Ichimoku

Last modified 13:29, 5 Nov 2012

Ichimoku Kinko Hyo (Cloud) Indicator

Ichimoku Kinko Hyo (Ichimoku Cloud) is a technical indicator published over 30 years ago by a Japanese journalist named Goichi Hosoda. It measures market momentum and trend and also outlines levels of support and resistance in a market.

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 traders can gauge an asset’s trend, momentum and support and resistance levels without the need for any other technical indicator.

The Ichimoku Indicator is an overlay constructed by five lines with coloured areas between two of them, which is called the Kumo (Cloud). The Ichimoku lines are based on the average of High and Low values over a specified period (number of bars) and is similar to moving average studies.

The Ichimoku Chart is traditionally constructed using the Ichimoku indicator over a Candlestick price chart and the overall “picture” should always be considered before taking trades.

ichi1.png

The five main lines that make up the Ichimoku are:

  1. Tenkan Sen = Conversion Line (Blue Line)
  2. Kijun Sen = Base Line (Red Line)
  3. Chikou Span = Lagging Span (Green Line)
  4. Senkou Span A = Leading Span A (Green Line)
  5. Senkou Span B = Leading Span B (Red Line)

The area between Senkou Span A and Senkou Span B is called the Kumo, or cloud.

An upward trending cloud occurs when the Senkou Span A crosses above the Senkou Span B and defaults to Light Blue in colour. Likewise, a downward trending cloud occurs when the Senkou Span A crosses below the Senkou Span B and defaults to Light Red in colour.

Using the Ichimoku Indicator

The Ichimoku indicator can be considered to be an integrated charting “system” where the five lines work in concert to produce the end result or “picture”. The word "system" is emphasized here because it is the key to understanding how to use the various trading strategies outlined below.

Each strategy covered below is to be used and measured against the prevailing Ichimoku "picture" rather than used in isolation. While a trading signal that matches a given strategy may have transpired in a market, it still must be weighed against the rest of the chart in order to determine whether or not it offers a high-probability trade.

Another way of looking at it is that the Ichimoku indicator is a system and the discrete strategies for trading it are merely "sub-systems" within that larger system. Thus, looking at trading any of these strategies from an isolated approach that doesn't take into account the rest of what the Ichimoku chart is telling you should generally be avoided. The overall “picture” should always be analysed before taking a trade.

The Ichimoku indicator is very similar to moving average studies and like moving averages, Buy and Sell signals are given with the crossover technique. The individual Ichimoku strategies are outlined as follows:

  1. Tenkan Sen / Kijun Sen Crossover,
  2. Kijun Sen Crossover,
  3. Kumo Support and Resistance,
  4. Kumo Breakout,
  5. Senkou Span Crossover, and
  6. Chikou Span Crossover.

Tenkan Sen / Kijun Sen Crossover

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.

ichi2.png

In addition, the position of the Kumo or Cloud should also be taken into account when analysing the strength of a Buy or Sell signal.

If a bullish crossover occurs and the current price is trading above the Kumo or Cloud, this would be considered a Strong Buy signal. If there was a bearish crossover signal and the current price, at the time of the crossover is trading below the Kumo, this would be considered a Strong Sell signal.

A Neutral Buy or Sell signal occurs if the Price is trading within the Kumo when the crossover took place.

A Weak Buy signal would be issued if there is a Bullish crossover that occurred while the Price is trading below the Kumo.

Weak Sell signal would be issued if there is a Bearish crossover that occurred while the Price is trading above the Kumo.

ichi3.png

The Chikou Span can also be added into the equation in relation to the three signal classifications from above. As explained in the section detailing the Chikou Span, this component acts as a "final arbiter" of sentiment and should be consulted with every single trading signal in the Ichimoku system and the Tenkan Sen/Kijun Sen crossover is no different.

Each of the three classifications of the Tenkan Sen/Kijun Sen crossover mentioned above can be further classified based on the Chikou Span’s location in relation to the Price at the time of the crossover.

If the crossover is a Buy signal and the Chikou Span is above the Price at that point in time, this will add greater strength to that Buy signal.

If the crossover is a Sell signal and the Chikou Span is below the Price at that point in time, this will provide additional strength to that Sell signal.

If the Chikou Span's location in relation to the Price is the opposite of the Tenkan Sen/Kijun Sen cross's sentiment, then that will weaken the signal.

Once again, it’s a combination of Ichimoku indicators that should be considered rather than relying on individual signals.

Kijun Sen Crossover

The Kijun Sen crossover signal is given when Price crosses over the Kijun Sen.

If Price crosses the Kijun Sen from below, then it is a Bullish signal.

If Price crosses the Kijun Sen from above, then it is a Bearish signal.

ichi4.png

Similar to the Tenkan Sen/Kijun Sen cross, the Kijun Sen crossover strategy can be classified into three major classifications: Strong, Neutral and Weak.

A Strong Buy signal occurs when there is a Bullish crossover that occurred while the Price is trading above the Kumo.

A Strong Sell signal would be issued if there is a Bearish crossover that occurred while the Price is trading below the Kumo.

A Neutral Buy or Sell signal occurs if the Price is trading within the Kumo when the crossover took place.

A Weak Buy signal would be issued if there is a Bullish crossover that occurred while the Price is trading below the Kumo.

A Weak Sell signal would be issued if there is a Bearish crossover that occurred while the Price is trading above the Kumo.

ichi5.png

Like all trading strategies within the Ichimoku system, the Kijun Sen crossover signal needs to be evaluated against the larger Ichimoku "picture" before committing to any trade.

Thus, the Chikou Span should also be used to confirm any Kijun Sen crossover signal.

Each of the three classifications of the Kijun Sen crossover outlined above can be further classified based on the Chikou Span's location in relation to the Price at the time of the cross.

If the crossover is a Buy signal and the Chikou Span is above the Price at that point in time, this will add greater strength to that Buy signal.

If the crossover is a Sell signal and the Chikou Span is below the Price at that point in time, this will provide additional strength to that Sell signal.

If the Chikou Span's location in relation to the Price is the opposite of the Kijun Sen cross's sentiment, then that will weaken the signal.

Kumo Support and Resistance

Ichimoku charting also identifies levels of support and resistance using the Kumo or cloud. The Kumo can be used to help identify the prevailing trend of the market. While the Price is above the Kumo, the prevailing trend is considered to be up and below it the prevailing trend is considered to be down.

ichi6.png

If Price is above the Kumo, its upper line forms the first support level, and the lower line forms the second support level.

If Price is below Kumo, the lower line forms the first resistance level, and the upper line forms the second resistance level.

Kumo Breakout

Kumo breakout trading is the purest form of trend trading offered by the Ichimoku charting system, as it looks solely to the Kumo and Price's relationship for its signals. It is "big picture" trading that focuses only on whether Price is trading above or below the prevailing Kumo.

A Buy signal occurs when Price closes above the prevailing Kumo.

A Sell signal occurs when Price closes below the prevailing Kumo.

ichi7.png

Senkou Span Crossover

The Senkou Span crossover signal is given when the Senkou Span A line crosses over the Senkou Span B line of the Kumo.

If the Senkou Span A crosses the Senkou Span B from below, then it is a Bullish signal.

If the Senkou Span A crosses the Senkou Span B from above, then it is a Bearish signal.

ichi8.png

Once again, like all trading strategies within the Ichimoku system, the Senkou Span crossover signal needs to be evaluated against the larger Ichimoku "picture" before committing to any trade.

It is important to keep in mind with the Senkou Span crossover strategy that the "cross" signal will take place 26 periods ahead of the price action as the Kumo is shifted 26 periods into the future.

While all Ichimoku strategies should be exercised with the larger Ichimoku picture in mind, this is particularly important with the Senkou Span cross. Thus, determining the overall trend on higher time frames first and then taking only Senkou Span signals that align with that trend on the lower timeframes is the best implementation of the Senkou Span strategy.

The Senkou Span crossover strategy can be classified into three major classifications: Strong, Neutral and Weak.

A Strong Buy signal occurs when there is a Bullish crossover that occurred while the Price is trading above the Kumo.

A Strong Sell signal would be issued if there is a Bearish crossover that occurred while the Price is trading below the Kumo.

A Neutral Buy or Sell signal occurs if the Price is trading within the Kumo when the crossover took place.

A Weak Buy signal would be issued if there is a Bullish crossover that occurred while the Price is trading below the Kumo.

A Weak Sell signal would be issued if there is a Bearish crossover that occurred while the Price is trading above the Kumo.

ichi9.png

Chikou Span Crossover

The power of the Chikou Span within the Ichimoku system has already been demonstrated as a confirmation indicator to determine the strength of a Buy or Sell signal. However, the Chikou Span crossover can be used as its own standalone trading strategy.

If the Chikou Span line crosses the Price from below, then it is a Bullish signal.

If the Chikou Span line crosses the Price from above, then it is a Bearish signal.

ichi10.png

Like the other Ichimoku trading strategies, the Chikou Span crossover strategy uses Price's relationship to the Kumo to classify its signals into three major classifications: Strong, Neutral and Weak.

A Strong Buy signal occurs when there is a Bullish crossover and the Current Price is trading above the Kumo.

A Strong Sell signal would be issued if there is a Bearish crossover and the Current Price is trading below the Kumo.

A Neutral Buy or Sell signal occurs when there is a crossover and the Current Price is trading within the Kumo.

A Weak Buy signal would be issued if there is a Bullish crossover and the Current Price is trading below the Kumo.

A Weak Sell signal would be issued if there is a Bearish crossover and the Current Price is trading above the Kumo.

ichi11.png

Given the fact that the Chikou Span measures the closing price shifted 26 periods in the past, both the location of the Chikou Span in relation to the Price (the "cross" itself) and the Current Price and its relation to the Kumo must always be considered. Thus, Point A1 is the point where the Chikou Span crossed the Price downward and Point A2 is the Current Closing Price that initiated the bearish cross.

However, since the Price at Point A2 was above the prevailing Kumo at the point of the cross, this particular signal would be categorized as a Weak Bearish cross.

A Strong Bullish cross can be seen in Points B1 and B2 since the Chikou Span crossed upward through the Price at Point B1 and the Current Closing Price at Point B2 in time was above the prevailing Kumo.

Points C1 and C2 represent a Weak Bearish cross given that they transpired above the prevailing Kumo.

Thus when analysing the Chikou Span crossover strategy, it is always important to check the Current Price against the position of the Kumo when the Chikou Span crossover takes place.

Line Calculations

The five plots of the Ichimoku indicator consist of:

1.   Tenkan Sen (Conversion Line)

(Highest High + Lowest Low) / 2 calculated over the last 9 periods where 9 is the default and most used conversion line period (Fast Period)

2.   Kijun Sen (Base Line)

(Highest High + Lowest Low) / 2 calculated over the last 26 periods where 26 is the default and most used base line period (Slow Period)

3.    Chikou Span (Lagging Span)

most current closing price plotted 26 time periods back where 26 is the same period as used in the Kijun Sen (Base Line)

4.    Senkou Span A (Leading Span A)

(Tenkan Sen + Kijun Sen) / 2 plotted 26 time periods ahead where 26 is the same period as used in the Kijun Sen (Base Line)

5.    Senkou Span B (Leading Span B)

(Highest High + Lowest Low) / 2 calculated over the past 52 time periods and plotted 26 periods ahead where 52 is the Leading period and 26 is the same period as used in the Kijun Sen (Base Line)

The Kumo (Cloud) is formed by the area between the Leading (Senkou) Span A and Leading (Senkou) Span B lines.

Parameters

The following Ichimoku variables can be set on the Parameters tabbed page of the Ichimoku Indicator Properties dialog box:

ichi12.png

Tenkan Sen

The mid-point between the highest high and lowest low of a particular security calculated over the past number of periods specified and used to measure short term momentum. The Tenkan Sen line is also known as the Conversion line.

The default number of periods is 9, this setting can be changed and saved using the Default button.

Kijun Sen

The mid-point between the highest high and lowest low of a particular security calculated over the past number of periods specified and used primarily to measure medium term momentum. The Kijun Sen line is also known as the Base line.

The default number of periods is 26, this setting can be changed and saved using the Default button.

Senkou Span B

The mid-point between the highest high and lowest low of a particular security calculated over the past number of periods specified and used primarily to measure long term momentum. The Senkou Span B line is also known as the Leading Span B line.

The default number of periods is 52, this setting can be changed and saved using the Default button.

Plots

The exact display of the Ichimoku plot lines is controlled on the Plot tabbed page of the Ichimoku Properties dialog box.

The settings below will apply for the Tenkan Sen, Kijun Sen, Senkou Span A, Senkou Span B and Chikou Span lines.

ichi13.png

Style

The display Style selected for the plot can be one of the following: Solid, Dashes, Dots or Points.

The default setting is a solid line (Solid).

Once the display style is selected the Color, Weighting and Visibility can also be controlled from this page.

The following settings will apply to the Kumo (Cloud).

ichi14.png

The settings that can be modified for the Kumo or Cloud are its Upper and Lower colours and its Visibility.

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