The Ichimoku Kinko Hyo indicator is a useful trend indicator in predicting price developments and belongs to the same family as the ADX indicator and the Parabolic SAR indicator.
Japanese Goichi Hosoda invented the Ichimoku Indicator.
The unique feature of the Ichimoku index is the so-called “clouds” that it draws in the graph.
These clouds are simply areas of support and resistance, already widely used in technical analysis.
An Ichimoku trading system may appear complex. The Ichimoku indicator is famous for its effectiveness and ease of reading.
It is possible to obtain in a few seconds indications on the current trend, the levels of support and resistance, and the potential input signals.
But let’s see now what trading through the Ichimoku trend indicator is and what it consists of and how the trading system it offers can help us predict the price trend of a financial instrument.
The Ichimoku indicator describes the current trend, its strength, the areas of support and resistance, and, therefore, the price targets.
The Ichimoku Indicator requires the combined use of several of its elements, five tools that cooperate to describe the same situation best:
- Kijun-sen: It is like a 26-period moving average, moving slower than Tenkan following the price trend on monthly averages;
- Tenkan-sen: It is practically a 9-period moving average, it is the most sensitive line, and it follows the price trend more closely;
- Senkou Span A: it’s the first of the two limits of the clouds and is born as a midpoint between Tenkan and Kijun, but projected for 26 periods in the future;
- Senlìkou Span B: it’s the second limit and creates clouds with Span A, also representing a projection of price variation in the future, but of 52 periods;
- Chikou Span: this line follows the projected price trend of 26 periods in the past.
The corresponding use of all these data gives us a relatively simple and graphically pleasant market reading.
Ichimoku indicator: how to interpret lines and clouds
The Tenkan and Kijun lines behave like two moving averages with different periods.
They are used in the same way, going to look for their intersection.
When this happens, the trading system detects an upward or downward trend in the short term.
Chikou, as mentioned, tracks past price trends.
You will notice that when the price crosses the Chikou line, it will tend to do so with extreme force.
Span A and B enclose the clouds.
The identification of the areas of support and resistance through the Spans takes place in this way:
When Span B marks the upper limit, they are considered areas of resistance.
While they are to be considered areas of support, and therefore present below the price level if Span A is the upper boundary of the cloud.
Approaching the price towards the clouds will generally signal the possibility that the time has come for a reversal of the primary trend.
Using this indicator in a trading system, you can build a filter that inhibits the opening of transactions when it occurs.
Chikou is useful when it is very close to the price.
Tenkan and Kijun must be seen in terms of both price and each other.
As with moving averages, the mutual crossing is a sign of a sustained trend, suggesting entering the direction Tenkan is crossing Kijun.