My Ichimoku reversal strategy

[kishp_ 5]

Here is a high probability trade I've been testing live over the last 3 months with considerable success. The idea is to take a long position for a scalp after a sustained downtrend. I use the indicator Ichomoku's Cloud (popular with Forex; although seriously underrated with Equity Traders as this one indicator provides so much valuable data). If you are unfamiliar with Ichomoku's Cloud I would highly recommend watching an introduction video on youtube.

Candidate Stocks

A) Any stock in play during the session; could be large cap or small cap. As long as it is in play it should work.

B) Any highly liquid stock in a sustained downtrend. Works well with stocks like AAPL or TSLA which always trade with high volume

Indicator Settings

A) Default Ichimoku Cloud Settings (9 for Tenkan, 26 for Kijun, 26 for displacement)

B) The Lagging Span is not material for this strategy

Conditions

A) The Stock must be in a continued downtrend on the 5m chart

B) The stock must be trading BELOW the Ichomoku Cloud on the 1m chart (Important that it is not inside or above the cloud)

C) The share price should have already begun some sort of reversal TOWARDS the direction of a RED colored kumo (cloud).

D) The Tenkan span must cross above the Kijun Span on the 1m chart

E) The stock must be trading with volume, the volume must be consistent or higher relative to the previous 20 periods on the 1m chart. The higher the relative volume; or if the average volume per period is increasing, the greater the chances of success.

Entry / Exit

A) Enter the trade when all of the above conditions are met with a large position size. Remember that the above conditions will only be met after the stock has already began a reversal, so set a stop loss at the previous low from which the price has reversed

B) As the share price continues an uptrend and moves further up above the Tenkan and Kijun spans, partial the majority of your position for a profit- set your stop loss to your avg cost after your partial.

C) Your remaining shares, if they do not fall back to your avg cost and get stopped out, can produce further profits (sometimes considerably despite being only a fraction of your original position) at these exit points:

1) Rejection of Cloud Lower Limit - If the share price is rejected by the red cloud, sell.

2) Rejection of Cloud Upper Limit - If the share price penetrated into the Red Cloud but fails to break out above it, sell. Or if the share price breaks into the red cloud but falls back below, sell.

3) Clean break of the Cloud - If the share price penetrates the cloud completely and a 1 minute candle opens and closes above the red cloud, the stock is likely entering a major uptrend, you may move your stop loss up to the cloud's upper limit and let your remaining shares ride

I've attached a picture of the 1 minute chart of TSLA from today. I traded TSLA today using this method  these 3 times, and all 3 trades produced profit. I circled in green points at which the conditions are met, you can see the Tenkan (Yellow Line on the chart) cross over the Kijun (Red Line on the chart) while the price is below the cloud, moving towards the RED cloud, during a major downtrend. The primary focus of this strategy is to scalp reversals, as often times, these uptrends are short lived (As you can see below, the first two times these conditions were met, the price rejected the Cloud, the third time the price broke above the cloud and continued in a major uptrend), so it is important to get in and out as quickly as possible, book a sizeable profit upfront, and leave a few shares remaining with an avgcost stop loss in the event of a sustained reversal.

False Positives

Sometimes this strategy will produce false positives which can be weeded out through further analysis - below  are situations when I do not takes these trades

1) When the share price is NOT in a sustained downtrend on the 5m chart - This includes when the stock is trading in a channel or flagging

2) When there is little volume - Obvious Reasons

3) When an "outlier" event produced a Tenkan/Kijun Cross - Sometimes a single arge green candle on a 1 minute chart can produce these conditions - The stock must be in a major downtrend on a 5m (or larger time frame) chart, while also ALREADY in a minor uptrend on the 1 minute chart.

4) When there is no "Clean Cross" of the Tenkan over the Kijun, occasionally they will meet but fail to cross, and sometimes get "stuck" together- Only take the trade after a clear divergence of the Tenkan over the Kijun. The cross should also be the Tenkan crossing over the Kijun - not the Kijun crossing under the Tenkan. It may sound like the same thing; but the Tenkan and Kijun are essentially 9 and 26 period moving averages, when the faster average Tenkan crosses over the Kijun with strength, i.e: The Kijun has flattened and the Tenkan crosses above it on an angle, it wil indicate stronger upward momentum, as opposed to when the Tenkan is flat and the Kijun falls below it from above, which would generally be a bearish sign, and also usually occur after a rejection of the cloud.

 

How to spot these trades

1) I use TradingView with all market data subscriptions

2) Enable the Ichimoku's Cloud indicator on Trading View

3) During Pre-Market pick a few stocks that are in play for the day

4) Go to each stock's 1 minute chart and create an Alert on the Ichimoku indicator for when the Tenkan (Conversion Line) "Crosses Up" the Kijun (Base Line)

5) You will now be alerted everytime the Tenkan/Kijun cross condition is met, after that, you have to manually verify the other conditions (5m major downtrend, share price is below the cloud, share price has begun a reversal towards a red cloud, volume is strong)

 

Other Notes:

Remember the idea here is to scalp POTENTIAL reversals - Examine the attached picture and see on the first two trades how soon after entry you must exit in order to make a profit. You are trading long in a major down trend, with no guarantee of a reversal, however, the share price will often try to reverse during these downtrends, and ultimately may fail, so it is important to get in and out as quickly as possible with a profit.

 

I thought I would share this strategy with you all as I am a new member here and being in the chat every morning has helped me so much with other strategies (ORB) I never tried before!

 

I hope this information is useful. The great thing about this strategy is its applicable during all hours of the trading session. Occasionally when I have a weak 9:30-11 trading day, I end up making some good gains later on in the day trading this strategy.

 

 

 

 

 

 

 

 

Edited March 30, 2021 by kishp_

[Roberto 10]

I have been looking at this one. Thx for the quick write up, on the to do list for sure.