Ichimoku Kinko Hyo indicator

Ichimoku Kinko Hyo indicator

Ichimoku Kinko Hyo (IKH) is a very useful and informative technical indicator. It shows the direction of the dominant trend; its lines may serve you as solid supports and resistances, and its clouds will allow you to visualize momentum and trend strength. At first glance, Ichimoku Kinko Hyo might look very intimidating and mind-boggling, but once you understand how to read it, you will see that the information and the signals it provides are very helpful. In the following tutorial, we will tell you about the Ichimoku lines generating different trading signals, the so-called Kumo-clouds, and lags. Then, we will explain how to analyze the market with this wonderful technical tool. So, let us cast a “glance at a chart in equilibrium” (literal translation of the phrase Ichimoku Kinko Hyo).

Ichimoku components

Kijun Sen (blue line, base line): it is a major indicator component of the Ichimoku Kinko Hyo indicator, it is used to measure medium-term momentum. It is calculated by averaging the highest high and the lowest low for the previous 26 periods. In lay terms, it marks the middle of the range of the past 26 candles.

Tenkan Sen (red line, conversion line): It is another turning line which is derived by averaging the highest high and the lowest low for the past nine periods. It shows the middle of the range of the previous 9 candles.

Chikou Span (green line): It is a lagging, delayed line. Its closing price can be found by shifting to the left for 26 periods. Think of it as of a reflection back to what’s already happen, as of a repaint.

Senkou Span (orange lines): The first Senkou line is the average of Tenkan Sen and the Kijun Sen shifted 26 periods ahead. The second Senkou line is the average of the highest high and the lowest low for the previous 52 periods and it is plotted 26 periods ahead.

Kumo (cloud): it is the shaded area between the two Senkou Span lines. The cloud is perceived as a price attractor. The price tends to retrace to its borders which are the price’s formal levels. In other words, the price very often revisits the levels it tested earlier. 

How to trade with Ichimoku components

Now, let us see what these components might tell us

Equilibrium lines (Kijun-Sen and Tenkan-Sen)

The equilibrium lines can show us the direction of the trend at the present moment. The cloud is a predictor of the future direction of a trend. Its crossovers are the signals for the identification of market reversals.

Kijun-Sen trading signals

A bearish trading signal occurs when the price crosses the Kijun-Sen line from up to down.

1_1.jpg

A weak bearish signal is in place when the cross is above the Kumo

1_2.png

A neutral bearish signal is present when the cross is inside the cloud

1_3.png

A strong bearish signal is present when the cross is below the cloud

 

A bullish trading signal occurs when the price crosses the Kijun-Sen from the bottom upwards 

2_1.png

A weak bullish signal occurs when the cross is below the cloud

2_2.png

A neutral bullish signal is in place when the cross is inside the Kumo

4_3.png

A strong bullish signal occurs when the cross is above the cloud.

 

Tenkan Sen trading signals

A bearish signal is present when the Tenkan Sen crosses from up to down the Kijum Sen line.

4_1.png

A weak bearish signal occurs when the cross is above the cloud

4_2.png

A neutral bearish signal occurs when the cross is inside the cloud

4_3.png

A strong bearish signal occurs when the cross is below the cloud

 

A bullish signal is present when the Tenkan Sen crosses Kijum from the bottom to the upside.

 

3_1.png

A weak bullish signal occurs when the cross is below the cloud

3_2.png

A neutral bullish signal occurs when the cross is inside the cloud

3_3.png

A strong bullish signal occurs when the cross is above the cloud

 Kumo (Cloud) trading signals

The borders of the cloud (Senkou Spans) are good resistance and support lines.

The cloud’s bandwidth is a proven measure of market volatility. The wider the cloud, the more volatility and less certainty on the future price direction we have. Narrow, flat clouds are the signs that the market is sideways. 

You may also use Kumos to identify the direction of the dominant trend. If the price is above the cloud, it means that un uptrend is in place and that there are lots of buying opportunities. If the price is below the cloud, it is better to look for shorts instead of longs. The cloud itself often acts as support/resistance.

The twists (crossovers) of Senkou spans (the lines that form the Kumo) are generally used for identification of the reversal points.

bearish_strong.png 

A bearish signal occurs when the Senkou Span A crosses from up to down the Senkou Span B – in other words when the cloud switches from bullish to bearish state. A strong bearish signal occurs when the price is below the cloud

bullish_strong.png

A bullish trading signal occurs when the Senkou Span A cross from the bottom upwards the Senkou Span B – in other words, when the cloud switches from bearish to bullish state. A strong bearish signal occurs when the price is below the cloud (as at the picture).

Some signals emerge when the price breaks from the Cloud inside out.  

price breaks above kumo.png

A bullish signal occurs when the price moves up and breaks the upper border of the Kumo

price breaks below kumo.png

A bearish signal occurs when the price falls and breaks the lower border of Kumo

 

Chinkou Span trading signals

If Chinkou Span crosses the prices from the bottom upwards, you should buy. At the same time, you should closely watch where the current price is located in relation to the Cloud: a bullish signal is strong when the price is above the Cloud; the signal is neutral if the price is inside the Cloud, and it is weak when the price is under the Cloud. Note that the signal is good only when Chinkou Span passes through the body of the candle.

Here we have an example of a strong bullish signal. Try to answer why it is so:

Chinkou goes above price.png

If Chinkou Span crosses the prices from up to down – you should sell. Also, you should closely watch the location of the current price in relation to the Cloud: the bearish signal is strong if the price is under the Cloud; neutral signal occurs when the price is inside the Cloud and a weak signal is present when the price is above the Cloud.

Rebound of Chinkou Span from the price is a signal of continuation of the current trend. For example, here Chinkou Span recoils from the prices to the upside signaling continuation of an uptrend.

Continuation.png

 

 

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