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Trading with the Ichimoku Kinko Hyo (一目均衡表)

 

Utility: Evaluating the Trend / Identifying Overbough / Oversold Market Levels

Standard Settings: Tenkan-Sen (9), Kijun-Sen (26), Senkou Span (52)

Forex professionals consider the Ichimoku Kinko Hyo as one of the best technical analysis tools to trade Forex. The Ichimoku Kinko Hyo was developed by the Japanese Goichi Hosoda back in late 1960. The indicator can be used in any financial market (Forex, stocks, etc).

What distinguishes the Ichimoku Kinko Hyo from other indicators is its ability to provide a complete and quick picture of the current market conditions via the Quick Equilibrium Chart. Ichimoku Kinko Hyo can also indentify strong trends and reversals in just a glance.

 

Ichimoku Kinko Hyo Calculation:

The Ichimoku Kinko Hyo system contains 6 main elements, here is how they are calculated:

Tenkan-Sen (転換線) Red Signal Line (9 periods)

Calculation: (Highest High + Lowest Low) / 2

Use: It represents the minor support/resistance level.

Trading Signals: If the red line moves up or down then the market is trending while if the red line moves horizontally then the market is ranging.

Kijun-Sen (基準線) Blue Signal Line (26 periods)

Calculation: (Highest High + Lowest Low) / 2

Use: Kijun Sen is the support / resistance line used as a stop level.

Trading Signals: The Kijun-Sen blue line can signal upcoming price movement. If the current price is higher than the blue line then it signals upward continuation. If the current price is lower than the blue line then it signals downward continuation.

Chikou (遅行) Span / Green Span (26 periods backwards)

Calculation: Compares current price to the price of 26 previous periods

Use: It projects the current price back 26 periods on the chart in a way that you may visualize the master trend. This is actually an additional tool.

Trading Signals: If the Chikou Span crosses the current price in the bottom-up trend that is a signal for upward movemnet. If the Chikou Span crosses the current price from the top-down trend that is a signal for downward movement.

Senkou (先行) Span / Brown or Yellow Leading Span A (26 periods)

Calculation: (Tenkan-Sen + Kijun-Sen) / 2

Use: Forms a cloud indicating the next two levels of support / resistance. It is one of the two edges of Kumo.

Trading Signals: Signaling major support and resistance levels as follows:

i) If current price is found higher than the Senkou Span, then the top line indicates 1st support level and the bottom line indicates the 2nd support level.

ii) If current price is found lower than the Senkou Span, then the bottom line indicates the 1st resistance level and the top line indicates the 2nd resistance level.

Senkou (先行) Span / Black Leading Span B

Calculation: (Highest High + Lowest Low) / 2

Periods: Calculated in 52 period / plotted in 26 periods ahead

Use: It forms the second edge of Kumo.

Kumo (雲) Cloud

Calculation: It is a cloud formed by Senkou Brown/Yellow Span-A and Black Senkou Span-B

Periods: As above the two spans (3), (4)

Use: The space between the Area of the two spans (A,B) indicates the major support / resistance levels.

Trading Signals: If the Senkou Span A is found above the Senkou Span B then this is a signal for a Bullish Market. When Senkou Span A is found below Sankou Span B then this is a signal of Bearish Market. Finally the change between the positioning of the two spans is a signal of trend reversal.

Trading with the Ichimoku Kinko Hyo (一目均衡表)

 

 

Trading with the Ichimoku Kinko Hyo Cloud

Here are some tips of how traders can use the Ichimoku cloud:

(i) It is best to trade when the price of an asset crosses the Ichimoku cloud and not while the price of an asset remains within the Ichimoku cloud.

(ii) Variations in the Ichimoku cloud’s height represent changes in market volatility.

(iii) Thin Ichimoku clouds are indicators of weak support / resistance levels while thick clouds are indicators of strong support / resistance levels.

 

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What is the Ichimoku Kinko Hyo?

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