For those that have been using the Ichimoku Kinko Hyo charting system for any length of time, utilizing the chikou span cross strategy should be like second nature. Why? Because the chikou span cross is essentially the “chikou span confirmation” that savvy Ichimoku traders utilize to confirm chart sentiment before entering any trade. This confirmation comes in the form of the chikou span crossing through the price curve in the direction of the proposed trade. If it crosses through the price curve from the bottom up, then it is a bullish signal. If it crosses from the top down, then it is considered a bearish signal.
Thus, we already know the power of the chikou span cross via its use as a confirmation strategy. However, when used within some simple guidelines, the chikou span cross can be used as its own standalone trading strategy with very good success.
Like many other Ichimoku trading strategies, the chikou span cross strategy uses price’s relationship to the kumo to categorize its signals into three (3) major classifications: strong, neutral and weak.
STRONG CHIKOU SPAN CROSS SIGNAL
A strong chikou span cross Buy signal takes place when a bullish cross takes place and current price is above the kumo
A strong chikou span cross Sell signal takes place when a bearish cross takes place and current price is below the kumo.
NEUTRAL CHIKOU SPAN CROSS SIGNAL
A neutral chikou span cross Buy signal takes place when a bullish cross takes place and current price is within the kumo
A neutral chikou span cross Sell signal takes place when a bearish cross takes place and current price is within the kumo.
WEAK CHIKOU SPAN CROSS SIGNAL
A weak chikou span cross Buy signal takes place when a bullish cross takes place and current price is below the kumo
A weak chikou span cross Sell signal takes place when a bearish cross takes place and current price is above the kumo.
The chart in Figure IX below provides several examples of the chikou span cross. Given the fact that the chikou span is a measure of closing price shifted 26 periods into the past, we must always keep in mind both the location of the chikou span in relation to the price curve (the “cross” itself) and the current candle and its relation to the kumo. Thus, Point A1 is the point where the chikou span crossed the price curve downward and Point A2 is the closing candle that initiated that bearish cross. However, since the candle at Point A2 was above the prevailing kumo at the point of the cross, this particular signal would be categorized as a “weak” bearish cross. A strong bullish cross can be seen in Points B1 and B2 since the chikou span crossed upward through the price curve and the closing candle at that point in time was above the prevailing kumo. Points C1 and C2 represent a weak bearish cross given that they transpired above the prevailing kumo.
The entry for the chikou span cross is relatively straightforward – the trader initiates a position in the direction of the chikou span cross after taking into consideration the cross’s strength and other chart signals. For the highest probability of success, the trader will also look for the chikou span itself to be free of the kumo as the chikou span can often interact with the kumo much like the price curve.
The most traditional exit for a chikou span cross trade is generally signalled by a chikou span cross in the opposite direction of the trade, though other exit signals may be taken depending upon the trader’s risk tolerance and profit goals.
The chikou span strategy does not dictate use of any particular Ichimoku structure for stop-loss placement, like some other strategies do. Instead, the trader should consider their execution time frame and their money management rules and then look for the appropriate prevailing structure for setting their stop-loss.
Take Profit Targets
Take profit targetting for the chikou span cross strategy can be approached in one of two different ways. It can be approached from a day/swing trader perspective where take profit targets are set using key levels, or from a position trader perspective, where the trader does not set specific targets but rather waits for the current trend to be invalidated by a chikou span cross transpiring in the opposite direction of their trade.
In the Daily chart in Figure X below for USD/CHF we can see a bullish chikou span cross at point A. However, while it is technically a strong cross, the chikou span is still below significant resistance provided by the two chikou span points at 1.2090. In addition, the tenkan sen and kijun sen are in a flat configuration which doesn’t provide any additional confirmation. Thus we wait for a more convincing setup before entering Long. This is achieved five (5) days later at Point B1 when the chikou span moves back up through the price curve after a brief dip below. We wait for the daily candle to close and then enter long at 1.2164 at Point B2. Our confidence in this entry is increased by the bullish tenkan sen/kijun sen cross that has since transpired.
For our stop-loss, we consider the prevailing structures and decide to place it just below the kijun sen at 1.1956, since a cross below that point will not only have the chikou span executing a fresh bearish cross, but also have price executing a bearish kijun sen cross, both of which would invalidate our long position.
Once we place our entry and stop-loss orders, we wait for the trade to unfold. Depending upon our trading style, we could opt to trail our stop-loss along with the kijun sen to keep a tighter rein on risk management or we could utilize the more traditional method of waiting for a chikou span cross in the opposite direction of our trade. In this case, a chikou span cross in the opposite direction takes place just under two months later (Point C1) at 1.2619 (Point C2) and we close out our trade for a gain of over 450 pips. It is worth noting that, even though the chikou span cross on its own would be considered technically “weak” due to its location above the kumo, it is bolstered by a bearish tenkan sen/kijun sen cross to form a bearish three-line pattern. Alternatively, if we had chosen to use the kijun sen as our trailing stop in this trade, instead of waiting for a chikou span cross, we would have exited somewhere around the 1.2735 level, which would have netted us over 560 pips.