Look at the chart below...
It looks messy as hell, doesn’t it?
But what if I told you it is, in fact, the most efficient chart you will see in your life.
It’s called the Ichimoku Kinko Hyo.
It’s an all-inclusive technical indicator which was developed by Goichi Hosoda, a Japanese journalist, over the better part of three decades.
This one indicator…
Defines levels of support and resistance
Identifies trend direction
Provides trading signals.
No need for a MACD, no need for trend lines, no need for moving averages. It is all right there.
So what makes up the Ichimoku Kinko Hyo?
Let me explain…
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#1: Your Moving Averages
Tenkan-sen: This is your fast moving average and is known as the conversion Line in the queen’s language. To calculate it, you basically just have to find the highest high and the lowest low for the past 9 bars, add the two together, and then divide it by 2.
Kijun-sen: This is your slow moving average known as the base line. It is calculated the same way as the Tenkan-sen, except that the highest high and the lowest low for the past 26 bars are used.
As with simple, exponential, or any other moving averages, your Tenkan-sen and Kijun-sen serve as your short-term and medium-term levels of support and resistance. They also serve as momentum oscillators as their steepness indicates the strength of a trend.
The number 9 was chosen through trial and error and exhaustive backtesting. The number 26 was chosen because Japan had a 6-day workweek when the indicator was developed and thus had 26 working days a month. Although Japan has since submitted to the more humane 5-day workweek, 26 remains as the standard setting for the Kijun-sen.
#2: Your Leading Indicator
Senkou Span A: Also known as Leading Span A, this is the midpoint between the Tenkan-sen and Kijun-sen and is one of the two boundaries that form the Kumo cloud. It has ‘Leading’ in its name as it is plotted 26 periods in the future.
Senkou Span B: Your Leading Span B is the slower of the 2 Kumo cloud boundaries. It is calculated the same way as the Tenkan-sen and Kijun-sen but uses the highest high and lowest low of the past 52 bars. As with your Senkou Span A, it is plotted 26 periods in the future.
If Senkou Span A is above Senkou Span B, your Kumo cloud will be green and will thus predict a Bullish market. If Senkou Span A goes below Senkou B, your Kumo Cloud will turn red and predict a Bearish market. Whenever Senkou Span A crosses Senkou Span B from either the top or bottom, it is known as a Kumo Twist.
Both Senkou Spans also serve as additional levels of support and resistance with the added caveat that you need to pay close attention to the thickness of the cloud. The thicker the cloud, the stronger the levels of support and resistance will be.
One of the most common Ichimoku trading signals is known as the Kumo Cloud Break. As the name suggests, it occurs when price breaks above or below the Kumo cloud, giving bullish or bearish signals respectively.
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#3: Your Lagging Indicator
Chikou Span: Also known as the Lagging Line. Your Chikou Span is nothing more than current price plotted 26 periods back.
The main purpose of the Chikou Span is to show you where price is currently trading in relation to the past. If your Chikou Span is moving in between your past price bars (Fig. A), you are in a sideways market. If Chikou Span is well above the candlestick of 26 periods ago (Fig. B), you are in an upturn, and vice versa for a downturn.
How to trade using the Ichimoku Kinko Hyo
Price is above the Kumo cloud.
Tenkan-sen is above Kijun-sen.
Chikou Span is above the Kumo cloud as well as above price from 26 periods ago.
Price is below the Kumo Cloud.
Tenkan-sen is below Kijun-sen.
Chikou span is below the Kumo cloud as well as below price from 26 periods ago.
And there you go ladies and gentleman, a quick little crash course on the Ichimoku Kinko Hyo indicator. Please take note, though, that just like any other indicator, it is not fool proof. Ichimoku, in a nutshell, translates into ‘at a glance’ and that is exactly the purpose of the indicator. It is there to help you analyse charts by giving them a quick glance. It does, however, still require you to use discretion before placing any trades.
Rand Swiss, Wealth Manager
If you’re interested in short-term trading and setting up your own live brokerage account to trade with me. Send an email to firstname.lastname@example.org
and I’ll help you get started.