The Ichimoku Kinko Hyo indicator allows traders to identify a market's trend and key price levels at a glance.
Although there is a wide range of technical indicators, the Ichimoku Kinko Hyo indicator is to date one of the most well-known and popular. While it provides a lot of information, the tool is relatively simple to use. It’s therefore ideal for beginner traders ready to take their first steps on the markets.
In Japanese, the term "Ichimoku" means "at a glance". The Ichimoku Kinko Hyo indicator is therefore a technical indicator that allows traders to identify current trends and key price levels in a glance. Its different components, five in number (Kijun-Sen, Tenkan-Sen, Senkou, Chikou, and Kumo), each have their own calculation formula. Once set, these price levels are then automatically plotted on the price chart by your trading platform.
The Kijun is the first median used by Ichimoku. It corresponds to the average of the high and low points observed during the last 26 periods.
Kijun-Sen formula : Kijun = (high + low) / 2 Where high and low are the high and low points, respectively, over the last 26 periods.
The Tenkan is the second median used by Ichimoku. Like the Kijun, it corresponds to the average of the high and low points, but these reference points are this time those observed during the last 9 periods only.
Tenkan formula : Tenkan = (high + low) / 2 Where high and low are respectively the high and low points observed over the last 9 periods.
Senkou designates a set composed of two medians. A first median, Senkou A, corresponds to the average of the Kijun and Tenkan medians projected into the future (26 time units ahead). A second median named Senkou B corresponds to the average of the highest and lowest of the last 52 time units projected into the future (here also, 26 time units ahead).
Kumo is the price area between Senkou A and Senkou B. Also known as the "cloud", this area is usually colored on the chart (green for an uptrend or red for a downtrend).
Chikou corresponds to the projection of the current price 26 periods ahead.
Although many trading strategies are possible using the Ichimoku indicator, the most common interpretations concern the position of prices in relation to the "cloud". Indeed, when prices move below the cloud (kumo), the Senkou A and Senkou B medians would tend to act as resistances. Conversely, when prices move above the cloud, these two medians tend to act as support. Furthermore, Senkou A and Senkou B crossovers are a way to determine the current trend in a given market. A bullish crossover is synonymous with a bullish trend reversal, and conversely, a bearish crossover is synonymous with a bearish trend reversal.
The Senkou A and Senkou B medians can be used to position your stop-loss orders. For example, when you enter the market, you can choose to place your stop-loss order above the "cloud" to automatically cut your losses in case of a trend reversal. Better still, you can use these dynamic price levels to follow the trend with a trailing stop-loss. In this way, you will benefit from the entire trend movement without running the risk of taking your profits too early. Finally, Ichimoku levels can also be used to position your take profit orders. If you are looking to exploit a counter-trend movement, you can for example target a return of the price to the "cloud".
On the other hand, if you exploit an impulse movement in the direction of the trend, you will be able to aim at least at a return on the Chikou, i.e. on the price level where the market was 26 periods before. In cases where the current price is already above this level, a trend following strategy should be considered.
Automated trading platforms such as MetaTrader allow their users to develop their own technical indicators, their own alerts, but also and especially to use automated trading systems. The Ichimoku indicator can then allow investors to manage their position entry and exit conditions as part of a complete trading system, or simply play the role of an Expert Advisor to alert them to ongoing opportunities. By combining the trading signals of a technical indicator such as Ichimoku with trading algorithms with effective management rules, traders maximize their chances of success. Ichimoku signals allow traders to detect market opportunities, filter them to retain only the best, and the automated solution then applies Money Management rules defined according to the trader’s investor profile. Instead of spending all day behind a screen waiting for the prices to come in contact with the Ichimoku "cloud", it’s enough to simply study the market before the stock exchange session, launch an automated solution, then to go on to other occupations. Comprehensive technical indicators such as Ichimoku allow traders to reduce to the strict minimum the time dedicated to the study phase.
Whichever way you choose to use the Ichimoku indicator, keep in mind that it is by no means a crystal ball, but simply results from mathematical formulas that can guide you in your decision making.