Senkou Span Cross

The senkou span cross is one of the lesser known trading strategies within the Ichimoku Kinko Hyo system. This is mostly due to the fact that the senkou span cross tends to be more commonly used as an additional confirmation with other trading strategies rather than being used as a standalone trading strategy in its own right. However, it is nonetheless a solid trend trading strategy and can definitely be used on its own.

Given that the senkou span cross strategy, like the kumo breakout trading strategy, utilize the kumo for signal generation, it is best employed on the longer time frames of the Daily chart and above. The senkou span cross signal is given when the senkou span A line crosses over the senkou span B line of the kumo. If the senkou span A crosses the senkou span B from the bottom up, then it is a bullish signal. If it crosses from the top down, then it is a bearish signal. Nevertheless, like all trading strategies within the Ichimoku Kinko Hyo system, the senkou span cross signal needs to be evaluated against the larger Ichimoku "picture" before committing to any trade.

The thing to keep in mind with the senkou span cross strategy is that the "cross" signal will take place 26 periods ahead of the price action as the kumo is time-shifted 26 periods into the future. This relationship is obvious when one looks at the current price on a live chart, but less so when looking at historical price action. In addition, while all Ichimoku strategies should be exercised with the larger Ichimoku picture in mind, this is particularly important with the senkou span cross. Thus, determining the overall trend on higher time frames first and then taking only senkou span signals that align with that trend on the lower timeframes is the best implementation of the senkou span strategy.

In general, the senkou span cross strategy can be classified into three (3) major classifications: strong, neutral and weak.

STRONG SENKOU SPAN CROSS SIGNAL

A strong senkou span cross signal takes place when the price curve is on the side of the kumo that matches the sentiment of the senkou span cross.

NEUTRAL SENKOU SPAN CROSS SIGNAL

A neutral senkou span cross signal takes place when the price curve is inside the kumo at the time of the senkou span cross.

WEAK SENKOU SPAN CROSS SIGNAL

A weak senkou span cross signal takes place when the price curve is on the opposite side of the kumo that matches the sentiment of the senkou span cross.

The chart in Figure VII below shows some classifications of the senkou span cross. The dashed vertical lines represent the 26-period relationship between price and the senkou span cross. Thus, point A represents a bullish senkou span cross that can be categorized as a "strong" buy signal due to the fact that price (point B), at the point of the cross, was trading above the kumo. Likewise, point C represents a bearish senkou span cross that generated a strong sell signal due to price's location at point D below the kumo. The senkou span cross at Point E generated a neutral buy signal since price (point F) was trading within the kumo at that point.

Figure VII - Senkou Span Cross Classifications

Entry

The entry for the senkou span cross trading strategy is relatively simple, though, as mentioned above, entries do require even more attention to the overall trend on higher time frames before executing any trades. After determining the trend on the higher time frames, the trader looks for a fresh senkou span cross in the same direction as the overall trend that has been solidified by a close on the execution time frame. Once they identify a suitable opportunity, they initiate a position in the direction of the senkou span sentiment. As in all Ichimoku trading strategies, traders will be well-advised to consider the relative strength of the cross (vis-a-vis price's location relative to the kumo) as well as the sentiment provided by the remaining Ichimoku components at the time of the cross in order to ensure the most optimum entry.

It is worth mentioning here that the strong bull (buy) signal outlined in our first chart that took place in April of 2005, while technically strong from a 1D perspective, was not aligned with the overall downtrend in-place on the Weekly and Monthly charts. Thus, traders taking this trade signal and using a senkou span cross in the opposite direction as their exit signal would have actually lost pips. This underscores the importance of evaluating sentiment on multiple time frames and trading with the overall trend.

Exit

The exit from a senkou span cross trade is generally signalled by a senkou 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.

Stop-Loss Placement

Being a "big picture" trend trading strategy like the kumo breakout strategy, the stop-loss for the senkou span cross strategy is placed on the opposite side of the kumo that the trade is transpiring on, 10 - 20 pips away from the kumo boundary.

Take Profit Targets

While traditional take profit targets can be used with the senkou span cross trading strategy, it is more in-line with the long-term trend trading approach to wait for a senkou span cross to transpire in the opposite direction of the trade before closing out the position. This method allows the trade to take full advantage of the trend without closing the trade until price action dictates unequivocally that the trend is over.

Case Study

In the Daily chart in Figure VIII below for USD/CAD we can see a bearish senkou span cross at point A. This cross corresponds to the candle at point B. Since the candle closed just below the kumo, the signal is considered a strong one given that its sentiment agrees with the sentiment of the bearish senkou span cross. In addition, we confirm that the direction of this signal is aligned with the overall downtrend in-place on the Weekly and Monthly time frames, so we know that we are trading with the trend. Nevertheless, we are wary of the flat bottom kumo just to the right of the candle, which could act as an attractor for price, so we look for a conservative entry point that will ensure we will not get caught in any false breakouts. The last chikou span support at 1.2292 looks like a good anchor point for assuring this. Price closes below this point a couple of days later at 1.2290 and we enter short at point C.

For our stop-loss, we follow the kumo breakout guideline of placing it 10 - 20 pips away from the opposite side of the kumo where our trade is taking place. In this case, we place it 20 pips away from the top of the kumo above our entry candle at point D (1.2542).

Figure VIII - Senkou Span Cross Case Study

Once we place our entry and stop-loss orders, we wait for the trade to unfold while continually moving our stop-loss down with the prevailing kumo. In this case, a bit more than four months later, price ranging has created a fresh senkou span cross in the opposite direction of our trade at point E, corresponding to the candle at point F where we close out our trade at 1.1908, netting us over 380 pips in the process.