Ichimoku Kinko Hyo and Trading Signals
Ichimoku Kinko Hyo (一目均衡表 Ichimoku Kinkō Hyō), popularly known as Ichimoku is a trend following tool for technical analysis developed by Goichi Hosada a Japanese journalist. He spent 30 years perfecting the indicator and in 1960 he introduced to the world.
In Japanese Ichimoku means a glance, Kinko means equilibrium and Hyo means to chart. It tells us about trends, directions, market’s equilibrium, and potential future support and resistance levels. All that can be analyzed in a “one glance at the chart”.
Ichimoku is mainly based on moving averages in a more precise manner. The mid values or 50% of high and lows are considered in Ichimoku’s lines.
in the western world, Ichimoku is popular for its graphic representation. It highly regarded indicator for precise analysis.
Ichimoku Kinko Hyo captures the full body of a price movement and ignores head and tail.
- Entry signals after the trend is in place.
- Signaling exit before the trend is ending.
- Future support and resistance range.
- Market reversals
It is a combination of sub-indicators Kijun Sen, Tenkan Sen, Chikou Span, and Kumo.
The standard color for Kijun Sen is blue. It is referred to as standard or baseline. Kijun Sen is calculated by the average of the highest high and lowest low of past 26 periods.
Kinjun Sen interprets future price movement
If Kijun Sen (Blue line) is below the price, the uptrend will is likely to continue.
If Kijun Sen (Blue line) is above the price, the downtrend is likely to continue.
The standard color for Tenkan Sen is red. It is referred to as a turning line. Tenkan Sen is calculated by the average of past 9 period’s highest high and lowest low.
Tenkan Sen is a market trend indicator
The downward and upward movement of Tenkan Sen (Red Line), tells us that the market is trending in the direction of Tenkan Sen.
If the Tenkan Sen is choppy or moving horizontal, it tells us that the market is consolidating.
Chikou Span is a lagging line which compares the latest price with a past 26th period, and standard color for Chikou Span is green.
There is a signal of starting a downtrend if Chikou Span crosses the price from above in any preceding uptrend. Here need to open a short order.
There is a signal of starting an uptrend if Chikou Span crosses the price from below in any preceding downtrend. Here need to open a long order.
Ichimoku Cloud or Kumo
Ichimoku cloud popularly known as Kumo is a combination of Senko Span A and Senko Span B. Kumo cloud is the area between Senko Span A and Senko Span B.
Senko Span A is the average of Tenkan Sen and Kijun Sen, plotted 26 periods ahead.
Senkou Span A = Tenkan Sen + Kijun Sen / 2
Senko Span B is the average of past 52 periods highest high and lowest low and plotted 26 periods ahead.
Senkou Span B = Highest high + Lowest low / 2
The Kumo plotted 26 days ahead tells us the potential future’s support and resistance range. The intersection of Senkou Span A and B tell us potential market reversals (Cloud reversal).
- Senkou Span A and Senkou Span B will act as resistance if the price is approaching Kumo from below.
- Senkou Span A and Senkou Span B will act as support if the price is approaching Kumo from above.
- The wider the Kumo the stronger support or resistance will be.
- The thinner the Kumo the weaker the support or resistance will be.
Signaling start or continuation of a downtrend:
- Kumo must be above the current price level.
- Senkou Span “B” must be above Span “A”.
Signaling start or continuation of an uptrend:
- Kumo must be below the current price level.
- Senkou Span “B” must be below the Senkou Span “A”.
The standard setting for Ichimoku Kinko Hyo is 9, 26, 52, Here 9 for “Tenkan Sen” with the standard color red. 26 for “Kijun Sen” with the standard color blue. Again 26 for Chikou Span with the standard color green and 52 for “Senko Span B”.
More related resources: Introduction to Japanese Candlesticks
Other helpful resources: What is forex?
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