Andrew Keene - Trading With the Ichimoku Cloud

Disclaimer Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com.. The information in this presentation is provided solely for general www.theocc.com education and information purposes. No statement within this presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only. only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in this presentation. Such costs will impact the outcome of the transactions and should be considered. Investors should consult their tax advisor as to how taxes may affect the outcome of contemplated transactions.. Past performance does not guarantee future results. Supporting transactions documentation for any claims, comparisons, statistics or other technical data in this presentation is available by contacting Andrew Keene. The views of third party speakers and their materials are their own and do not necessarily represent the views of Chicago Board Options Exchange, Incorporated (CBOE). CBOE is not affiliated with Andrew Keene or optionsonthefloor.com. optionsonthefloor.com. This presentation should not be construed as an endorsement or an indication by CBOE of the value of any non-CBOE product or service described in this presentation. presentation.

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What is the Ichimoku Cloud? The Ichimoku cloud is a technical analysis method that uses the past, present, and future to help traders identify at a single glance if a security is in bullish or bearish territory. Ichimoku Kinko Hyo actually translates to “One Glance Equilibrium Chart” The cloud is made up of 6 key components, each of which we will examine individually. When combined, these components construct the Ichimoku Cloud.

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Trading Using the Ichimoku Cloud •

What is the Ichimoku Cloud?

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The different components of the cloud

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Using the cloud as levels of support and resistance

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The cloud and trend

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Using the cloud for options

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AAPL Daily

So Why Use the Cloud? •

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The cloud is my favorite indicator because it is forward looking unlike moving averages, fib levels or other popular technical analysis methods. The cloud takes into account more data than simple or exponential moving averages do. This gives us clearer levels of support and resistance for setting profit targets or stops. The cloud can be a tool to any trader trading ANY plan on any product. 17

What Makes the Cloud Different? •

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The cloud is one of the only indicators that is past and forward looking. Averages are calculated in real time and are plotted on both current price and 26 periods in advance. The cloud is applicable to ANY security. The cloud is not as widely used as many other more popular indicators.

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The Cloud for Options Traders The cloud for options traders: As options traders we find the cloud to be one of the most useful indicators around. We apply the Ichimoku Cloud to all of our trading plans. Using the cloud helps steer us away from false signals and helps keep us in the best trade set ups. These are only a few examples of applications of the cloud. We believe that using the Ichimoku Cloud can benefit any trader regardless of the experience with technical analysis. The cloud is one of the easiest indicators to read and apply in a trading plan and is an excellent tool for traders of any skill level.

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Cloud Thickness In general we say that the thicker the cloud is the more difficult a sustained break of the cloud is going to be. A thicker cloud is also considered to be a sign that trend is less likely to reverse in the future. A thinner cloud could signal a reversal is coming. Since it is more difficult to break out of a thick cloud it is considered a stronger break. The thickness of the cloud however means that the amount of risk a trader takes is going to have to be larger.

We can see here that the test of the top of the cloud produced several false signals where the cloud was thin.

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Keene’s Approach:Ichimoku Cloud Since the cloud originated in Japan there is very little literature pertaining to its use originally written in English. It is because of this there is so much debate among practitioners on how to use the cloud. Some of the factors that practitioners debate over are: •

Importance of cloud thickness.

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Which line is forming the top/bottom of the cloud.

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Space between the current price and the cloud.

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Importance of the lagging indicator.

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Different moving average periods.

Our views on how to use the cloud are formed from practical experience and a lot of real world testing. We believe that we use the cloud in the best possible application for our trading plans.

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SUMMARY •

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The Ichimoku cloud is a technical analysis method that uses forward looking moving averages to help traders identify at a single glance if a security is in bullish or bearish territory. The cloud is made up of 6 key components. The cloud works best in trending markets. The cloud will not produce good signals in markets that are in periods of consolidation or sideways action. The cloud will work best on different time scales depending on the security. Faster time scales will produce more traps in some assets while providing good signals in others.

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The cloud is best used as an indicator of key zones of support or resistance.

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The slope and thickness of the cloud can help indicate the strength of trends.

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The simplicity of the cloud allows for the quick and easy analysis of any chart in any stock, ETF, future, or index.

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