Understanding and Using Ichimoku

Ichimoku Kinko Hyo (often refered to as Ichimoku or simply Ichi), is a method of technical analysis developed by a Japanese journalist. Here’s everything you need to know about it…

Advantages of using Ichimoku

Ichimoku merges three indicators on one graph to provide a clear picture of the market. It simultaneously provides the trader with an eye on previous price trends, clear cross-over points to initiate a position, as well as an indication on the strength of the entry points.

It is a technique which really utilises the power of information, allowing the trader to make very well informed decisions.

Let’s jump in at the deep end…

At first sight the combination of three indicators on one graph can be a little overwhelming, but it’s a good idea to simply have quick glance at a Ichimoku graph featuring all three indicators. This will give us something to dissect – one indicator at a time – as well as something to refer back to.

Understanding the three indicators

Kijun-Sen & Tenkan-Sen

Below is the very familiar candlestick chart, with the addition of a red line (Tenkan-Sen) and a blue line (Kijun-Sen); these are our first indicators.

The first thing to understand is that a red over blue line indicates a bullish market, and a blue over red line indicates a bearish market.

However the most critical thing the Tenkan-Sen & Kijun-Sen lines reveal is a clear cross-over point; this is the point at which a trader should consider initiating a position.

Chikou Span

The Chikou Span is represented in the initial graph (and the graph below) by a purple line. When this sits above the price line, it is a bullish market. When it sits below the price line, it is a bearish market.

The Chikou Span is directly translated as the lagging line. This is because it is not an up-to-date indicator and always lags at least 24 candles behind the current price – see above.

It is intended to give the trader an eye on previous price trends and give a clue to any potential upcoming trends. For example, if the current close price is lower than 24 candles ago, it would indicate that there is a more bearish price action to come and vise versa.

Clouds

This is potentially the most important indicator of the of Ichimoku strategy.

As with the previous indicators, the first thing to understand is that price above the cloud indicates a bullish market, and price below the cloud indicates bearish. Anything inside the cloud is considered neutral, as resistance is being tested.

The cloud is a measure of support and resistance and is used to identify potential breakout points. It becomes extremely powerful when it is used alongside the cross-over points provided by the red and blue lines of the Tenkan-Sen & Kijun-Sen.

Note that a cross-over point is the point at which a trader should consider initiating a position.

Below is a graph featuring all three indicators.

The first cross-over which takes place indicates an upward trend (red crosses over blue), which is supported by the graph. The cloud gives the trader further insight as the cross-over takes place at the bottom end of the cloud (bottom end of resistance), which indicates that the upward trend will have average strength.

A cross-over below the cloud indicates weak strength, and a cross-over above the cloud is the strongest indicator, as it is clear of resistance.

Hopefully this hasn’t been too confusing due to the various components of the strategy, but its almost fool-proof indicators will allow you to capture some very profitable trends.