Ichimoku Kinko Hyo

Ichimoku Kinko Hyo (一目均衡表 Ichimoku Kinkō Hyō, ‘one glance equilibrium chart’ or ‘instant look at the balance chart’) usually just called ichimoku is a technical analysis method that builds on candlestick charting to improve the accuracy of forecasted price moves. It was developed in the late 1930s by Goichi Hosoda (細田悟一 Hosoda Goichi), a Japanese journalist who used to be known as Ichimoku Sanjin, which can be translated as “What a man in the mountain sees”. He spent thirty years perfecting the technique before releasing his findings to the general public in the late 1960s.

Step into any Japanese trading room and you will see the indicator displayed across most of the traders’ screens. Only recently did the Western world adopt this trading system due to the lack of traders willing to translate the methodology into the English language, thus keeping this trading secret well kept among the Japanese community. But this is fast changing, with the adoption of this trading indicator growing exponentially in recent years, with applications across asset classes (even options trading).

Ichimoku Kinko Hyo sometimes referred to as ‘one glance cloud chart’ based on the unique ‘clouds’ that feature in ichimoku charting. At first glance, the indicator looks messy like a child’s painting. With a little patience and practice, this “mess” ironically makes chart reading a breeze. Below is a snapshot of Ichimoku:

EURUSD Daily Chart (September 2010 - June 2011) | Ichimoku Kinko Hyo

Ichimoku is a moving average-based trend identification system and because it contains more data points than standard candlestick charts, provides a clearer picture of potential price action. The main difference between how moving averages are plotted in Ichimoku as opposed to other methods is that Ichimoku’s lines are constructed using the 50% point of the highs and lows as opposed to the candle’s closing price.

Ichimoku factors in time as an additional element along with the price action, similar to William Delbert Gann’s trading ideas.

Popular in Japan, Ichimoku is gaining traction in the west through proponents of its charting accuracy such as Lincoln FX and Ichi360.

The key elements of the ichimoku chart

Tenkan-sen
Tenkan-sen (転換線) calculation: (highest high + lowest low)/2 for the last 9 periods.
It is primarily used as a signal line and a minor support/resistance line.
Kijun-sen
Kijun-sen (基準線) calculation: (highest high + lowest low)/2 for the past 26 periods.
This is a confirmation line, a support/resistance line, and can be used as a trailing stop line.
Senkou span A
Senkou (先行) span A calculation: (Tenkan-sen + kijun-sen)/2 plotted 26 periods ahead.
Also called leading span 1, this line forms one edge of the kumo, or cloud.
Senkou span B
Senkou span B calculation: (highest high + lowest low)/2 calculated over the past 52 time periods and plotted 26 periods ahead.
Also called leading span 2, this line forms the other edge of the kumo.
Kumo
Kumo (雲, cloud) is the space between senkou span A and B. The cloud edges identify current and potential future support and resistance points. Yes this is one of the rare indicators which forecasts price action ahead, contrary to what most believe technical analysis to be backward looking. At one glance, you can see whether price is currently bullish (above the cloud), bearish (below the cloud) or consolidating (inside the cloud).
The Kumo cloud changes in shape and height based on price changes. This height represents volatility as larger price movements form thicker clouds, which creates a stronger support and resistance. As thinner clouds offer only weak support and resistance, prices can and tend to break through such thin clouds.
Chikou span
Chikou (遅行) span calculation: today’s closing price projected back 26 days on the chart.
Also called the lagging span it is used as a support/resistance aid.

Generally, markets are bullish when Senkou Span A is above Senjou Span B and vice versa when markets are bearish. Traders often look for Kumo Twists in future clouds, where Senkou Span A and B exchange positions, a signal of potential trend reversals.

In addition to thickness, the strength of the cloud can also be ascertained by its angle; upwards for bullish and downwards for bearish. Any clouds behind price are also known as Kumo Shadows.

What Does Tenkan Sen Mean?

The mid-point between the highest high and lowest low of a particular security calculated over the past nine periods. The Tenkan-Sen line is the conversion line used specifically in the Ichimoku Kinko Hyo (or Ichimoku Cloud) equilibrium charts. Along with the 26-period moving average, Kijun-Sen, it is one of two moving average lines displayed in the chart.
This line is calculated by using the following formula:

Tenkan Sen = (HighestHigh - LowestLow) / 2 [for the last 9 periods]

The resulting line is interpreted in the same manner as a short-term moving average. Also known as “Tenkan-Sen line” or simply “Tenkan line”.

The Tenkan-Sen is generally used in combination with the Kijun-Sen to create predications of future momentum. A buy signal is created when the Tenkan-sen line moves above the Kijun-Sen, while a sell signal is created when the Tenkan-Sen line moves below the Kijun-Sen line.

Many technical traders use the Tenkan-Sen as a tool for predicting levels where the price of the asset will find short-term support.

When reading Ichimoku Kinko Hyo charts, investors should note that the Tenkan-Sen line leads the Kijun-Sen, and tracks price with more sensitivity because it covers a shorter period of time. When the Tenkan-Sen line crosses and moves above the Kijun-Sen line, this is generally considered a bullish signal. Alternatively, when the Tenkan-Sen line crosses below the Kijun-Sen line, it is considered a bearish signal.

What Does Kijun Sen Mean?

A component of the Ichimoku Kinko Hyo indicator that is primarily used to measure medium-term momentum. This line is calculated by using the following formula:

Kijun Sen = (HighestHigh - LowestLow) / 2 [for the last 26 periods]

The formula that is used to create the Kijun-Sen is nearly identical to the formula used to create the Tenkan-Sen except the number of time periods used in the calculation is increased to better gauge longer-term momentum.

The Kijun-sen is generally used in combination with the Tenkan-sen to create predications of future momentum. A buy signal is created when the Tenkan-sen line moves above the Kijun-sen, while a sell signal is created when the Tenkan-sen line moves below the Kijun-sen line. The Kijun-Sen is often regarded as the trigger line for traders who use the Ichimoku method.

What Does Senkou Span A Mean?

A component of the Ichimoku Kinko Hyo indicator that is used to measure momentum and future areas of support and resistance. Senkou span A is always plotted alongside Senkou span B and the area between the two lines is filled with shaded indicator lines, also known as the cloud, which is used by traders to predict levels of future support/resistance. Senkou span A is calculated by using the following formula:

Senkou Span A = (TenkanSen - KijunSen) / 2

The trend is deemed to be downward when Senkou span A is located below senkou span B. In practice, the indicator is most commonly used to predict the reversal of a current trend when the senkou spans cross over each other.

What Does Senkou Span B Mean?

A component of the Ichimoku Kinko Hyo indicator that is used to create the ‘cloud’ of the indicator. Senkou span B is always plotted alongside Senkou span A and the area between the two lines is shaded. The shaded area, known as the cloud, is then used to give traders an idea of future support and resistance. Senkou span B is calculated by using the following formula:

Senkou Span B = (HighestHigh - LowestLow) / 2

Senkou span B is generally regarded as the slowest moving component of the Ichimoku indicator because it is created by using the greatest number of time periods in its calculation (generally 52 time periods).

What Does Ichimoku Kumo (Cloud) Mean?

A chart used in technical analysis that shows support and resistance, and momentum and trend directions for a security or investment. It is designed to provide relevant information at a glance using moving averages (tenkan-sen and kijun-sen) to show bullish and bearish crossover points. The “clouds” (kumo, in Japanese) are formed between spans of the average of the tenkan-sen and kijun-sen plotted six months ahead (senkou span B), and of the midpoint of the 52-week high and low (senkou span B) plotted six months ahead.

The overall trend is up when prices are above the cloud, down when prices are below the cloud and flat when they are in the cloud itself. When senkou span A is rising above senkou span B the trend is stronger upward, and is typically colored green. When senkou span B rises above senkou span A, the trend is stronger downward and is denoted with a red-colored cloud.

What Does Chikou Span Mean?

A component of the Ichimoku Kinko Hyo indicator that is created by plotting recent price movement 26-periods behind the latest closing price. The number of periods used to lag the Chikou span is customizable so that transaction signals are generated more or less frequently. Also known as the “lagging span”.

The trend is deemed to be upward when the Chikou span is located above the closing prices and downward when the indicator is located below them. Many traders watch for the Chikou span to cross below the closing prices as a signal that the price of the asset is getting exhausted and is likely to experience a pullback.

USDJPY Daily Chart (September 2010 - June 2011) | Ichimoku Kinko Hyo

Ichimoku Trading Strategy

Kumo Break

Traders commonly look to enter long positions when price breaks resistance levels and conversely, short positions when price breaks support. A similar methodology can be applied by going long when prices break above the cloud, and going short when prices break below the cloud. Why the cloud is special:

As most indicators such as Fibonacci/ Pivots/ Trendlines define support and resistance levels as lines in the sand, traders often find themselves getting stopped out of their positions because their lines were drawn a little too high or low. With the cloud, support and resistance is a range, which is multi-dimensional and more meaningful for taking trading positions.
The cloud varies in height as price action changes. This height represents volatility in the market as wider price movements form a thicker cloud. A thicker cloud also means the support/resistance is stronger, and likely to keep price trending one direction. A thinner cloud warrants caution as it is susceptible to price breaking through it in the opposite direction.
You will also notice that the clouds twist, highlighted by a change in colour between orange and light blue in the above chart, as the Senkou Span A crosses the Senkou span B. Generally, future price action is bullish when Span A is above Span B and bearish when Span A is below Span B. This “Kumo Twist” can thus serve as a confirmation for the Kumo Breakout strategy.
Please understand that current price is forming the cloud 26 periods ahead. Or put another way, the cloud at present was created by price action 26 periods ago. The cloud therefore allows us to look into the future support/resistance.

Tenkan Sen / Kijun Sen Crossover

Traders can look to go long (short) when the Tenkan Sen crosses above (below) the Kijun Sen. Unlike traditional SMA strategies, the strength of the Tenkan Sen / Kijun Sen Cross can be ascertained based on its position relative to the cloud as follows:

A strong tenkan sen/kijun sen cross Buy (Sell) signal takes place when a bullish cross happens above (below) the kumo.
A neutral tenkan sen/kijun sen cross Buy/ Sell signal takes place when a bullish cross happens within the kumo.
A weak tenkan sen/kijun sen cross Buy (Sell) signal takes place when a bullish cross happens below (above) the kumo.

Traders can exercise risk allocation and position sizing based on the strength of the crossover. The more conservative Ichimoku Kinko Hyo practitioners ignore weak crosses altogether.