Ichimoku and MACD Strategy - Momentum Trading Strategy based on Japanese Technical Analysis

The Ichimoku and MACD strategy is based on the most popular trading indicator in Japan, which is the Ichimoku Cloud. We’re also going to use the MACD indicator to identify momentum, especially short-term momentum. Without a doubt MACD is one of the most popular indicators used in technical analysis so I think it’s quite important to have further insights into the MACD indicator. Many traders know that the MACD indicator is mostly used as a crossover system or for spotting divergences but we’re going to incorporate MACD in our strategy and used it to gauge momentum and the strength of the trend, this is a complementary tool to the Ichimoku Cloud so we can have a stronger confirmation of the trend in place.

Ichimoku and MACD Strategy – Trading Rules

The system uses the Cloud and the two “moving average”: Tenkan-Sen and Kijun-Sen and we’re not going to use the Lagging Span MA. The Ichimoku cloud is designed to identify the trend direction as well as support and resistance level. So, when the price is above the Cloud it indicates we are in a bullish trend, when the price is below the Cloud it indicates we’re in a bearish trend.

The Tenkan-Sen and Kijun-Sen line will be used to identify support and resistance levels and potential entry levels. These lines behave the same as typical Moving Averages, however, they provide more accurate support/resistance levels. In summary, we’re going to use the Ichimoku Cloud features to identify the trend and potential support/resistance that can be a good level to entry the market, but in order to fine tune our entry and reduce the amount of false signals, we’re going to sue the MACD indicator as well.

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Ichimoku and MACD Trading Rules for a BUY signal:

Currency pair to trade above the Ichimoku Cloud;
We must also trade below both of the Tenkan-Sen and Kijun-Sen moving averages;

MACD Histogram must be above the zero line;
Entry Long at the first retracement towards either the Tenkan-Sen or Kijun-Sen lines;
Stop Loss below Kijun-Sen line;

Take Profit as soon as we break below the Tenkan-Sen line;

Ichimoku and MACD Trading Rules for a Sell signal:

Currency pair to trade below the Ichimoku Cloud;
We must also trade below both of the Tenkan-Sen and Kijun-Sen moving averages;

MACD Histogram must be below the zero line;
Entry Short at the first retracement towards either the Tenkan-Sen or Kijun-Sen lines;
Stop Loss above Kijun-Sen line;

Take Profit as soon as we break above the Kijun-Sen line;

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Ichimoku and MACD - Buy Signal

Ichimoku and MACD Strategy – Sell Signal

In the above chart, we can have a clear example of this strategy at work and how a short signal will present itself. Even though we manage to catch a nice 400 pips profit out of this trend we can see that the market has continued to trade lower and in this regard, we can use several ideas to ensure we capture as much as possible from the trend move, and one of the idea would be to wait for 2 candles to close above the Kijun-Sen line before taking profits.

This is always going to be a double edge sword because sometimes the market will completely reverse and you’ll end up giving back some of your profits, but it’s something that we have to live with if we want to capture a bigger portion of the trend.

Ichimoku and MACD - Sell Signal
Ichimoku and MACD Strategy – Buy Signal

In the above example, we can see how by taking the profit and waiting for two consecutive closes below the Tenkan-Sen line, we managed to capture a bigger portion of the trend. Even though initially we had a break below the Tenkan-Sen line, we still close above it, that’s why a closing price above/below it’s so important.

The system works very well in a trending environment while in a ranging market it tends to produce a lot of false entry signals which is one of the reasons why we’re only going to use this strategy when we have a clear trend in place.