Ichimoku Kinko Hyo: Difficult Yet Effective
A newbie trader might be intimidated even by only the name of this indicator. If they look at it on the chart, it’s unlikely the opinion will change. Ichimoku Kinko Hyo sounds and looks complicated. That’s why many traders try to avoid using it. Nevertheless, it’s one of the most common and useful indicators for Forex traders. We will do our best to explain it as simply as possible.
Ichimoku Kinko Hyo: What Does It Mean?
Ichimoku Kinko Hyo, or Ichimoku, is a technical analysis indicator that consists of five lines, which are the tenkan-sen, kijun-sen, senkou span A, senkou span B, and chikou span. It was created by a Japanese journalist, Goichi Hosoda, in the late 1960s.
This indicator is used to gauge momentum, determine the trend, and place support and resistance levels. This wide range of applications makes it a match for most of your trading needs.
How to Interpret and Calculate the Ichimoku Kinko Hyo
As we said above, the indicator consists of five lines. Let’s take a closer look at them:
- Tenkan-sen (blue line) is a conversion line. To calculate it, you need to add the highest high and the highest low, over the past nine periods, and then divide the result by two. This line is commonly used to determine support and resistance levels and a trend reversal.
- Kijun-sen (brown line) is a base line. If you want to calculate it, you need to add the highest high and the lowest low over the past 26 periods and divide it by two. This line has similar functions to the Tenkan-sen; at the same time, it can be implemented as a trailing stop-loss point.
- Senkou Span A or leading span A (orange line). You need to add the tenkan-sen and the kijun-sen, and divide the result by two. Then you will plot the result 26 periods ahead. This line is one of the edges of the cloud, and it’s used to determine future support and resistance levels.
- Senkou Span B or a leading span B (red line). You can calculate this line if you add the highest high and the lowest low, over the past 52 periods, divide the result by two and plot it 26 periods ahead. This line works together with the Senkou Span A and forms another edge of the cloud, which will determine future support and resistance areas.
- Chikou Span or lagging span (green line). This line stands for the current period's closing price plotted by 26 periods back. The function is similar to previous ones – to find possible support and resistance levels.
This brief explanation should make it easier. Take a look at the picture below to find all the mentioned lines on the real-life chart.
Catch the Ichimoku Signals
Here’s how to catch the signals of the Ichimoku Kinko Hyo.
Senkou Span. We’ve previously mentioned two lines – A and B. Now, we will talk about the cloud they form. Cloud is the key point of the indicator, which gives many signals.
- If the price is above the cloud, the first line or leading span A will serve as a first support level; the second line is the second support level.
- Alternatively, if the price is below the cloud, the bottom line or leading span B will become the first resistance. The leading span A will be the second resistance.
- If the leading span B is above the leading span A, it’s a sign of a bearish trend.
- If the leading span A is above the leading span B, it’s a sign of a bullish trend.
- If the price is inside the cloud, it’s a signal that traders are not sure about the further direction of the asset.
- If the cloud is thin, it’s a sign of low volatility.
- If the cloud is wide, volatility is high.
Kijun-sen or a base line will determine the future price movement. If the price is above it, it’s more likely the rise will be prolonged. If the price is below the base line, a trader may wait for the prolonged decline.
Tenkan-sen or a conversion line determines the short-term trend. If it moves up, it’s an uptrend. If it moves down, it’s a downtrend. If it moves sideways, the price is consolidating. Moreover, if the price is above the line, it’s a short-term buy signal. If the price is below the line, it’s a short-term sell signal.
Chikou Span will give you buy/sell signals. If the line crosses the price from bottom to top, it’s a buy signal. If it breaks the price upside-down, it’s a sell signal.
Why Does the Ichimoku Matter?
Although this indicator consists of many lines that can create noise on the chart, you need just two minutes to catch the signal of it. No matter what signal it is: a trend reversal, momentum or buy/sell signal, you will get something. Plenty of lines help the indicator to cover different aspects of the market situation. That’s why the Ichimoku provides so many signals.
Moreover, the indicator is quite accurate. Of course, it may occasionally provide fake signals sometimes, but their percentage is low.
Benefits and Pitfalls of the Ichimoku Indicator
If a trader wants to make a decision of whether to use or not use the indicator, they inevitably look for advantages and disadvantages. We’ve compiled a table to help you decide.
|Multifunctionality. You can use it to place support and resistance levels. Every trader knows that these levels are one of the essential tools for trading. Also, you can find a trend, catch momentum, and get buy/sell signal.||Too complicated. It’s the phrase you can hear from a trader who sees the indicator for the first time. The significant number of lines and clouds makes the chart look busy. You can be lost among all these lines, especially if you add any other indicator.|
If you want to clear your chart, you can hide lines that are not important for you. It’s up to you to decide after you practice and implement this indicator into your trading strategy.
|Varied uses. This indicator will help you while trading not only on Forex but on other markets such as stock, futures, and option.||Historical data. It’s a drawback not only of the Ichimoku but of other indicators. They use past data to predict the future price. That’s why some signals can be fake or delayed.|
|Fast results. The indicator looks complicated and creates market noise. Nevertheless, you don’t need a lot of time to get the signal. It will show you the trend, or momentum, or support/resistance levels.|
|Easily-combined. Although Ichimoku provides many signals, any signal should be confirmed by either a candlestick or another indicator. The Ichimoku cloud is easily combined with such indicators as the RSI or MACD. Feel free to mix them to get the most reliable signal.|
Common Ichimoku Mistakes
It might be difficult to understand the meaning of each line. The most frequent mistake is the misunderstanding of the lines. It’s not easy to remember their names and functions, which is why traders get wrong signals. All you need to do is to select the colors of your choice and determine the color for each line.
The second mistake you can face is the market noise. Don’t apply too many indicators. We recommended combining Ichimoku with other indicators for more reliable signals, but that doesn’t mean you should implement too many. Use only one additional indicator. It’s better if it is placed below the chart. Oscillators are always located in the window below the chart. Thus, you will see the signals clearly.
The next mistake you can meet while using the indicator is the wrong confirmation. Ichimoku Kinko Hyo has many functions – it can confirm the trend, determine the momentum, help place support and resistance levels, and give buy/sell signals. To confirm the signal, you need to find a proper additional indicator. Sometimes, traders don’t know functions of other indicators. Thus, they don’t get any confirmation or get the wrong one.
The Best Ichimoku Trading Strategy
To make your first step with the Ichimoku Kinko Hyo indicator easier, we present a trading strategy. Following these steps, you will find a good point to increase your income. Later, you can implement the indicator into your trading strategy and find other entry and exit points.
- First, you need to wait for the price to close above the cloud. If the price closes above the cloud, it’s more likely we will see the uptrend.
- After that, we need the conversion line (Tenkan-sen) to break above the base line (Kijun-sen). If both conditions are fulfilled, we can look for a good entry point for a long position.
- You can open a trade at the opening of the candlestick that followed the crossover.
- Remember about the Stop Loss. Place the stop loss 5-10 pips below the candlestick that broke above the cloud. You can trail the stop loss regarding the market situation.
- It’s time to use a take-profit order. Close the position as soon as the conversion line breaks below the base line.
This strategy can be applied to a sell position. Just use all the steps in reverse.
Most Common Questions About Ichimoku
Having learned the indicator’s basics, we know that any trader might still have questions. So, we are here to answer all of them.
What Is the Best Timeframe for Ichimoku?
There is no best timeframe for the Ichimoku indicator. No matter what timeframe you apply it to, the lines will be calculated regarding the timeframe. Thus, you will get proper signals on any period from one minute to one month.
What Is the Best Indicator to Use with Ichimoku?
Ichimoku can be applied to many situations and provide many signals. To find a perfect match, you need to understand what signal you are looking for. If you want to catch the momentum, use momentum indicators such as the RSI or Momentum. If you want a confirmation of the trend, place something like Parabolic SAR or MACD. If you look for a buy/sell signal, you can also use the RSI, MACD, or Awesome Oscillator.
What Is the Ichimoku Cloud Strategy?
As we said above, the cloud is the central part of the indicator. It’s formed by two lines. The cloud provides a vast number of signals. To sum up all of them, we can write three crucial rules.
- Open a position when the price breaks the cloud. The direction of the position will be determined by the direction of the breakout. Keep the position open until the price breaks the Kijun Sen or base line in the opposite direction.
- Open a position when the price breaks the cloud. Again, you will either buy or sell depending on the direction of the breakout. Close the position as soon as Chinoku Span breaks Tenkan Sen in the opposite direction.
- Open a position when the price breaks the cloud. Choose the direction regarding the direction of the breakout. Close the position as soon as the price breaks the cloud in the opposite direction.
To conclude, the Ichimoku Kinko Hyo indicator sounds and looks complicated. Many traders don’t use it because of that. However, it’s a big mistake. All you need to do is find proper colors for each line and learn what signals the lines provide. In the beginning, you can simply save the part of our article where we talk about lines’ functions and use this part while trading. To put your knowledge into practice, use a Libertex demo account. It’s a free and easy way to build your new trading strategy with the new indicator.
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