Jun 24 2021 0
The Ichimoku Kinko Hyo, or Ichimoku indicator for short, is a technical indicator used to gauge momentum along with future areas of support and resistance. The Ichimoku indicator consists of five lines called Tenkan-sen, Kijun-sen, Senkou Span A, Senkou Span B, Chickou Span.
What is Ichimoku indicator?
The Ichimoku indicator was originally developed by someone from Japan to combine different technical indicators into a single indicator that can be easily executed and interpreted.
Ichimoku may look very complicated to novice traders, but once you understand what each of these indicators mean and why they are used you will find it very simple.
The Ichimoku indicator is best used in conjunction with other technical analysis methods even though its goal is an “all in one” indicator.
Identify trends based on Ichimoku indicator
We will identify trends and corrections such as: price will move above the cloud, indicating an uptrend. The price will move below the cloud, indicating a downtrend. The price will move in the cloud, indicating a sideways trend.
On the other hand, the color of the cloud changes from green to red, indicating a correction in the range of the uptrend, and vice versa, the color of the cloud changes from red to green, indicating correction within the range of the downtrend.
Besides, we will identify support and resistance levels such as: Main line A of the first line of support with an uptrend. The main line B of the 2nd line supports the uptrend.
The first major line A of resistance to the downtrend. The main line B of the 2nd line is the resistance to the downtrend.
Composition of the Ichimoku indicator
There are 5 main components to the Ichimoku indicator:
Kijun-sen is calculated by summing the highest high and low low for the past 26 cycles and dividing the result by two. The resulting line represents key support and resistance levels, confirms trend changes, and can be used as a stop loss (also known as the baseline).
Tenkan-sen is calculated by summing the highest high and the highest low for the past 9 periods and then dividing the result by two. The resulting line represents key support and resistance levels, as well as a signal line for a reversal (also known as a turning line).
Chickou Span is the closing price of the current cycle plotted 26 days back on the chart. This line is used to show possible areas of support and resistance.
Senkou Span A is calculated by adding tenkan-sen and kijun-sen, dividing the result by two, and then plotting the result 26 cycles ahead. The resulting line forms an edge of the kumo – or cloud – which is used to identify future areas of support and resistance.
Senkou Span B is calculated by adding the highest high and low low for the past 52 cycles, dividing by two, and then plotting the result 26 cycles ahead. The resulting line forms the other edge of the kumo that is used to identify future areas of support and resistance.
To summarize, there are five calculations used to form Ichimoku as follows:
- Kijun-sen = (26-day high + 26-day low)/2
- Tenkan-sen = (9-day high + 9-day low)/2
- Senkou Span A = (Tenkan-sen + Kijun-sen)/2
- Senkou Span B = (52-day high + 52-day low)/2
- Chikou Span = Closing price of the last 26 days
How to trade with Ichimoku indicator
Let's first take a look at the Senkou range.
- If the price is above the Senkou range, the top line acts as the first support while the bottom line acts as the second support.
- If the price is below the Senkou range, the lower line forms the first resistance while the top line is the second resistance.
Meanwhile, Kijun Sen acts as an indicator of future price movements.
- If the price is above the blue line, it can continue to move higher.
- If the price is below the blue line, it can continue to decline.
Tenkan Sen is a market trend indicator.
- If the red line moves up or down, it shows that the market is trending.
- If it moves horizontally, it signals that the market is oscillating.
Finally, if the Chikou Span (green line) crosses the price in the bottom-up direction, it is a buy signal (BUY).
- If the blue line crosses the price from above, it is a sell signal (SELL).
- It looks complicated at first glance but this indicator has support and resistance levels, crossovers, oscillators and trend indicators – all in one, very convenient.
The Ichimoku indicator is a very complete tool and overcomes many limitations of other technical analysis indicators. With the Ichimoku indicator, traders can use it to identify trading opportunities without combining with any other indicator. The Ichimoku indicator shows the objectivity of the market, and the simpler the trading strategy, the more effective the trader applies. However, the Ichimoku indicator has a weakness that it does not show when the price has passed a period of strong volatility for traders to find a suitable take profit point before the price makes a correction.