Ichimoku – An important indicator

The Ichimoku Kinko Hyo is a indicator present in most of the trading platform, and obviously could not miss in the MetaTrader 4, MetaTrader 5 and JForex platforms. It is a very powerful indicator, but also quite simple to use and with a bit of practice we can get a lot of information from it. In the following video you can find a more complete explanation

Introduction

The indicator has Japanese origins, in fact it was developed by a Japanese journalist and the term Ichimoku indicates a balance at a glance. As you can see by looking at the following chart

expert advisor - IchimokuEA 01

the indicator has a very strong visual impact able to communicate a lot of information. In some cases even discourage its use, especially for beginners. In reality, the graphic is its strong point because it allows you to find the presence or absence of a trend.

The Ichimoku Kinko Hyo indicator consists of 5 lines, two of which form a cloud, called kumo, which is typical of this indicator. Another salient feature of this indicator is the temporal translation of some lines. If we look at the kumo for example, we realize that it is moved forward with respect to the candles, while the yellow line is translated backwards.

Let’s now analyze the various lines that make up the indicator to try to understand how to read the indicator and obtain information from it.

Tenkan Sen

It is the red line and as we can see it is not translated with respect to the candles. Tenkan normally analyzes a period of 9 previous candles (obviously the number of candles is fixed by parameter). The default value was chosen because normally you use the indicator on a daily timeframe and the 9 value rappresents a time window equivalent to one and a half  Japanese work week.

The Tenkan Sen is the most reactive line of the Ichimoku Kinko Hyo, that is the one that follows more quickly the price variations. In fact it is the line that analyzes the shortest period (all the other lines have larger values ​​by default). For the calculation of the value of Tenkan Sen corresponding to a specific candle, the indicator calculate the average value of  the highest maximum and the smallest minimum of the previous 9 candles (they are added together and the result divided by 2).

This simple line already provides us information on the trend. In fact, when the candles cross the Tenkan from the bottom to the top we have an indication of increasing trend, while an opposite crossing signals a decreasing trend.

Kijun Sen

The Kijun Sen is the blue line and is very similar to the Tenkan Sen. It is calculated in the same way but over a longer period, normally 26 candles (corresponding to the Japanese working month). This line, because analyzes a larger period, has a greater stability and is therefore less reactive than Tenkan Sen.

The Kijun Sen and Tenkan Sen can be used together to get input signals in the market. When the Tenkan Sen crosses from bottom to top the Kijun Sen we will have a signal of increasing trend and therefore it is possible to open a bullish position. Vice versa for a contrary crossing.

The Kijun Sen, like the Tenkan, is not time translated and it has the characteristic of having flat zones. A flat area is due to the fact that for a given number of candles (given by the length of the flat area), prices have not realized new highs and new lows and have moved within a well-defined range. These flat areas also have the characteristic of attracting prices. We note it on the following chart

expert advisor - IchimokuEA 02

In the presence of a flat area in the Kijun, prices tend to return to the line. Instead, when the Kijun goes down, prices are pushed down, and vice versa when it goes up.

Chinkou Span

The yellow line is called Chinkou Span. Its construction is that: the closing value of a candle is taken and it is translated backwards by a certain number of candles (normally 26 candles). As we can see it is time translated in the past and for the last 26 candles the value of Chinkou Span still does not exist.

expert advisor - IchimokuEA 03

Chinkou Span provides trend information too. Consider the candle just closed and in particular its closing value which, as we said, is the last value of Chinkou Span (referred to 26 previous periods). If this value is below the corresponding candle (of 26 previous periods) then the trend is bearish, if it is above it is bullish, while if it is in the middle we have an absence of trend. Chinkou is normally used to confirm or not a trend (obtained for example through crosses).

Chinkou Span can also be used to identify resistors and supports. In this case we look at the negative and positive peaks of the indicator that, based on the relative position of the prices, can be considered resistances or supports.

Kumo, Senkan Span A and Senkan Span B

The heart of the indicator is the cloud, also called kumo, formed by two lines, Senkan Span A and Senkan Span B. These indicators, a difference of the Chinkou Span, are moved forward of 26 periods for which the cloud will also come first the candles. The value of Senkan Span A is calculated by averaging the values of Tenkan and Kijun of the candle and then moved forward by 26 periods. The calculation of the Senkan Span B is similar to that of Kijun but performed on a larger time window (normally 52 candles). The value found is then moved forward by 26 periods.

Characteristics of the kumo

  • it has a double coloring. When Senkan Span A is greater than Senkan Span B, kumo has one color. It is considered positive and it signals a positive trend. When Senkan Span A is lower than B kumo has another color, it is considered negative and it indicates a negative trend.
  • it can also be used to derive input signals from color changes (when the two Senkan crossings). When the Senkan Span A crosses the Senkan Span B from the bottom up and then the kumo passes from negative to positive we have an uptrend and therefore a BUY input signal, vice versa for a contrary crossing. Further information on trends can be obtained from the relative position between kumo and candles. When the candles are inside the kumo we have an absence of a trend, while when the candles are above the kumo or below we have respectively a positive or negative trend.
  • the thickness of the kumo gives us information on the market volatility for the corresponding period.
  • As the Senkan Span B is calculated in the same way as of the Kijun, it will have some horizontal traits that will attract prices. In sloping stretches it will push the price.
  • From Kumo we can also get other input signals. When a candle breaks up the top line of the kumo we could open a Buy position, vice versa when it breaks down the bottom line.
  • Lastly, the values ​​of Senkan Span A and Senkan Span B can also be used as resistances or supports. The greater the thickness of the kumo the greater the reliability of these resistors and supports will be

Conclusions

We have analyzed the individual lines that make up the indicator, but the strength of the Ichimoku is in evaluating them in its entirety for obtain information on the trend and for decide the inputs into the market. Ichimoku is like a puzzle and each line represents a piece. With a little ‘practice, however, you can evaluate the Ichimoku Kinko Hyo in its entirety.

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