You should first have a thorough understanding of Ichimoku before applying this trading concept. If you need a more thorough understanding of Ichimoku, you can follow this link to watch a video about Ichimoku:
The Three Role Reversal Strategy is the strongest Ichimoku trading strategy that you can learn. For the more experienced Ichimoku trader, adding Ichimoku Time, Wave, and Observation theories will greatly increase your chances of a successful trade. You can learn the Ichimoku Time, Wave, and Observation theories in our “Ichimoku Advanced Japanese Techniques” course.
Ichimoku Equilibrium is composed of market prices represented by your candlesticks and five lines. Using these lines, we will search for trading points. Among them, there is a “Three Roles Improvement” known as a strong buy signal. As the term “three roles” indicates, there are three conditions that must be met. It is the most basic buying and selling signal used with Ichimoku by judging mainly from the cross of the reference line and the conversion line.
Before we proceed any further, I think we should review the basic lines of Ichimoku:
• Tenkan Sen / Conversion line 転換線 – (green line) = (9 day high + 9 day low) ÷ 2 = midpoint
• Kijun Sen / Reference line 基準線 – (blue line) = (Highest high for past 26 days + Lowest low for past 26 days) ÷ 2 = midpoint
• Senkou Span A / Leading Span A 先行スパンA – (gray line) = (Conversion Line + Reference Line) ÷ 2 advanced 26 days into the future
• Senkou Span B / Leading Span B 先行スパンB – (blue line) = (52 day high + 52 day low) ÷ 2 advanced 26 days into the future
• Chikou Span / Lagging Span 遅行スパン = the closing price of the current day moved back 26 days
Three Role Improvement (Buy Signal)
- The Conversion Line / Tenkan exceeds the Reference Line / Kijun (balance improvement)
- Lagging Line / Chikou Span breaks above the price line/candle
- The current price breaks out of the Cloud / Kumo
It is important to note that these signals should fall in order of 1-2-3. It is ok for either signal 1 & 2 to take place in any order such as 1-2 or 2-1 but the third signal of price breaking outside of the Kumo Cloud should be the last signal to take place. The price should not break the Kumo before signals 1 & 2 take place or the trade is voided.
The chart below shows signal 1: The Conversion Line / Tenkan exceeds the Reference Line / Kijun (balance improvement)
The next chart below shows signal 2: Lagging Line / Chikou Span breaks out of the price line
The chart below shows the final signal 3: The current price breaks out of the Cloud / Kumo
The chart below shows a winning trade of 190 pips after all signals were triggered for this long trade example!
There are many ways to apply a Stop Loss but using Ichimoku’s built-in Stop Loss which is the Kijun Sen we exit the trade when price closes below the Kijun as we see in the chart above.
Now that you have seen as an example of the Three Role Improvement (Buy Signal) let’s examine the Three Role Reversal (Sell Signal). Mainly we have the exact same signals but now crossing downward.
Three Role Reversal (Sell Signal)
- The Conversion Line / Tenkan breaks below the Reference Line / Kijun (balance reversal)
- Lagging Line / Chikou Span breaks below the price line/candle
- The current price breaks below the Cloud / Kumo
Once again it is important to note that these signals should fall in order as stated previously.
The chart below shows signal 2: Lagging Line / Chikou Span breaks below the price line/candle occurring before signal 1 but as we mentioned, signals 1 and 2 can happen in any order before signal 3.
In the chart below we see signals 1 and 3 happening simultaneously. The Conversion Line / Tenkan breaks below the Reference Line / Kijun (balance reversal) and the current price breaks below the Cloud / Kumo happen at the same time! Also, take note that once Tenkan and Kijun are connected, this is considered a cross. You do not have to wait for the split.
Finally, in the chart below we can see that the short trade was successful as the trade yielded 289 pips!
Well, that’s the Ichimoku Three Role Reversal Trade Strategy in a nutshell. Of course, we saw great opportunities but remember, there is nothing that can guarantee you 100% success. Even using this strategy you will encounter losing trades. The goal of success is risk management. There are also additional advanced Ichimoku techniques that can be applied to help your trades become more successful. If you would like to learn more advanced techniques to trading Ichimoku, click the link below and see what we offer when you become a member of our website. I hope this trading strategy helps you! Thanks and God bless!