Among all of the trading technical strategies there is one that literally means “instant look at the balance chart”, and of course, we are talking about the Ichimoku Kinko Hyo indicator. The Japanese Goichi Hosoda developed the Ichimoku Kinko Hyo technique in 1960. For obvious reasons, the Ichimoku indicator was well received by users in Japan, however, due to its excellent design features, this outstanding strategy had spread worldwide. Keep reading if you are interested in estimating trends trough the exceptional Ichimoku Kinko Hyo indicator.
How Does It Work?
Focused on the medium price, the Ichimoku Kinko Hyo indicator makes use of multiple point moving averages that ultimately turn in a group of indicators. The Ichimoku indicator consists of five lines called: tankan sen (red lie), kijun sen (blue line), senkou span A (green interrupted edge of the cloud), senkou span B (red interrupted edge of the cloud), kuomo cloud (gridded area) and chickou span (wrinkled green line). For further understanding, check out the figure below.
In other words, it is quite a complex indicator fully available in any set of timeframes in your charts. The main purpose is to calculate the medium price and understanding the trends.
We can say that this indicator can’t work alone, because your work is based on other indicators such as candlestick patterns, Stochastic and some others; however, it’s worth the effort since the chances of creating effective trading strategies are definitively huge. If you are looking to estimate trends using this type of technical indicators, knowing how to spot the lines is crucial. As we stated, the Ichimoku indicator consists of the following components:
The Tenkan sen, which is the first indicator. Whenever the red line above starts moving, you may consider that as a new trend. You can estimate this indicator by taking the last nine candlestick highs-lows as your middle price.
The Kijun sen is the indicator of trends. This blue line above moving slower than the Tenkan sen, so you have to be aware of that time lag and be patient. It follows the last 26 candlesticks.
The Senoku span A is noticeable the fastest moving line that forms the green edge of the Kuomo cloud. If you need to calculate this indicator, you just have to add two the sen lines, the result is divided by two and then plotted twenty-six periods in advance.
The Senoku span B is the lower red edge of the cloud, which is plotted twenty-six periods in advance. You can estimate this indicator by taking the average of the high/low of the last 562 candlesticks.
The Kuomo cloud is the gridded area shown above. This area expands and contracts depending on the size of the trade. We can also say that the form might change in terms of the market behavior (contracting when there are horizontal ranges and expanding when there is a trendy market).
The Chickou span indicates a lagging trend with a wrinkled green line. This is a momentum indicator that is formed within the same direction of the price. You can estimate this indicator by calculating approximately 26 days from the current closing price, this can be your absolute trade validation.
There are some important facts to bear in mind when using this complex technical indicator:
1) The key of the Ichimoku indicator is the cloud. Keep an eye on the form of the cloud, which is your ultimate trend indicator. Don’t forget that the cloud changes depending on the size of the trade.
2) The color change of indicators definitely makes the work easier. Take advantage of this feature by identifying a downtrend price (which turns red) and an up price (which turns green). Note: You can set your color indicator preferences as you wish.
3) The shape of the cloud portrays the behavior of the price. You are facing an uptrend whenever the price is above the cloud, and you are facing a downtrend whenever the price is below.
4) Try to reduce risks by waiting until the price retraces back down and placing the stop loss below the lowest line of the cloud, instead of entering the trade right after the price breaks.
5) Work on the uptrend while the cloud remains green and the price is still placed above. The tenkan and the kijun lines are very useful at this point, if you are looking to adding the position on the retraces. It is advisable to place the stop below these two lines.
6) lf you are working on long period timeframes, it is highly recommended to take advantage of the Chickou span line, which is the greatest momentum indicator. Its lagging feature makes it perform as your trade validation once the price moves above the cloud and you actually observe the crossover of the tenkan and the kijun lines.
Many traders use the Ichimoku as their main strategy, mostly because it can be combined with a number of indicators as well. Overall, the Ichimoku indicator can be quite an effective tool for both conservative and daring traders, since it provides them with the necessary tools and it is complex enough for them to decide over a fast trade or a trade that needs to be reconfirmed a few times. The choice is yours. You can always find some books that will help you with your trading and choice of indicators at Forex-Library.com.