The Ichimoku Kinko Hyo indicator was developed in the 1930s by Goichi Hosoda, a Japanese journalist. He spent 30 years perfecting his technique before making it public in the sixties.
The Ichimoku Cloud Indicator, also known as Ichimoku Kinko Hyo, is a versatile manual trading indicator that defines support levels and resistances, identifies the direction of the trend, measures momentum and provides trading signals in forex.
It is a trading system that works with all time frames, and with any instrument. This indicator gives traders a good understanding of the different markets and helps them discover a multitude of trading opportunities with a high probability, so that in a few seconds we will be able to determine if a trade with the current trend is positive or if you should wait for a better market setting in that particular pair.
Ichimoku can be used to show both uptrends or downtrends. This indicator should not be used when there is no clear trend.
Understanding the Ichimoku Indicator
Tenkan-sen (red line) represents short-term price movement. It is similar to a fast moving average. If the market price is above the Tenkan-sen line, it is a short-term bullish sign. If the price is below Tenkan-sen, it is a short-term bearish sign. One function of Tenkan-sen is to clue us in with regards to the character of the market.
This is because the direction of the Tenkan-sen line can suggest if the market is trending or not. A rising Tenkan-sen suggests an upward trend, and a falling line represents a downward one. As the line is calculated from price extremes, it will tend to flatten out when the market is not trending. Therefore, if Tenkan-sen is moving sideways, it suggests that the market is range-bound.
As Ichimoku is primarily a trend-following system, you should only trade using Ichimoku when you are in a trending market. Kijun-sen (dark orange line) represents medium-term price movement. Think of it as being a little like a slower moving average in comparison to Tenkan-sen. Once again, it can clue us into the trend, but over a longer time-frame.
The interaction of Tenkan-sen to Kijun-sen can give us trading signals, in a similar fashion to a moving average crossover. That is to say, if the fast-moving Tenkan-sen crosses above the slower-moving Kijun-sen, it can be a signal to buy. A crossover of Tenkan-sen below Kijun-sen can be a signal to sell.
Whether we follow these crossover signals is governed by the Chikou span (lime green line) that helps us see the big-picture trend of the market. Remember, the Chikou span plots the current closing price 26 periods back on the chart. If it is above the chart of price, it means that current prices are higher than previous ones.
This is bullish. When the price is above the Chikou span, the current prices are lower than previously, suggesting a bearish tenor. You should use the Chikou span as a trade filter, only placing trades that agree with the overall trend. For example, if the Tenkan-sen crosses below the Kijun-sen, you would only sell if the Chikou span indicated a bearish overall trend.
The kumo, or cloud, is the space bounded between the Senkou span A and the Senkou span B. If the price is above the cloud, it is a bullish sign. The top of the cloud acts as a first line of support, and the bottom of the cloud, as a second line. If the price is below the cloud, the reverse is true.
It is a bearish sign, and the bottom of the cloud acts as the first level of resistance. Logically, the top of the cloud is the second level of resistance. The wider the cloud, the stronger the expected support, or resistance. A thin cloud represents only weak support/resistance.
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Advantages of the Ichimoku system
- It can be used in almost all trading markets, including the stock, futures and options markets, forex, indices, and precious metals (gold and silver), etc.
- Ichimoku allows you to quickly choose the configurations or trade preferences at a glance, including the immediate understanding of the direction of the price movement, the feeling, the momentum, and the strength of the trend.
- Ichimoku shows a very clear picture, as it displays a lot of data, which provides greater reliability in understanding the price action. This technique combines three indicators in a graph, which allows the trader to make a more informed decision.
- Ichimoku is a trend identification chart system. That means it works best in markets showing clear trends. It helps to find the direction of the price movement, so that the trader will have a good understanding of the trends in general.
- With Ichimoku it is possible to capture false price breaks, as this system helps you to capture the direction of the trend in the time frame of the trade.
- The Ichimoku Cloud is primarily used to identify trend direction, gauge momentum and come up with applicable trading signals.
- It consists of four key elements: the Tenkan Sen, the Kijun Sen, Chikou Span, and Kumo (the cloud)
- Traders primarily monitor three situations: the crossover between Tenkan and Kijun, the point where the cloud breaks of the cloud in one of two directions, and the location of Chikou on the chart.
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