Ichimoku Kinko Hyo indicator

Ichimoku indicator is one of the most versatile indicators, with many facets that contribute to identify support and resistance, trend direction, entry points and exit points. It was developed by Goichi Hosada, a Japanese journalist who called it Ichimoku Sanjin ("view of the Mountain Man"). It is widely used since the 60's in Japan and since the late 90's of XX century has been gaining popularity in the West. Ichimoku Kinko Hyo could be translated as "balanced graphicat first sight", which gives an idea of the functionality of this indicator in technical analysis.

Composion of this indicator

The Ichimoku consists of 5 lines and a cloud made ​​up of the space between two lines. These 5 lines are Senkou Span (A and B, the space between them forms the Kumo, or cloud), Chikou Span, Tenkan and Kijun (also called Tenkan-Sen-Sen and Kijun-Sen ). All these lines are a calculation based on the midpoints between maximum and minimum of a given period.
  • Chikou Span: The delayed line represents the current price drawn back 26 periods.
  • Tenkan: It is known as the conversion line. It is calculated by the following formula: (Highest High + lower minimum) / 2 calculated for the last 9 periods.
  • Kijun: It's the baseline, its formula is (Highest High + Low minimum) / 2 calculated for the last 26 periods.
  • Senkou Span A and B, kumo or Ichimoku Cloud: The most important features of these lines is that are drawn several periods ahead in time. The calculation of these lines is:
    • - Senkou Span A: It is estimated by (Tenkan - Kijun) / 2 and is plotted 26 periods ahead.
    • - Senkou Span B: Its value comes from the formula (Highest High + Low minimum) / 2, calculated for 52 periods and drawn 26 periods forward.
    • - Kumo, Ichimoku Cloud: The space between Senkou Span A and Senkou Span B  is called Kumo, or cloud, and represents an area of ​​support / resistance. Therefore it is a representation of different levels of support and resistance. The cloud was one of the most important points in the development of this indicator. In this case, Hosada did not represented the levels of support and resistance as single lines as the traders opened their positions at different distances from the points of support or resistance, creating a cloud of support and resistance levels corresponding to different bid / ask or prices of supply and demand.

Technical Analysis with Ichimoku Kinko Hyo indicator

  • General trend: In general, when the price is on the Ichimoku cloud, we can say that there is an uptrend. On the contrary, if the price is below the cloud we have a downtrend.
  • Buy/sell signal: The buy or sell signal is giving by the crossing of the Tenkan and the Kijun. As we seen before, both lines are calculated in the same way but for different periods, therefore the buy signal is when the line of least period (Tenkan) crosses from the bottom up the line of longer period (Kijun). The sell signal is given by the crossing of theTenkan from top to bottom over the Kijun.
  • Signal Strength: The Chikou Span give us information about the strength of the signal. Just think, What information can offer the current price drawn back 26 periods? For example, if we see that the current price is above the Ichimoku cloud, Tenkan has crossed from the bottom up the Kijun and Chikou Span is above the cloud, we can say that the buy signal is stronger than if Chikou span is below. This is because if the current price is above the cloud, and if we draw it some periods backwards it is also above the cloud, that indicates that the trend is confirmed. It also increases the signal strength if Chikou Span is above the baseline (Kijun). Another point to bear in mind when evaluating the signal is that the signal (Tenkan-Kijun crossing) occurs above the cloud.
Basically the Ichimoku Kinko Hyo can be used to informs us about the general trend of the market, to give us an entry signal and show us the strength of the trading signal. These applications demonstrates the versatility of this technical indicator.