What is the Ichimoku Indicator?

01 December 2020

    Ichimoku Kinko Hyo is an indicator developed in the late 1930s by Goichi Hosoda. Hosoda was also known as Ichimoku Sanjin, which means "what a man in the mountain sees" and Ichimoku Kinko Hyo can be translated as “one glance equilibrium chart”. The Ichimoku indicator was originally developed to trade rice, but it gradually gained popularity and is now used on all kinds of assets.  

     

    Ichimoku Kinko Hyo is an attempt to present an all-in-one indicator that contains information about the market momentum, the trend direction, and the levels of resistance and support. Hence, it is composed of five different lines and a cloud, each representing a different kind of information for the trader. 

     

    Ichimoku Kinko Hyo Components and Calculation

     

    The Ichimoku indicator is composed of the following 5 components.

     

    Kijun Sen

     

    Kijun Sen is called the base line or standard line. It is calculated by adding the highest high and the lowest low over the past 26 periods and dividing the result by two.  Kijun Sen is usually interpreted as a key support and resistance level. It also serves as a trend change confirmation level and some strategies use it as a trailing stop loss price.

     

    Calculation

     

    The formula for the Kijun Sen is the following 

     

    Kijun Sen = ( Highest High + Lowest Low ) / 2, Periods

     

    The typical setting for the Periods is 26 but it is adjustable by the users. 

     

    Tenkan Sen 

     

    Tenkan Sen is called the turning line or conversion line. It is derived by averaging the highest high and the lowest low for the past 9 periods.

     

    Calculation

     

    The formula for the Tenkan Sen is the following 

     

    Tenkan Sen = ( Highest High + Lowest Low ) / 2, Periods

     

    The typical setting for the Periods is 9 but it is adjustable by the users. 

     

    Chikou Span (green line) 

     

    The Chikou Span is called the lagging line. It is just a line composed of closing prices, shifted 26 periods behind.

     

    Senkou Span A 

     

    Senkou Span A line is calculated by averaging the Tenkan Sen and the Kijun Sen and plotted 26 periods ahead.

     

    Calculation

     

    The formula for the Senkou Span A is the following 

     

    Senkou Span A = (Tenkan Sen + Kijun Sen) / 2, 26

     

    Senkou Span B 

     

    Senkou Span B line is determined by averaging the highest high and the lowest low for the past 52 periods and plotted 26 periods ahead.

     

    Calculation

     

    The formula for the Senkou Span B is the following 

     

    Senkou Span B = (Highest High + Lowest Low) / 2, 52

     

    The typical setting for the Periods is 52 but it is adjustable by the users.

     

    Ichimoku Kinko Hyo in Fondex cTrader

     

    Ichimoku indicator plots five lines and a cloud on the symbol’s chart. We can see an example of a plotted Ichimoku indicator from Fondex cTrader below.

     

    Ichimoku Kinko Hyo in Fondex cTrader

     

    To add an Ichimoku indicator in Fondex cTrader, right-click on the chart and navigate to Indicators > Other > Ichimoku Kinko Hyo. After clicking on Ichimoku Kinko Hyo, the below form will appear. 

     

    To add an Ichimoku indicator in Fondex cTrader

     

    In this form you select the Tenkan Sen Periods, the Kijun Sen Periods, the Senkou Span B periods, customize your line’s color thickness and type and press OK. The Ichimoku indicator will be added to the bottom of your screen.

     

    How to Trade Ichimoku Kinko Hyo

     

    In the previous section we explained how the Ichimoku indicator lines are calculated. Now we will provide an overview of how they should be interpreted.

     

    Kijun Sen

     

    Kijun Sen line is a type of moving average indicator. However, instead of averaging closing prices, it plots the average price between high and low prices. Therefore, Kijun Sen serves as a trend direction indicator.

     

    Tenkan Sen

     

    Tenkan Sen line is a type of moving average indicator. But it calculates on much shorter periods, hence its purpose is to reflect the current market momentum rather than provide long term trend information.

     

    Senkou Span Cloud

     

    Senkou Span A and Senkou Span B are used to construct the Senkou Span cloud. The Senkou Span cloud serves as a support and resistance area, with the two lines serving as first and second support and resistance levels for when the market price is above or below the cloud respectively.

     

    Chikou Span

     

    Chikou Span serves as a signal line. If it crosses the price in the bottom-up direction, that is a buy signal. If the line crosses the price from the top-down, that is a sell signal.

     

    Ichimoku Strategies

     

    There are several ways to trade the Ichimoku indicator since it offers various types of information in just one indicator. Below we present some of the most popular.

     

    Ichimoku Cloud Break Out

     

    The simplest way to trade the Ichimoku indicator is to monitor for price break outs through the Ichimoku cloud formed by Senkou Span A and Senkou Span B. Since the cloud indicates a possible support and resistance area, the price penetrating this area is a strong indication about the upcoming movement of the price. Below we can see an example of such a break out. 

     

    Ichimoku Cloud Break Out

     

    In the GBPUSD chart above we can see (in the yellow rectangle), the price penetrating the Ichimoku cloud from below. When the price moves this way, it means that a major resistance level has been broken. When this happens - we have an increased possibility of the price continuing to move upwards and forming a bullish trend, since there is no significant resistance to the trend anymore. The price action following this break out, confirms this possibility. Vice versa, when the price breaks the resistance of the Ichimoku cloud from above, a bearish trend might be in the cards.

     

    Tenkan Kijun Crossover

     

    Another popular strategy using the Ichimoku indicator is to look for crossovers between the Tenkan Sen and the Kijun Sen. These crossovers become more accurate signals when they are confirmed by the Ichimoku cloud. For example, if the Tenkan Sen crosses the Kijun Sen from below and the price is above the Ichimoku cloud, this is a strong indication of a future bullish move. Respectively, a cross from above to below, below the Ichimoku cloud should raise the alarm for a downwards continuation of the price movement. The chart below demonstrates a bullish crossover on the GBPUSD chart. Again, the price action after the crossover confirms the validity of this signal.

     

    Tenkan Kijun Crossover

     

    Limitations of the Ichimoku Kinko Hyo Chart

     

    Ichimoku Kinko Hyo, as any other technical indicator, always needs to be used in context. An out of context interpretation of Ichimoku indicator patterns can generate a lot of false signals that could lead to substantial losses. Therefore, when using the Ichimoku indicator, always consider the market fundamentals that currently move the market, and combine the signals with other confirmation signals, like trend indicators, support/resistance levels and the relevant price action taking place on the chart.

     


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#Article#Educational#indicator#Indicator#Ichimoku