MightyZinger

MZ Adaptive Ichimoku Cloud (Volume, Volatility, Chikou Filter)

This study is a functional enhancement to conventionally used Ichimoku Clouds . It uses particular effective adaptive parameters (Relative Volume Strength Index (MZ RVSI), Volatility and Chikou Backward Trend Filter) to adapt dynamic lengths for Kijun-sen, Tenkan-sen, Senkou-span and Chikou.
This study uses complete available Ichimoku Clouds trading methodology to provide trade confirmations. Its still in experimental phase so will be updated accordingly.

ADAPTIVE LENGTH PARAMETERS

Relative Volume Strength Index (MZ RVSI)
  • For adaptive length, I tried using Volume and for this purpose I used my Relative Volume Strength Index " RVSI" indicator. RVSI is the best way to detect if Volume is going for a breakout or not and based on that indication length changes.
  • RVSI breaking above provided value would indicate Volume breakout and hence dynamic length would accordingly make Ichimoku Clouds more over-fitted to better act as support and resistance . Similar case would happen if Volume goes down and dynamic length becomes more under-fit.
  • Original RVSI Library and study can be found here:
Volatility
Average true range is used as volatility measurement and detection tool. Dual ATR condition would decide over-fitting or under-fitting of curve.
Chikou Backward Trend Filter
  • Chikou is basically close value of ticker offset to close and it is a good for indicating if close value has crossed potential Support/Resistance zone from past. Chikou is usually used with 26 period.
  • Chikou filter uses a lookback length calculated from provided lookback percentage and checks if trend was bullish or bearish within that lookback period.
  • Original Chikou Filter library and study can be found here:

ADAPTIVE ICHIMOKU CLOUD

Tenkan-Sen (Conversion Line)
Tenkan-sen is a moving average that is calculated by taking the average of the high and the low for the last nine periods conventionally but in this study its length is dynamically adapted based on Volume , Volatility and Chikou filter. Default adaption range is set to 9-30 which I found universally applicable to almost every market on all time-frames.
Kijun-Sen (Base Line)
The Kijun-Sen is usually considered a support/resistance line which also acts as an indicator of price movements in the future and takes a longer period into consideration, usually 26 periods compared to Tenkan-Sen’s nine periods is used conventionally. In this study, its length is set to vary in range of 20-60 based on adaptive parameters.
Senkou-Span (Leading Span)
  • Senkou-Span A : Senkou Span A is the average of the highs and lows of Tenkan-Sen and Kijun-Sen so it automatically adapts accroding to dynamic lengths of Tenkan and Kijun.
  • Senkou-Span B : Senkou Span B is usually calculated by averaging highs and lows of the past 52 periods and plotting it 26 points to the right but this study uses adaptive parameters to adapt its dynamic length in range of 50-120 which makes Kumo ( Ichimoku Cloud ) a better area for support and resistance . I don’t consider its necessary to adapt Kumo’s displacement to the right, so I used conventional 26 period as offset.
Chikou-Span (Lagging Span)
The Chikou Span, also known as the lagging span is formed by taking the price source and offsetting it back 26 periods to the left but I used adaptive length in range 26-50 which makes this tool a better option to check for Chikou-Price cross check in wide range.

TRADE SIGNALS & CONFIRMATIONS

  • Volume : RVSI used to detect volume breakout about given point. By default, On Balance Volume based RVSI is selected for all dynamic length adaption and also for trade confirmations.
  • Cross(Tenkan,Kijun) : Easiest way to detect trend as if Tenkan is above Kijun then market is uptrend and vice versa.
  • Volatility : High volatility is a good way to confirm if price is on the move or not.
  • Tenkan = Kijun : Because of a wide range of Tenkan and Kijun length; their value can become equal before reversal.
  • Chikou > Source : A very conventional way to detect price momentum as if Chikou is above price then market is in uptrend and vice versa.
  • Chikou Momentum : Another simpler way to represent Chikou > Source as if momentum of price source is uptrend then price will tend to follow.
  • Source > Kumo : Using the best tool of Ichimoku Clouds i.e. Kumo. If price crosses both Senkou-Span A & B then market has broken potential resistance leading to a good uptrend and vice versa.
  • Source > Tenkan : Better way to detect price trend in short term.
  • Chikou Backward Trend Filter : Different from Chikou>Source in a way that Chikou filter makes sure that price crosses highest/lowest within defined period.

CHARTING

  • Bars Coloring : Bars coloring is set as following :
  • src > tenkan-Sen and src > kijun-Sen : Strong uptrend detection and shown by green bars.
  • src < tenkan-Sen and src < kijun-Sen : Strong downtrend detection and shown by green bars.
  • src > tenkan-Sen and src < kijun-Sen : Better way to detect bottom reversals as if price comes above tenkan but remains below kijun; that’s early signs of recovery. Light red bars are used for this by default.
  • src < tenkan-Sen and src > kijun-Sen : Better way to detect top reversals as if price comes below tenkan but remains above kijun; that’s early signs of losing potential in uptrend. Dark Grey bars are used for this by default.
    Kumo Coloring : Following steps are used to derive Kumo’s dynamic color:
    • Average of Senkou-span A and B is calculated.
    • RSI with 14 period of that average is calculated.
    • Gradient color based on calculated RSI values with 0-100 range is derived which is final Kumo color.
    Chikou Span Coloring : Dynamic coloring from Chikou Filter is used as Indicator’s Chikou’s color.
    Signals Overlay : Red and Green small triangles are used as signals overlay.

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