A detailed overview of Ichimoku Kinko Hyo indicator and trading strategies
The Ichimoku Kinko Hyo, or Ichimoku for short, is a standard trend indicator included in the list of built-in indicators of the Meta Trader and other trading platforms.
The Ichimoku technical indicator was developed by Goichi Hosoda, a Japanese journalist, in the late 1930s. The analyst published his article in the trading journals, he was used to be known as Ichimoku Sanjin.
The technical analysis indicator was named after his pseudonym. The original aim was to predict the trend of the Japanese major stock index Nikkei. The primary task of the indicator is the identification of a trend that is represented as the signal line, and the secondary task is to show the support/resistance levels.
2. Ichimoku’s Graphic Environment
The below screenshot displays how the indicator looks in the price chart with the default settings.
Key elements of the indicator:
Tenkan sen (the red line).It is the average value of the highest high and the lowest low for the first time period. The default value 9.
Kijun sen (the blue line). It is the average value of the highest high and the lowest low for the second time period. The default value is 26.
Senkou Span A and Senkou Span B form the edges of the cloud. The A line averages the values of Tenkan and Kijun, it is plotted 26 periods ahead. The B line calculates the average of the highest high and the lowest low over the past 52 time periods. It is also plotted 26 periods ahead.
Chikou Span (the green line). It is the so-called lagging span. It calculates today’s closing price projected back 26 days on the chart.
In addition to the base lines, there are some other prominent elements of the indicator, filled zones. They are the so-called clouds. The cloud is the area between the Senkou lines А and B.
If Senkou A is below Senkou B, the zone is purple, which signals a downtrend.
If Senkou A is above Senkou B, the zone is orange and the trend is up.
3. How to use Ichimoku Cloud?
We have studied technical aspects of the lines’ calculation. Now, let us see what these lines are used for and what they mean.
In general, the Ichimoku cloud is designed to spot direction and momentum in order to help you make buy and sell decisions more easily. You can have a brief look at the chart and see the trend direction and the price location relative to the support/resistance levels, and then, you can look for a corresponding pattern to enter a buy or sell trade.
An important note. The tool was designed to analyze quite long timeframes, daily and weekly charts of the Nikkei. Later, this algorithm was applied to the forex chart analysis.
Besides, financial are more volatile than 90 years ago. The indicator still quite accurately anticipates middle- and long-term trends, but it can also be employed in shorter Forex trading timeframes, starting from H1.
I do not recommend using timeframes shorter than one hour. Perfect timeframes to trade with the Ichimoku cloud are H1-D1.
You can trade any currency pairs.
3.1. How to identify the trend using Ichimoku Cloud?
The long-term trend is defined using the filled zones, Ichimoku clouds. If the price is trading below the cloud, the trend is down. If the price ticker in the chart is trading above the cloud, the trend is up.
The color of the cloud is also important. A purple cloud means that the price could fall soon. An orange cloud signals that the price should start rising soon.
A perfect case for entering buy trades is when the price is trading above the orange cloud.
When the price is trading inside a cloud it means there is no clear trend.
The medium-term trend is defined by the Kijun line, and the short-term trend is indicated by the Tenkan line. These lines are basically common moving averages, but the calculation is different. They are the average of high and low over a particular time. There is an opinion among the speculators trading with the Ichimoku cloud that the Tenkan and Kijun lines are more accurate than common EMAs.
You should also assess the direction of these lines and the angle. The more acute is the angle, the stronger is the trend.
When Tenkan and Kijun are horizontal, there is the accumulation zone in the market.
As the Ichimoku technical tool is a leading indicator, it can be used to anticipate the market situation in the medium-term and long-term outlook. The clouds projected into the future give clues on possible movements of the trend. The below screenshots present the examples of such projections:
3.2. The role of dynamic levels
All Ichimoku lines, except the Chikou span, may serve as important levels. It is suggested that the Tenkan line is rather weak, while the Kijun line is a much more important level.
Senkou A and Senkou B are key levels, which are the strongest. The cloud itself is also a level.
Let us see how it works on an example:
3.3. Flat zones
Flat zones are Ichimoku clouds, within which you can also trade. As you know, when an instrument is trading flat, one should enter trades at the borders of the trading range. If the price goes into the filled zone, the Senkou A and Senkou B become reference levels, where one could enter trades with targets at the opposite level.
The above figure displays the GBPUSD H1 chart. You can see that, on April 23, 2022, the price broke through the Senkou A line and entered the cloud.
Next, via the retest of the broken-out Senkou A, the price reached Senkou B and even went beyond the cloud zone. At the next bar, however, the price rolled back to the trading range, drawing a false breakout pattern. The false breakout of the Senkou B was a signal to enter a sell trade with the target at the opposing strong level.
Note that the price has twice tested the Senkou A line from above after it broke the line out. A buy pattern was formed at the Asian session and, later, at the European session. At the U.S. session, the market sent a signal to sell the GBPUSD.
3.4. The role of the Chikou span oscillator
Basically, the Chikou line is a momentum indicator. Like any oscillator, it is designed to indicate the price deviation from the average value. Significant deviations create the overbought/oversold zones, which indicates a potential correction or a trend reversal.
4. Parameters and values
Let us enter the indicator parameters. We see three variables:
- Tenkan period (default value = 9)
- Kijun period (default value = 26)
- Senkou Span B period ( default value = 52)
The default settings of the Ichimoku cloud are quite effective, so, I do not recommend beginners to change them. When you study the working principle of the Ichimoku tool, you can experiment with its parameters.
Originally, Goichi Hosoda, when developing the indicator, referred to the Japanese stock market and Japanese working days, which were six days a week at that time. So, he took a period of 1.5 weeks for the Tenkan line. 26 period originally meant working days in a month, and 52 is the number of weeks in a year.
You can set the indicator parameters according to the current conditions:
- Tenkan = 5
- Kijun = 20
- Senkou Span B = 52
As a result, you will have the data changing more dynamically, but this is not always better. Anyway, you should test the changed parameters and compare them with the default values. Only after that, you can decide.
5. How to use Ichimoku Cloud strategies to trade Forex?
5.1. Patterns of Tenkan and Kijun lines
Traders usually consider signals created by the Tenkan and Kijun lines in two cases:
- When the lines cross;
- When the lines are facing in the same direction.
Ichimoku Tenkan and Kijun are crossing
When the Tenkan line crosses the Kijun upside, there is a Golden Cross pattern. This is a buy pattern.
When the Tenkan line crosses the Kijun downside, there is a Dead Cross pattern. This a sell pattern.
Based on the market situation, the above patterns may signal the trend continuation or correction. They should be taken into account, but they are not the strongest signals, so, I recommend trading according to the patterns that are consistent with the general trend. To trade in the correction, i.e. counter the trend, there should additional confirming signals.
How to trade the Tenkan and Kijun crossing?
You can enter a trade once the signal bar closes. A stop loss is set beyond the next local high or low. Another option is to enter a trade at the breakthrough of the local high or low in the direction suggested by the signal (i.e. if it is a buy pattern, you enter when the price breaks through the local high).
There is no universal entry rule. You should make a decision according to the particular market situation and your personal trading style.
Kijun and Tenkan alignment pattern
Kijun and Tenkan’s alignment in the same direction means that the local and middle-term trends are the same, which suggests entering a trade. You should also analyze the long-term trend when you want to enter a trade based on the alignment of the Ichimoku Kijun and Tenkan lines. The long-term trend must confirm the idea to buy or sell a trading instrument.
You can enter a trade immediately after a trending movement starts when the lines have located in the same direction. You can also enter a trade in the middle of the trend, but, in this case, you’d better expect a correction or the test of the red or the blue line or the zone that is created between these lines.
5.2. Senkou Span signals (A and B)
Signals sent by the Senkou Span lines and the cloud they create. The Senkou span A and B lines could be the support or resistance levels, depending on the trend. The Senkou Span A is a less important level, the Senkou Span B is thought to be stronger, it marks the…