Lessons on Ishimoku: interaction with candlestick analysis
In the fifth lecture on the Ishimoku indicator in ForTrader.org, we will get acquainted with Interaction technical analysis based on the Ishimoku indicator with other TA elements. The Ishimoku indicator itself is self-sufficient for successful profitable trading, and as I have already noted more than once - practically a ready-made trading system.
In my classes earlier, I also said that to facilitate technical analysis, I use other elements of TA, which help me to determine trends in the market in a more timely manner. In my practice, I constantly use elements of candlestick, wave, and channel analysis. So, let's talk about this topic.
Candlestick analysis and the Ishimoku indicator
As has been repeatedly stated, the author Ishimoku indicatorThe first version of this type of TA, by Goichi Hosoda, was created to help Japan's widespread candlestick analysis. You can read more about this type of TA, studying the works of Steve Nison, "Candlestick chart analysis of financial markets" and "Beyond the Japanese candlesticks. Steve Nison became the conductor of this method of TA in the Western markets, and now it has become very popular among traders around the world.
The method of candlestick analysis itself is very voluminous and has more than 50 different combinations of candlestick patterns, which can be used to judge the trends in the market. We do not need that many. But we will consider the most basic ones and their interaction with the Ishimoku indicator. Since the format of the journal is limited, I will not describe the characteristics of certain candlestick patterns. We will simply note their existence and attach them to the Ishimoku indicator.
The basis of the candlestick analysis is market reversal models. That's what we're going to focus on.
Here are examples of the most common candlestick combinations that have a reversal character. Brief characteristics:
1) The Hammer and the Hanged Man - the color does not matter. Hammer - bullish signal at the bottom of the movement. The Hanged Man is a bearish signal at the top of the movement;
2) Bearish takeover - signal to sell;
3) Bull Takeover - signal to buy;
4) A veil of dark clouds - signal to sell at the top of the movement;
5) A glimpse into the clouds - signal to buy at the bottom of the movement;
6) Morning Star - signal to buy at the bottom of the movement;
7) Evening Star - signal to sell at the top of the movement;
8) Doji - a kind of star, reinforcing positions 6 and 7;
9) Shooting star - signal to sell at the top of the movement;
10) Inverted Hammer - signal to buy at the bottom of the movement;
11) Harami - reversal pattern. It depends on what color the big and small candle is. The main condition is that the color is different. A white small candle is a buy signal, a black small candle is a sell signal.
12) The Harami Cross - amplifying the harami signal.
As soon as you see something like that on the chart, be ready for the end of the movement and exit the market, because the appearance of such combinations tells us that the objectives are likely to be achieved and we should prepare to enter it in the direction of a new trend.
Confirmation of the new trends is the subsequent reversal of the Tenkan Sen and Shinkou Span A.
As these candlestick combinations themselves are sufficient signals, in these cases, the indicator Ishimoku helps us to avoid possible losses, if we did not timely see the reversal, as using its lines, we set stop orders. These lines are also used as a guide for setting targets and orders. And then the subsequent signals from the indicator lines give us confidence to enter the market and determine the final objectives.
Examples of work on the candlestick analysis and the Ishimoku indicator
Let's look at a few examples. These figures are a single whole, broken down by me for clarity. Chart Daily, British pound, January-June 2004.
As can be seen from the above figures, after the appearance of certain combinations of candles, signaling reversals, the targets of these movements are Ishimoku indicator lines - Kijun Sen and cloud borders. The closing price of the last candle in the pattern can be used as an entry point. But it is better to wait for the signal from the indicator Ishimoku. And it will surely happen. In the above case we can see that the "Bullish Engulfment" pattern (fig. 2, item 2) has shown a pullback from the Kijun Sen and we got the "Signal of three lines", telling us about the end of the correction and continuation of the main bullish trend. In the other case, using the "Evening Star Doji" (fig. 2, item 1), we would also be able to timely exit the main trend and determine the beginning of the correction, where the target would be the Kijun Sen line.
We can see that in corrections the price constantly tested this line. But the bulls were still strong and we saw a prolonged flat movement, finally getting one more "Evening Star Doji" combination, then a "Dead Cross" from Ishimoku and a price break of the Kijun Sen. In this case the upper boundary of the cloud is the target for our movement. The correctness of the choice of the target will be confirmed later. The price has tested Senkou Span A several times and rebounded from it, having drawn a "bullish absorption". Since we use the Ishimoku indicator, we are not afraid of the rebound, as we have a stop order above the Kijun Sen line. Having tested the line Tenkan Sen, we got the combination "Evening Doji Star", after which we got the "Bearish Takeover" once again. Already after this combination, it was clear that the bears won the market and we have a promising long-term downward movement ahead of us. We got a break-down of the cloud from above, worked in it for some time, then we encountered the "Harami" combination, due to which the bulls corrected the bearish movement twice, where the targets of the movement were the borders of the cloud, and then exited it downwards.
So, we have broken down the entire section of the end of the bullish trend and the development of the bearish trend. Figure 4 shows it in its entirety.
As you can see, almost every change in trend is preceded by the combinations of candlesticks we have noted, which then find their confirmation or cancellation by the indicator lines. I constantly use this interaction of Ishimoku and candlestick analysis in my analysis. This interaction recommended by the author of the indicator himself is very effective. Knowing and knowing how to use the combinations of candlesticks, and carefully analyzing the behavior of the indicator lines, we can almost instantly react to changes in market trends and direct our work in the right direction.
Strong and weak candlestick pattern signals
It should be noted. Like signals from Ishimoku, I also divide signals from candlestick patterns into strong and weak ones. Strong signalsAs a rule, are confirmed on the same chart signals from the Indicator of the Ishimoku, as well as confirmed and worked out the signals on a smaller TF. For example, if you get a signal from the candles on a daily period, then try to find a confirmation of it on the H1 and M30 Indicator of the Ishimoku. If the signal is strong, then on the lower TF, the indicator of the Ishimoku will give you a signal for the processing of this combination of candles. Just the opposite, if you get a signal on small timeframes from the Indicator of the Ishimoku, do not be lazy to look at a higher TF. Is there any combination of candlesticks, which confirms this signal? Otherwise, you might encounter something called signal malfunctionI.e. there is a signal and it seems to be strong, but the price does not make a move in the necessary direction and 20% movement.
Actually, there are many factors that affect the performance of the target by the signal. I will devote a separate topic to them, although I have already touched upon this topic in previous lessons. I will simply summarize these factors.