Ichimoku Kinko Hyo (一目均衡表) Indicator

The Ichimoku Kinko Hyo is a popular trading indicator that was created by a Japanese journalist, Goichi Hosoda, and his team.

The system was released in late 1960 after more than 20 years of development and testing. Today Ichimoku Kinko Hyo is considered on of the top Forex trading indicators which can also be applied to equities, futures and other types of financial instruments. Ichimoku Kinko Hyo means 'Quick Equilibrium Chart' and it is able to provide traders a complete picture of the current market conditions, in just a glance. Ichimoku Kinko Hyo is a relatively complex tool but it offers some unique trading characteristics, for example identifying instantly strong trends and reversals.

 

How Ichimoku Kinko Hyo Works?

The Ichimoku indicator is based on the combination of different moving averages aiming to identify the master trend. The lines of moving averages incurred in an Ichimoku chart are calculated and plotted using the ½ point of highs and lows as it is described below.

Ichimoku Kinko Hyo

 

 

Ichimoku Chart Six (6) Key Elements

Ichimoku Kinko Hyo includes 6 main elements, here they are:

 

(1) Tenkan-Sen (転換線) Red Signal Line

Calculation: (Highest High + Lowest Low) / 2

Periods: 9 periods

Utility: It is a signal line used as a minor support/resistance level.

Signals: If the red line moves up or down then the market is trending while if the red line moves horizontally then the market is ranging.

 

(2) Kijun-Sen (基準線) Blue Signal Line

Calculation: (Highest High + Lowest Low) / 2

Periods: 26 periods

Utility: Kijun Sen is a support/resistance confirmation line that can be used as a stop level.

Signals: The Kijun-Sen can signal the upcoming price movement. If the current price is higher than the blue line then it signals upward continuation. If the current price is lower than the blue line then it signals downwards continuation.

 

(3) Chikou (遅行) Span / Green Span

Calculation: Compares current price to the price of 26 previous periods

Periods: 26 periods backward

Utility: It projects the current price back 26 periods on the chart in a way that you may visualize the master trend. This is actually an additional tool.

Signals: If the Chikou Span crosses the current price in the bottom-up trend (↑) that is a signal for higher upcoming prices. If the Chikou Span crosses the current price from the top-down trend (↓) that is a signal for lower upcoming prices.

 

(4) Senkou (先行) Span / Brown or Yellow Leading Span A

Calculation: (Tenkan-Sen + Kijun-Sen) / 2

Periods: 26 periods

Utility: Forms a cloud indicating the next two levels of support/resistance. It is one of the two edges of Kumo.

Signals: Signaling major support and resistance levels as follows:

i) If the current price is found higher than the Senkou Span, then the top line indicates 1st support level and the bottom line indicates the 2nd support level.

ii) If the current price is found lower than the Senkou Span, then the bottom line indicates the 1st resistance level and the top line indicates the 2nd resistance level.

 

(5) Senkou (先行) Span / Black Leading Span B

Calculation: (Highest High + Lowest Low) / 2

Periods: Calculated in 52 periods / plotted in 26 periods ahead

Utility: It forms the second edge of Kumo.

 

(6) Kumo (雲)Cloud

Calculation: It is a cloud formed by Senkou Brown/Yellow Span-A and Black Senkou Span-B

Periods: As above the two spans (3), (4)

Utility: The space between the Area of the two spans (A, B) indicates the major support/resistance levels.

Signals: If the Senkou Span A is found above the Senkou Span B then this is a signal for a Bullish Market. When Senkou Span A is found below Sankou Span B then this is a signal of Bearish Market. Finally, the change in the positioning of the two spans is a signal of a trend reversal.

 

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General Conclusions using the Ichimoku Kinko Hyo Cloud

Here are some basic conclusions about the Ichimoku cloud:

  1. Trade the market when the price crosses the cloud and avoid trading while the price stays within the cloud.

  2. Changes in the cloud’s height reflect changes in market volatility.

  3. Thin clouds indicate weak support/resistance levels while thick clouds indicate strong support/resistance levels.

 

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