Ichimoku Kinko Hyo Technical Analysis Trading

Ichimoku Cloud is a method of technical analysis that combines multiple indicators in a single graph. It is used in candlestick charts as a negotiation tool that provides information on possible support and resistance price zones. It is also used as a forecasting tool, and many operators use it when trying to determine the direction of future trends and market momentum.

The Ichimoku cloud was conceptualized in the late 1930s by a Japanese journalist named Goichi Hosada. However, its innovative commercial strategy was only published in 1969, after decades of studies and technical improvements. Hosada called it Ichimoku Kinko Hyo, which translates from Japanese as “balance board at a glance.”

Ichimoku Clouds Explained

How does it work?

The Ichimoku Cloud system displays data based on both advanced and delayed indicators, and the graph consists of five lines:

1. Conversion line (Tenkan-sen): moving average of 9 periods.

2. Baseline (Kijun-sen): the moving average of 26 periods.

3. Leading Span A (Senkou Span A): the moving average of the conversion and the projected baselines 26 periods in the future.

4. Leading Span B (Senkou Span B): 52-period moving average projected 26 periods in the future.

5. Lagging Span (Chikou Span): the closing price of the current period projected 26 periods in the past.

The space between the Leading Span A (3) and the Leading Span B (4) is what produces the cloud (Kumo), which is probably the most notable element of the Ichimoku system. The two lines are projected in 26 periods in the future to provide forecast perspectives and, as such, are considered leading indicators. The Chikou Span (5), on the other hand, is a lagged indicator projected 26 periods in the past.

By default, clouds are shown in green or red, for easy reading. A green cloud is created when the main interval A (green cloud line) is greater than the main interval B (red cloud line). Naturally, a red cloud results from the opposite situation.

It is worth noting that, unlike other methods, the moving averages used by the Ichimoku strategy are not based on candle closing prices. Instead, the averages are calculated based on the high and low points recorded within a given period (high-low average).

For example, the standard equation for a 9-day conversion line is:

Conversion line = (9d high + 9d low) / 2

Ichimoku settings

After more than three decades of research and testing, Goichi Hosada concluded that the configuration (9, 26, 52) had the best results. At that time, Japanese business hours included Saturdays, so the number 9 represents a week and a half (6 + 3 days). The numbers 26 and 52 represent one and two months, respectively.

While these settings are still preferred in most business contexts, cartographers can always adjust them to suit different strategies. In cryptocurrency markets, for example, many operators adjust the configuration of Ichimoku to reflect 24/7 markets, often changing from (9, 26, 52) to (10, 30, 60). Some go even further and adjust the setting to (20, 60, 120) as a way to reduce false signals.

Even so, there is an ongoing debate about how efficient the configuration modification can be. While some argue that it makes sense to adjust them, others claim that abandoning the standard configuration would alter the balance of the system and produce many invalid signals.

Analyzing the chart

Ichimoku trading signals

Due to its multiple elements, the Ichimoku cloud produces different types of signals. We can divide them into momentum and trend tracking signals.

Impulse signals: they are generated according to the relationship between the market price, the baseline and the conversion line. Bullish momentum signals occur when one or both conversion lines and the market price move above the baseline. The bearish momentum signals are generated when one or both conversion lines and the market price move below the baseline. The cross between the conversion line (Tenkan-sen) and the baseline (Kijun-sen) is often referred to as a TK cross.

Trend tracking signals: they are generated according to the color of the cloud and the market price position in relation to the cloud. As mentioned, the color of the cloud reflects the difference between the main sections A and B.

Simply put, when prices are constantly above the clouds, there is a greater chance that the asset is in an upward trend. On the contrary, prices that move below the clouds can be interpreted as a bearish sign, indicating a downward trend. With some exceptions, the trend can be considered flat or neutral when prices are making lateral movements within the cloud.

Lagging Span (Chikou Span) is another element that can help traders detect and confirm possible trend reversals. It provides information on the strength of the price action, possibly confirming an upward trend when it moves above-market prices, or a downtrend when it is below. Normally, the Lagging Span is used together with the other components of the Ichimoku Cloud, and not only.

Summarizing:

Moment signals

The market price moves above (bullish) or below (bearish) of the baseline.

TK Cross: Conversion line that moves above (bullish) or below (bearish) of the Baseline.

Trend Tracking Signs

The market price moves above (bullish) or below (bearish) of the cloud.

The color of the cloud changes from red to green (bullish) or from green to red (bearish).

Delay in the market price above (bullish) or below (bearish).

Support and resistance levels.

The Ichimoku table can also be used to identify support and resistance zones. Typically, the Leading Span A (green cloud line) acts as a support line during uptrends and as a resistance line during the downtrend. In both cases, the sails tend to approach the Leading Span A, but if the price moves towards the cloud, the Leading Span B can also act as a support/resistance line. In addition, the fact that the two main sections are planned 26 periods in the future allows operators to anticipate possible support and resistance areas.

Signal strength

The strength of the signals generated by the Ichimoku Cloud depends largely on whether they are in line with the broader trend. A signal that is part of a larger and clearly defined trend will always be stronger than one that arises briefly in opposition to the prevailing trend.

In other words, a bullish signal can be misleading if it is not accompanied by an uptrend. Therefore, each time a signal is generated, it is important to recognize the color and position of the cloud. The volume of negotiation is also something to consider.

Keep in mind that using Ichimoku with shorter deadlines (intraday graphics) tends to generate a lot of noise and false signals. In general terms, longer terms (daily, weekly and monthly charts) will produce more reliable momentum and trend tracking signals.

Final thoughts

Goichi Hosada dedicated more than 30 years of his life to create and refine the Ichimoku system, which is now used by millions of merchants worldwide. As a versatile graphics method, Ichimoku clouds are used to identify trends and market momentum. In addition, Leading Spans make it easier for cartographers to anticipate potential levels of support and resistance that have not yet been tested.

Although the graphics may seem too busy and quite complex at first, they do not depend on subjective human contributions like other methods of technical analysis (for example, drawing trend lines). And despite the ongoing debate over the configuration of Ichimoku, the strategy is relatively easy to use.

However, as with any indicator, it should be used together with other techniques to confirm trends and minimize business risks. A large amount of information shown in this chart can also be overwhelming for beginners. For these merchants, it is generally a good idea to feel comfortable with more basic indicators before addressing the Ichimoku cloud.