Guide to Ichimoku Analysis in Forex Trading
First of all, the Japanese word "Ichimoku" means "one glance", "Kinko" means "balance / equilibrium and "Hyo" means "chart", in short Ichimoku Kinko means to see the equilibrium at a glance. Basically, the indicator is best used to define market trend, support and resistance and finally generate buy/sell signals.
Ichimoku Kinko Hyo consists of 5 lines and a "Kumo" or known as "cloud" as most people call it, they are:
- Tenkan-Sen (Conversion Line) -- (Highest High + Lowest Low)/2, for the past x periods (Traditionally x=9)
- Kijun-Sen (Base Line) -- (Highest High + Lowest Low)/2, for the past y periods (Traditionally y= 26)
- Chikou Span (Lagging Span) -- Today's closing price plotted y periods behind
- Senkou Span A -- (Tenkan-Sen + Kijun-Sen) / 2, plotted y periods ahead
- Senkou Span B -- (Highest High + Lowest Low) / 2, for the past z periods, plotted y periods ahead (z = 52)
The space between the Senkou Span A and Senkou Span B is known as the Kumo or the cloud.
The Ichimoku Kinko Hyo works best on longer term timeframes and is preferably to be used on daily and weekly charts.
Applications of the indicators
To start with, the Kumo (or most people call it cloud) is getting more popular among chartists to identify support and resistance area. When price is trading above the Kumo, the prevailing trend is said to be up and the Kumo will be treated as the support area whilst if price is below the Kumo, the trend is said to be down and the cloud will become resistance area instead.
If the price is below the Kumo (cloud), the lower line (i.e. the Senkou Span A) acts as the first resistance level, and the upper line (i.e. Senkou Span B) becomes the second resistance level.
If the price is above the cloud, its upper line (i.e. the Senkou Span A) acts the first support level, and the lower line (i.e. the Senkou Span B) becomes the second support level.
One more thing is that the thickness of the Kumo (cloud) also indicates the market volatility. A thin layer of cloud implies the current volatility is low whilst a thick cloud implies increasing volatility.
The applications of the 2 lines - Tenkan-Sen and Kijun-Sen are quite similar to moving average studies, buy and sell signals are generated when short-term line (Tenkan-Sen) crossover the longer-term line (Kijun-Sen).
A buy signal is generated when the Tenkan-Sen crosses above the Kijun-Sen from below. On the other hand, a sell signal is generated when the Tenkan-Sen crosses below the Kijun-Sen from above. However, one clear advantage of using Ichimoku Kinko over the moving average crossover is that the area where the Tenkan-Sen crosses the Kijun-Sen will dictate the relative strength of that buy/sell signal.
If a buy signal (i.e. the Tenkan-Sen crosses above the Kijun-Sen from below) happens above the Kumo (or cloud), this would be considered as a very strong buy signal as the cloud is representing support / resistance area.
Similarly, if a sell signal (i.e. the Tenkan-Sen crosses below the Kijun-Sen from above) occurs below the cloud, this would be considered as a very strong sell signal. If the buy/sell signal occurs inside the Kumo (or cloud), this signal will be treated as normal.
Finally, if the buy signal happens below the cloud, it will be viewed as a weak signal whilst if the sell signal occurs above the cloud, it will be treated as a weak signal also.
The Chikou Span originally is used to indicate the relative strength of the buy/sell signals generated by Tenkan-Sen and Kijun-Sen, if the buy signal happens above the Chikou Span, it will be treated as a strong signal and vice versa. However, in our approach, we prefer and remove the Chikou Span (which leave a chart a bit more clear) and simply use the other 4 lines.
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