Trading with support and resistance is one of the more popular and successful trading methods in the forex market. In using any level as support or resistance, it is important to remember the following points:
a) The more often a key level of support/resistance is tested by the pair without being broken, the stronger it is and the more difficult it is for price to break through that level.
b) Once a level has been broken, its function changes. So a broken support becomes a new resistance while a broken resistance becomes a new support level.
Once these principles of support/resistance trading are adhered to, the trader can better understand how to use the Kumo or cloud component of the Ichimoku Kinko Hyo, for support and resistance trading.
Flat Tops and Bottoms
When performing support and resistance trading with the Ichimoku Kinko Hyo, the most important thing to look out for is when the Kumo (cloud) has formed a flat top or flat bottom. Since the Kumo is bounded by the Senkou span lines A and B, it is not difficult to identify the areas where the Kumo has made a flat top or flat bottom.
Once the flat tops or bottoms have been identified, the next step is to draw a thick line using your trend line drawing tool on your platform across the Senkou span A or B, forming the flat top or flat bottom respectively. Once this has been done properly, the trader will immediately see areas where the price action of the asset has either bounced off this line (as a support level), or pulled back from this line (as a resistance level). We look at this chart to illustrate support and resistance trading with the Ichimoku Kimko Hyo.
The chart above is a GBPUSD hourly chart that spans trading over 2 weeks. The first step is to identify where there are flat tops or flat bottoms on the cloud.
The topmost white line is the first to be drawn on September 8, which shows that there was a prior support at points 1 and 2 which was broken. Following our rule of support being turned to resistance, point 4 would have served as a good place to place a short order, especially since the Kumo at that area is quite thick, giving added strength to this level and making it highly unlikely that the new resistance would have been broken.
The chart below shows an interesting setup:
The support line 1 was drawn at a flat Kumo bottom on 18 August, and this would serve as a reference point down the road as a possible short trade profit target. The support line 2 was drawn at another Kumo flat bottom, and this served as a strong support until price got to point 3, when support was broken, turning support 2 into a new resistance. This is where the trader could setup a short trade, and use the previously drawn support line 1 as a profit target to exit the trade.
This is a very simple way of using the Kumo for support and resistance trading. To learn more about rule based methods using the Kumo for trading support and resistance, make sure to check out the Advanced Ichimoku Course.