• Home ::
• Education ::
• Technical

• Send
• Print
• Add To
• Rss

Technical Basics Lessons

ba5878be-44e6-4fe2-ae0f-6ff4a7cf5494

13

1

Trading with Ichimoku Kinko Hyo

Wed, Jul 29 2009, 09:36 GMT
by Valeria Bednarik

FXstreet.com Independent Analyst Team

Let’s start by understanding what the name of this indicator means, in order to understand how it is used. The Japanese term “Ichimoku” means “instant view’ or “one glance”, “Kinko” is the equivalent of “equilibrium” or “balance” and “Hyo” means “chart”.

So, we can translate the full name “Ichimoku Kinko Hyo” to “Instant view of the balance chart”. This indicator was developed by Goichi Hosoda around 1969, and from that point forward Ichimoku Kinko Hyo has become a permanent feature in Japanese trading rooms.

The Ichimoku Kinko Hyo Technical Indicator is predefined to characterize the market Trend, Support and Resistance Levels, and to generate signals of buying and selling. Remember this indicator works best on weekly and daily charts, so it's better for long term analysis.

When defining the parameters of the indicator, four time intervals of different lengths are used: these lines, very similar to moving averages, are based upon high and low prices.

It could sound a bit complicated at the beginning, but let’s see the lines and what they represent:

1. 1.Tenkan-Sen, RED in our chart, shows the average price value during the first time interval defined as the sum of maximum and minimum within this time, divided by two - (Highest high + lowest low) / 2, calculated over the past nine time periods.
2. 2.Kijun-Sen shows the average price value during the second time interval or base line (BLUE) - (Highest high + lowest low) / 2, calculated over the past 26 time periods.
3. 3.Senkou Span A shows the middle of the distance between two previous lines shifted forward by the value of the second time interval (ORANGE) - (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 time periods ahead.
4. 4.Senkou Span B, GREY in our chart, shows the average price value during the third time interval shifted forward by the value of the second time interval (Highest high + lowest low) / 2, calculated over the past 52 time periods. And Plots 26 periods ahead.

Finally, there is Chikou Span, or lagging span (GREEN), the most current closing price plotted 22 time periods behind. This green Chinkou Span shows the closing price of the current candle shifted backwards by the value of the second time interval.

The distance between the two Senkou lines is hatched with another color and called "cloud" or KUMO. The two Senkou Span (leading) lines are pushed forward in time to represent past support and resistance – similar in concept to the idea that once established, support will continue to provide support until broken when it becomes resistance. The colored area between the two Senkou , the “cloud”, not only defines the trend but acts as support and resistance for price. A very basic precept is: if price is above the cloud then the trend is higher and vice versa.

This means that:

• If the price is above the cloud, its upper line forms the first support level, and the second line forms the second support level;
• If the price is below the cloud, the lower line forms the first resistance level, and the upper one forms the second level;
• If the price is between these lines, the market should be considered as non-trend, and then the cloud margins form the support and resistance levels.

Ichimoku analysis is similar to Moving Average analysis. Buy and sell signals are given by cross-overs.

First we can say that the Kijun-sen BLUE is used as an indicator of the market movement. If the price is higher than this indicator, the prices will probably continue to increase. When the price traverses this line, the further trend changing is possible. Also, the crosses between the Kijun-sen BLUE and the Tenkan Sen RED cross overs are signs of further continuation. A bullish signal is issued when the Tenkan Sen RED crosses Kijun Sen BLUE from below. Conversely, a bearish signal is given when Tenkan Sen crosses Kijun Sen from above.

The Tenkan-sen is used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel.

However, the relative positions of the Kijun Sen and Tenkan Sen are also important: as we just said, basically a crossing of the Tenkan Sen above the Kijun Sen is bullish and a crossing of the Tenkan Sen below the Kijun Sen is bearish.

But we should also take care of the positions of price against the cloud and of the Tenkan Sen and Kijun Sen crossing the relative position of today’s price against that of 26 periods ago. That determines the strength of the signals. The Chikou Span (lagging span) is today’s price moved back 26 periods. If the Chikou Span (today’s price) is below that of 26 periods ago and a sell signal occurs, it is a stronger signal that it had been above the close of 26 periods ago. Equally the opposite is true for buy signals.

Let’s see an USD JPY weekly chart: price is breaking above the first resistance level, base of the cloud. Kijun Sen is about to cross the Tenkan Sen, while Chikou Span is well above the 26 sessions ago price. A clear cut, plus a candle opening inside the cloud, will give a bullish signal, though not the strongest one, as 98.75 level, roof of the cloud, which should act as strong resistance in the pair or probable target.

If the Chinkou Span line traverses the price chart in the bottom-up direction it is a signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is a signal to sell.

Interpreting the Chart

Here is a list of signals and how you can spot them:

• Strong signals - A strong buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A strong sell signal occurs when the opposite occurs. The signals must be above the Kumo.
• Normal signals - A normal buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A normal sell signal occurs when the opposite occurs. The signals must be within the Kumo.
• Weak signals - A weak buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A weak sell signal occurs when the opposite occurs. The signals must be below the Kumo.
• Overall strength - Strength is shown to be with the sellers if the Chikou Span is below the current price. Strength is shown to be with the buyers when the opposite is true.
• Support/resistance levels - Support and resistance levels are represented by the presence of the Kumo. If the price is entering the Kumo from below, then the price is at a resistance level. If the price is falling into the Kumo, then there is a support level.
• Trends - Trends can be determined by simply looking at where the current price is in relation to the Kumo. If the price stays below the Kumo, then there is a downward trend (bearish). Alternatively, if the price stays above the Kumo, then there is an upward trend (bullish).

Ichimoku rates the strength of bullish and bearish cross overs, too. A bullish crossover signal that occurs above the Kumo is a very strong signal. Similarly, a bearish cross below the Kumo is considered strong.

Published on  Wed, Jul 29 2009, 09:36 GMT