HAVING condensed for 30 years in the mind of Goichi Hosoda, a Japanese journalist, ichimoku kinko hyo – which translates as “one glance balanced chart” – took Japanese traders by storm when it was unveiled in 1960. It’s now a stock indicator in Japan and has a scattered following in Europe and the US. This should only precipitate in the coming years.
CHARTING THE CLOUDS
“Ichimoku is a complex charting system, which can be used as part of many trading strategies,” says Michael Hewson of CMC Markets. Although ichimoku charts appear confusing at first sight, using ichimoku is actually quite easy. Kathleen Brooks of Forex.com thinks “the indicator’s appearance should not scare traders, as it is simply based averaging highs and lows, combining the results on one chart.”
Ichimoku uses five indicators, each of which indicates an average or price:
1. Tenkan sen (calculated by averaging highest high and lowest low during the last 9 days)
2. Kijun sen (calculated by averaging highest high and lowest low during the last 26 days)
3. Chikou span (today’s daily closing price projected into the past by 26 days)
4. Senkou span A (calculated by taking the average value of the sum of the tenkan sen and the kijun sen, which is then projected 26 days into the future)
5. Senkou span B (calculated by averaging the highest high and the lowest low over the prior 52 days, but plotted into the future)
Hewson explains: “The most distinctive feature of ichimoku is kumo (translates as ‘cloud’), the area between senkou span A and senkou span B – this feature is given its name by the appearance of this area when shaded. Markos Solomou of Easy-forex notes: “When green and prices are above the cloud, this is considered an indication that the trend is an uptrend. When red and prices below the cloud the trend is downtrend. When prices are in the cloud the trend is flat.” Hewson says unlike with typical support or resistance indicators “kumo has depth, which indicates how likely it is for a price to break through the cloud.”
Ichimoku signals are generated when key lines cross. A buy signal is triggered when the tenkan sen crosses above the kijun sen from below, while a sell signal is triggered when the tenkan sen crosses below the kijun sen from above. But as Brian Dolan of Forex.com notes in Trading Clouds: “In ichimoku theory, all signals are not created equal, and this is where the cloud comes into play.” Dolan explains that the strongest sell signal is generated when the downside crossover occurs while prices are below the cloud and the strongest buy signal comes from an upside crossover while prices are above the cloud. Except Chikou span, all the other lines also work for traders as supports and resistance. Elliott Winner of Capital Spreads explains that ichimoku helps traders identify support and resistance levels and indicate momentum at a quick glance. He adds: “It also shows future direction of a current trend using moving averages to show bearish and bullish crossover points.”
Since forming in Japan, ichimoku’s popularity has dispersed across Asia. A strong easterly is blowing ichimoku westward, as over the years the indicator becomes increasingly popular for western traders. Spread Co’s Ian O’Sullivan says it is being used more and more in analyses and is mentioned increasingly on tweets as a point of reference for trading levels. James Stanley, a trading instructor at DailyFX, the research arm of FXCM, thinks “ichimoku is the type of trading system that can really grow in popularity.”
It’s time to get your head in the clouds.