Posted By: TradersLog
Ichimoku Kinko Hyo is a technical indicator published over 30 years ago in Japan. It measures market momentum and trend and also outlines levels of support and resistance. Ichimoku means ‘one look’ in Japanese and this reflects the indicators intent to measure multiple aspects of the market at once. This indicator was developed so that a trader can gauge an asset’s trend, momentum and support and resistance points without the need of any other technical indicator.
Ichimoku Kinko Hyo works best on longer term timeframes, such as the daily and weekly. The Ichimoku indicator consists of five lines.The calculation for four of these lines involves taking only the midpoints of previous highs and lows, similar to moving average studies.
This indicator was developed so that a trader can gauge an asset’s trend, momentum and support and resistance points without the need of any other technical indicator.
1)Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) / 2, for the past 9 periods (Blue Line)
2)Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, for the past 26 periods (Red Line)
3)Chikou Span = Lagging Span = Today’s closing price plotted 26 periods behind (Light Blue Line)
4)Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead (Green)
5)Senkou Span B = Leading Span B = (Highest High + Lowest Low) / 2, for the past 52 periods, plotted 26 periods ahead (Yellow)
The area between Senkou Span A and B called the Kumo, or cloud.
Ichimoku is very similar to moving average studies. And like moving averages, buy and sell signals are given with the crossover technique.
A bullish signal is issued when the Tenkan-Sen (blue line) crosses the Kijun-Sen (red line) from below. Conversely, a bearish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above.
If a bullish crossover occurs and the current price was trading above the Kumo (or cloud), this would be considered a very strong buy signal. If there was a bearish crossover signal and the price, at that time of the crossover was trading below the Kumo, this would be considered a very strong sell signal.
A normal buy or sell signal occurs if the price was trading within the Kumo when the crossover took place.
A weak buy signal would be issued if there was a bullish crossover that occurred while the price was trading below the Kumo.
Ichimoku charting also identifies of support and resistance levels using the Kumo. The Kumo can also be used to help identify the prevailing trend of the market. While the price is above the Kumo, the prevailing trend is said to be up and below it the prevailing trend is said to be down.
If the price is above the cloud, its upper line forms the first support level, and the second line above forms the second support level.
If the price is below cloud, the lower line forms the first resistance level, and the upper line forms the second level.
If the Chinkou Span line traverses the price chart in the bottom-up direction it is signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is signal to sell.
The Chikou Span can also be used to determine the strength of the buy or sell signal. If the Chikou Span was below the closing price and a sell signal was issued, then the strength is with the sellers, otherwise it is a weak signal. Conversely, if there was a buy signal and the Chikou Span was above the price, then there is strength to the upside, otherwise it can be considered a weak buy signal.