The Ichimoku Kinko Hyo is a versatile technical indicator that is commonly used to gauge future price momentum and direction, along with future areas of support and resistance. This indicator is most commonly used on JPY (Japanese Yen) currency pairs.
In Japanese, “ichimoku” translates to “one look,” or “glance” , “kinko” means “equilibrium” or” balance” and “hyo” translates to “chart”. Combining these translations together, the phrase “ichimoku kinko hyo” stands for “A Glance at a chart in equilibrium.” This essentially means that the ichimoku chart incorporates many charts in equilibrium such that traders only have to look or glance at this one chart in order to determine the security’s many properties as well as its various buy or sell signals. The ichimoku graph is most identifiable for its “cloud” or “kumo” through which most of its signals are focused around or developed from.
The five lines/charts used in equilibrium for the ichimoku chart are:
- The Tenkan-sen/Conversion line/Turning Line
This chart is calculated by adding the highest high and the highest low over the past nine periods and then averaging the two (Dividing the result by 2). Since it has the least periods used in its calculation, it is the fastest and most sensitive line and therefore also follows price action the closest. The default setting is to use 9 periods although this can be adjusted. On daily charts, this line is the midpoint of the 9-day high-low range, which is almost two weeks.
- Kijun-sen/Base line/Standard Line
This chart is calculated by adding the highest high and the lowest low over the past 26 periods and averaging the two (Dividing the result by two). It does not move as fast as the conversion Line, but it still follows price action relatively closely. The default setting is to 26 periods but again this can be adjusted. On daily charts, this line is the midpoint of the 26-day high-low range, which is almost one month.
- Kumo/Cloud/Senkou Span/Leading Span
(Comprised of Two parts-The Senkou span A and the Senkou Span B)
This chart is comprised of two different lines, the Senkou span A and the Senkou Span B. Together they form the edges of the ichimoku cloud/kumo. The empty space/difference between the two lines is filled up to make this cloud. It is also referred to as “Leading” because it is plotted 26 periods ahead into the future.
Using default colour schemes, the cloud will be green when the Leading Span A is above the Leading Span B and when the Leading Span A is below the Leading Span B, the colour of the cloud will be red.
- Senkou
Span A/ Leading span A (Green Line)
- The Senkou span A/ leading span A, is calculated by adding the tenkan-sen and the kijun-sen, dividing the result by two, and then plotting the result 26 periods ahead. (Periods can be adjusted)
- The resulting line forms one edge of the kumo and can alternate to be the top edge or the bottom edge of the cloud depending on price movements.
- Forms the faster cloud boundary since it uses less periods in its calculation.
- Senkou
Span B /Leading span B (Red line)
- The Senkou span B/ leading span B, is calculated by adding the highest high and the lowest low over the past 52 periods, dividing it by two, and then plotting the result 26 periods ahead. (Periods can be adjusted)
- When using daily charts, this line is the midpoint of the 52-day high-low range, which is a little less than 3 months
- The resulting line forms the other edge of the kumo and can also alternate to be the top edge or the bottom edge of the cloud depending on price movements.
- Forms the slower cloud boundary since it uses more periods in its calculation.
- Chikou Span/Lagging span/Delay
This chart is essentially calculated as the current period’s closing price plotted 26 days behind, hence why it is also considered “lagging” or “delayed”. The default setting is 26 periods, but like all previous charts before it, it can also be adjusted. The Chikou span’s comparison to the other indicators that gauge future price predictions allow traders to visualise the relationship between current and prior trends, as well as spot potential trend reversals.
Signals without use of the Ichimoku Cloud/Kumo
Most of the charts used in the ichimoku kinko hyo chart are used to form the kumo’s calculation or used in conjunction with the cloud to form analysis. However in some cases they can be used individually or together along with the security’s price movements to identify some trends or signals. However these should generally be verified through use of the cloud and other technical indicators in order to improve accuracy and reduce risk.
The Tenkan-sen/Conversion line/Turning Line:
- This line follows price very closely due to its
high sensitivity. Therefore it can highlight short-term price direction via its
slope. This is really only useful for extremely short term time traders.
- If the line is moving up or down, it could suggest that the market is respectively trending bullishly or bearishly.
- If line moves horizontally, it signals that the market is ranging (i.e. Price of security is making the same highs and lows a set number of times. Traders most commonly identify ranging markets to occur when support and resistance levels are hit at the same spot three times)
- Can be used in conjunction with just the kijun
line to from crossover buy/sell signals
- Buy signal if the Tenkan line crosses above the kijun line (Bullish Crossover)
- Sell signal if the Tenkan line crosses below the kijun line (Bearish Crossover)
- Crossover signals will not be accurate if the Tenkan-sen and Kijun-sen are intertwined or constantly crossing back and forth since it suggests that price is lacking a consistent trend. A common tactic when using this method is to hold the trade until the conversion line drops back below the base line.
Kijun-sen/Base line/Standard Line:
- If the price is higher than the Kijun-sen, then short- to medium-term price momentum is up, suggesting that the price could continue to increase. This soar can be further confirmed if the Kijun-sen line is angled upwards.
- If the price is higher than Kijun-sen then price momentum is down and this can be further confirmed if the Kijun-sen is angled downwards.
- If the price is below the line, it suggests that price could continue to drop
- Unless there is a lot of recent price movement which pulls the price away from the 26-period midpoint, the Kijun-sen will often trade near and intersect with the price. At times like these, the kijun-sen will not be a useful tool for helping with identifying trend direction.
Short term uptrend on hourly chart
Chikou Span/Lagging span/Delay
- The Chikou span crossing the price chart may
sometimes be a signal for trend reversal. Ideally, the price and Chikou span
charts will have had some distance between them for some time since signals may
not be accurate when the price is consistently crossing back and forth with the
Chikou span. Although a trend may be evident, they will need to be further
verified through other indicators.
- An uptrend and buy signal is evident when the Chikou span crosses up and above the price.
- A downward and sell signal evident when the chikou span crosses below the price.
Short term uptrend on hourly chart
Signals and uses of the ichimoku cloud/kumo/Senkou Span/Leading Span
The majority of signals gained from the ichimoky kinko hyo methodology involve the analysis of the price in comparison to the cloud.
The kumo can be used as indication of future support and resistance. Since the chart is shifted forward by 26 days, it means that it is plotted 26 days ahead of the last price point and is therefore indicative of the future.
- Acts as a support level- If the security’s price level is above the cloud, the top line (Being one of the Senkou spans) serves as the first support level while the bottom line (The other Senkou span) serves as the second support level.
- Acts as a resistance level-If the security’s price is below the cloud, the bottom line (Being one of the Senkou spans) forms the first resistance level while the top line (The other Senkou span) is the second resistance level.
- When price is inside the Ichimoku cloud, this means that the market is in the process of consolidating, and it is not a good time to buy or sell.
Bullish and Bearish Signals using cloud
Where the conversion Line and the Base Line are used to identify faster and more frequent signal, the cloud can be used to identify more long term trends. The price trend is generally bullish when prices are above the cloud, bearish when prices fall below the cloud and flat or stagnant when prices are in the cloud.
- When the Leading Span A is rising, moving the same direction as price and above the Leading Span B a green cloud is produced and the uptrend signal is strengthened.
- When the Leading Span A is falling, moving same direction as price and is below the Leading Span B a red cloud is produced and the downtrend is strengthened.
- Therefore the essence of this trading technique relies heavily on combining multiple signals to ensure greater risk aversion. If there are signals that are counter to the existing trend such as prices being above the cloud, but there is a red cloud, the contrasting indications result in a signal that is weaker than say having prices above the cloud plus a green cloud.
Additional Signals
- When all five charts of the ichimoku are parallel, the trend will continue in that parallel direction.
- If the cloud turns from red to green this is a bullish signal
- If the cloud turns from green to red this is a bearish signal
- There is a buy signal if chiko span crosses above the cloud
- There is a sell signal if chiko span crosses below the cloud
Limitations
- The Ichimoku indicator like most indicators is best used in conjunction with other forms of technical analysis despite its goal of being an all-in-one indicator. This indicator is often paired with the Relative Strength Index (RSI) to confirm momentum in a certain direction.
- It is important to look at long term trends in comparison to the smaller term trends. During very strong downtrends, prices may push into the cloud or slightly above it, temporarily, before falling again. This would provide a false bull signal. Only focusing on the short term would mean misunderstanding the bigger picture, that the price was actually undergoing strong longer-term selling pressure.
- Data points plotted in the future to calculate the ichimoku clouds are based off of historical data. There is no inherent predictive analysis used meaning that the indications may not be entirely accurate or representative of the future.
- The cloud can often become irrelevant for long periods of time when the price remains way above or below it. During times like these, the conversion line, base line, and their crossovers become more important, as they generally stick closer to the price.
Article by Nathan Chua