At the beginning, it might be hard for you to decide in which direction you should trade or even take a position at the moment. That is why I have given some idea, which will help you make better decisions.
What can you see on the chart
– A candlestick chart
– The 200 simple moving average
– The linear weighted moving averages from 5 to 154 periods long (the rainbow)
– Two Kijun-sen lines from Ichimoku (one is 26 periods long and the other is 60 periods long)
It may look like there are a lot of things on the chart, but this is only to help you visualize what the current situation is. Candlesticks and the 200 simple moving averages should be familiar to you by now. Let’s discuss the other tools in detail.
The linear weighted moving averages from 5 to 154 periods are also called the rainbow. There are many types of the rainbow chart – sometimes they are built from averages ranging from 2 to 200 periods. In this case, we have averages from 5 to 154 sorted in three groups: blue, green and red. You look at them to find out what the current trend is and how strong it is. It is very simple. When the blue group is at the bottom, green in the middle and red at the top, then we probably have a strong downtrend.
Rainbow and Kijun-Sen lines.
When there is an opposite situation – blue at the top, green in the middle and red at the bottom there is probably a strong uptrend.
When these averages are mixed up, there is probably something wrong with the trend.
Mixed averages – this is no good place to look for a trade.
We use the rainbow to have another confirmation of the current trend. Of course, we could achieve a similar goal with a set of a few averages, but I like the look of the rainbow. It is very intuitive to use.
The Kijun-Sen lines
These are lines taken from the Ichimoku Kinko Hyo indicator. Actually, in Ichimoku there is only one Kijun-sen line, and a few other lines, but I’ve taken two Kijun-sen lines with different parameters. What is so great about these lines? The price respects them and if there is an uptrend, the price for sticks above them most of the time. If there is a downtrend, the price is below these lines most of the time.
Price above two Kijun-Sen lines.
Basically you should search for a situation to take the long position when:
- The price is above 200 SMA
2. The rainbow lines suggest an uptrend
3. The shorter Kijun-sen is above the longer Kijun-sen
Good situation to look for long trade.
In order to take the short position, you look for a situation when:
- The price is below 200 SMA
2. The rainbow lines suggest a downtrend
3. The shorter Kijun-sen is below the longer Kijun-sen
Good situation to look for short trades.
Now you can draw the entrancement lines and place the trade in the direction of the trend. Of course, it is not always perfect, but in the situation described above you have the best chance of success.
Below we can see a very strong uptrend on the chart. It is a perfect situation to use the Fibonacci entrancement and extension tools. The trend is strong, so it is very easy to find many ABCD setups. Below you can see one of them. Notice that you could draw more of those on that chart.