Banded Chikou Breakout — Quantifying Ichimoku Momentum

10 Jun 2023

Title: Banded Chikou Breakout — Quantifying Ichimoku Momentum

Overview:

Banded Chikou Breakout (BCB) is a unique, algorithmic script designed to augment the capabilities of traders seeking substantial breakout opportunities. Constructed on the robust principles of the Ichimoku trading strategy, BCB is designed to quantify and filter the Chikou Span's significant breakouts above or below the price action. This script does not aim to replace the Ichimoku system; instead, it enhances it, providing an optimized tool for momentum trading.

Rationale:

Ichimoku traders often scrutinize the Chikou Span's position relative to price action to identify market trends. However, determining whether the Chikou Span is above or below due to a genuine trend or mere market noise can be challenging in choppy markets. BCB resolves this predicament by offering a unique way to interpret the Chikou Span's movement. It does so by quantifying the Chikou Span's momentum and utilizing Bollinger Bands to determine its significance. By effectively differentiating substantial movements from the insignificant, BCB can help traders better navigate the market and increase their potential for profitable trades.

How it Works:

BCB combines three key elements: a Momentum Script (simulating Chikou Span), a Bollinger Band Script, and a Timeframe Switcher, all working together to provide a refined trading perspective.

• Momentum Script: Calculates the price difference between the current price and the price 'n' periods ago, transforming the Chikou Span into a quantifiable momentum value that signifies the strength and speed of a market move.
  
• Bollinger Band Script: Computes a Simple Moving Average (SMA) around the momentum, plotting two 'bands' at a specified standard deviation from this SMA. This functionality allows traders to discern when the Chikou Span's momentum is abnormally high or low, signifying a potential significant breakout.
  
• Timeframe Switcher: This feature lets traders apply the BCB script to a different timeframe from the one they are currently viewing. This capability can help traders identify higher timeframe breakouts and trade them with precision on the lower timeframe.
  

How to Use:

BCB is designed to complement the Ichimoku strategy for effective breakout identification.

• Add the BCB script to your trading chart. It plots the momentum (yellow line) and Bollinger Bands (green lines) with the area between the bands shaded blue.
  
• Utilize the Ichimoku strategy to identify larger and smaller timeframe trends.
  
• Optional: Leverage the timeframe switcher to synchronize your trades with higher timeframe trends while operating on lower timeframes.
  
• If the BCB momentum line crosses the upper Bollinger Band while the Ichimoku indicates a bullish trend, it signifies a potential significant upward breakout. Similarly, a cross below the lower band during a bearish trend could denote a significant downward breakout.
  

Remember, without the context provided by the Ichimoku system's trend analysis, BCB can yield false breakouts. It is, therefore, crucial to use these tools in tandem. I like to check for an Ichimoku trend on the 4H and 1H charts, and then use BCB on charts <60 minutes to capture trends with precision.