kijun/Tenkan crosses that are giving the overall direction of the trend. A bullish cross calls for longs to be traded, while a bearish cross favors shorts to be taken. The idea is to go short on a bearish Kijun/Tenkan cross and stay that way until a bullish cross forms or to go long on a bullish Kijun/Tenkan cross and stay long until bearish one forms. At that very moment, traders should reverse the previous trade.
Spotting Fake Crosses
However, Forex trading is not that straightforward as this market is best known for its fake moves and the way stops are being triggered in aggressive ways. It means that not all Kijun/Tenkan crosses are valid as well and some of them are actually showing fake signals. The risk here is to close and reverse the trades on a fake Kijun/Tenkan cross, only to see the market reversing again and the previous trend resumes. How to avoid this kind of situations? The way to go is to use the Kijun/Tenkan crosses together with the Kumo (the cloud). For this, please refer to the previous article dedicated to trading with the cloud here on Forex Trading Academy. In other words, if a Kijun/Tenkan cross form, without the projected cloud to be already turned into the direction of the cross, then the signal can be ignored and labeled as a fake one. The opposite is true as well: if the cloud already turned before the Kijun/Tenkan cross forms and then the cross is forming, that is a solid signal and one should take it. This way fake signals are filtered and, if anything, one can take another trade and add to the original trade by the time the new cross comes after the fake one. The chart below shows how to avoid fake Kijun/Tenkan crosses.
Starting from the left side the first bullish cross should be discounted as, if we look twenty-six periods (candles) on the right side, the cloud it still bearish. It doesn’t matter that the cloud will turn up bullish after that. We simply do not have that information by the time the Kijun/Tenkan cross formed. The next cross is a bearish one and yet it needs to be discounted again as the projected cloud is still bullish. This retrospective look may give the impression that good signals are wasted, but on the long term trading it will only take the profitable trends and allows traders to spot fake swings market may make. Considering that we had already two fake crosses we shouldn’t trade, it means that the trend prior to the first cross (the bearish trend!) is still very much valid and in place. So traders should avoid that spike higher and only stay on the short side or try to find places to sell some more. Moving forward, we have a bullish Kijun/Tenkan cross and this one is to be ignored as it represents the classical fake cross. A close look at the cloud reveals a bearish cloud, and then on the next bearish cross traders will look to sell some more. Not only that traders stayed on the right side of the market from the start, ignoring the fake move higher, but on confirmation of the trend resuming and after a fake Kijun/Tenkan cross, new trades can be taken in the same direction. You can practice with the other examples on the same chart or simply attach the indicator to any time frame and on any currency pair to find similar examples and see that this approach is really powerful. Ichimoku Kinko Hyo, once again, proves to be a profitable trading tool.
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