Ichimoku Kinkō Hyō Technical Analysis

Introduction

The Japanese origin term ichimoku kinko hyo (一目均衡表 Ichimoku Kinkō Hyō, will be referenced as ichimoku in the rest of this article) is very popular in time-series technical analysis. This term can be translated to “one look of equilibrium chart”, or “a glance of balance chart” (ichimoku = one look/glance, kinkō = balance/equilibrium, hyō = chart/graph) [2]. This analysis was developed in the late 1930s by Goichi Hosoda (細田悟一 Hosoda Goichi), and released to the public in his 1969 book [1].

Figure 1. Ichimoku Kinko Hyo Analysis on USD/JPY

Ichimoku Elements and How to Compute

An example of Ichimoku analysis presentation is shown in the Figure 1. It shows the main elements of Ichimoku indicator: tenkan-sen, kijun-sen, senkou-span-A, senkou-span-B, chikou span, and kumo (the ichimoku cloud). Here is the explanation of these elements:

  • Tenkan-sen (the red line), also called conversion line, is computed by adding the highest point of 9 periods high and the lowest point  of 9 periods low then divide it by 2. In other words, tenkan-sen is a moving median of the last 9 period candles.
  • Kijun-sen (the blue line), also called base line, is computed by by adding the highest point of 26 periods high and the lowest point  of 26 periods low then divide it by 2. In other words, kijun-sen is a moving median of the last 26 period candles.
  • Senkou-span A (the thin green line), also called the leading-span A or faster cloud boundary, is the mid point between tenkan-sen and kijun-sen, plotted 26 period forward (in the future)
  • Senkou-span B (the thin orange line), also called the leading-span B or the slower cloud boundary, is the median of the last 52 period ((the highest high + the lowest low)/2), plotted 26 period forward (in the future)
  • Kumo, also called Ichimoku cloud, is the shaded area between the cloud boundaries senkou-span A and senkou-span B. The shading is colored by the upper line color, so if senkou-span A is higher than senkou-span B the shading color is green, and orange otherwise.
  • Chikou span (the thick green line), also called the lagging span, is the close price plotted 26 periods backward (in the past).

The indicator setting for computing the analysis other than periods of 9, 26, and 52 can be configured in many charting software platforms.

Ichimoku Indicator Interpretation

Interpretation of many ichimoku signals should be viewed as an integrated analysis which can’t be separated. Here the summary of the interpretation:

  • Price above the cloud indicate an up-trend, below the cloud indicate a down-trend, inside the cloud indicate sideways or possible trend reversal. Kumo break-out, when price leave the cloud then its a break-out from sideways period and start a trending period.
  • Tenkan-sen cross the kijun-sen upward, above the cloud is strong bullish signal, inside the cloud is normal bullish signal, and below the cloud is weak bullish signal. The opposite (bearish) identification is similar for downward cross.
  • Price cross the kijun-sen upward, above the cloud is strong bullish signal, inside the cloud is normal bullish signal, and below the cloud is weak bullish signal. The opposite (bearish) identification is similar for downward cross.
  • Senkou-span cross or kumo/cloud flip, happens when senkou-span A cross the senkou-span B. Upward crossing (look at the future-shifted current cloud flip for current price) indicate a strong bullish when the current price is above kumo, normal bullish if inside kumo, and weak bullish if below kumo. The opposite (bearish) identification is similar for the downward crossing.
  • Chikou-span cross, happens when chikou-span cross the price (26 period in the past record). Upward crossing indicate a strong bullish if the current price is above kumo, a normal bullish if inside kumo, and weak bullish if below kumo. The opposite (bearish) identification is similar for downward crossing.

Ichimoku Trading Strategy

For automated trading system, we have to define a consistent procedure in producing the signal. Because ichimoku indicator gives many type of signals, we have to define our own rule exploiting them to construct both entry and exit signal. An ichimoku trading system model is under development at VidiForex using our analysis and trading sytem modeler. A trading simulation report and free real-time trading signal might be available in the future, and we will update them here in this page.

 

REFERENCES

  1. Ichimoku trading strategy, http://traderhq.com/trading-indicators/ichimoku-cloud-trading-strategy-explained/
  2. Best Ichimoku for Quick Profit, https://tradingstrategyguides.com/best-ichimoku-strategy/

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