Forex Trading Strategies With Ichimoku Kinko Hyo

The Ichimoku Kinko Hyo, which is also known as the Ichimoku for short, is a technical indicator that is deployed in measuring momentum, spotting trend direction, defining probable zones of support and resistance, as well as delivering trade signals.

The wide-ranging technical indicator is made up of five distinct lines i.e. the tankan-sen, kijun-sen, senkou span A, senkou span B and chickou span.

Ichimoku Kinko Hyo is translated as “one look equilibrium chart”.

Just a peep at your trading chart, chartists are able to spot the trend and search for likely alerts within that trend.

Published in his book in 1969, the journalist, Goichi Hosoda developed the Ichimoku Kinko Hyo technical indicator.

When first viewed on the activity chart, the indicator may seem complex, although it is a straightforward technical tool that is very functional.

Considering it was designed by a journalist, not a computer programmer, it still prides an easy concept that has a well-defined alert system.

Fig. 1.0

Trading the Ichimoku Kinko Hyo Indicator

The Ichimoku cloud has five key components as listed below:

Tenkan-sen – When the highest high and the highest low over the last nine periods gets computed and the outcome divided by two, the Tenkan-sen is derived. The represented line signifies a major support and resistance level, along with reversal signal line.

Kijun-sen – The Kijun-sen is computed by summing the highest high and the lowest low over the last 26 periods and dividing the outcome by two. The represented line shows the major support and resistance level, a trend change confirmation and can also be deployed as a trailing stop-loss point.

Senkou Span A – Add the tankan-sen and the kijun-sen, divide the outcome by two, plot the outcome 26 periods ahead, and you’ve just computed the senkou span A. The formed line creates one edge of the kumo or cloud that is deployed in spotting imminent zones of support and resistance.

Senkou Span B – Adding the highest high and the lowest low over the last 52 periods, dividing the outcome by two, and then plotting the outcome 26 periods in advance, this is termed the senkou span B. The formed line creates the other edge of the kumo that’s deployed to spot future zones of support and resistance.

Chickou Span – If the current period’s closing price gets drawn 26 days behind on the activity chart, the Chickou Span is born. The line is deployed to depict possible zones of support and resistance.

Formula

The Ichimoku cloud is dependent on default indicator values i.e. deploying nine periods for the Conversion Line.

These standard values can be tweaked without problems on most charting platforms, such as MetaTrader 4, to suit any trader’s preference.

Here’s how to derive the formula for the Ichimoku cloud, although it’s needless because your trading platform will excitingly do it for you.

  • Tenkan-line, Conversion Line or Tenkan-sen: (9-period high + 9-period low)/2))
  • Kijun-line, Base Line or Kijun-sen: (26-period high + 26-period low)/2))
  • Senkou Span A, Leading Span A or Up Kumo: (Tenkan Line + Kijun Line)/2))
  • Senkou Span B, Leading Span B or Down Kumo: (52-period high + 52-period low)/2))
  • Chikou Span, Lagging Span or Delayed Span: Close plotted 26 days in the past

The default setting on the indicator is 26 periods, but can be modified by the trader.

Understanding Basic Ichimoku Kinko Hyo Signals

The Ichimoku Cloud also referred to as the Kumo is the most noticeable feature of the Ichimoku.

It is the Senkou Span A and Senkou Span B that forms the Cloud. The Senkou Span A is the mean of the Tenkan-sen and the Kijun-sen.

We know that the 9 and 26 periods calculations makes up the Tenkan-sen and Kijun-sen respectively, as such the sandy brown Cloud moves faster than the thistle Cloud boundary, which is the average of the 52-day high and 52-day low.

Moving averages operate on the same principle. Moving averages with shorter periods are more sensitive and faster than those with longer periods.

The overall trend in the Cloud can be spotted using two methods.

To start with, the trend is bullish when price is above the Cloud, while trend is bearish when price is below the Cloud.

Next, the bullish trend is reinforced when the Up Kumo is rising above the Down Kumo.

This situation yields a sandy brown Cloud. On the contrary, a bearish trend is strengthened when the Up Kumo is dipping below the Down Kumo.

This scenario yields a thistle Cloud and since the Cloud is shifted 26 days ahead, it also offers a pointer to future support and resistance.

1. Trend Signals

In order to spot signals more frequently and faster the Tenkan-sen and Kijun-sen are the right candidate.

It is critical to remember that bullish signals are in the cards when price gets aligned above the sandy brown Cloud.

Bearish signals are in the offing when price is below the Cloud and the cloud is Thistle.

The Ichimoku helps us trade in the direction of the bigger trend.

Signals that are the opposite of the prevailing trend are tagged weaker.

Short-term bullish signals that are found to occur within long-term downtrend and short-term bearish signals that occur within long-term uptrend are less robust.

Fig. 1.1

2. Trading Support & Resistance Levels

The Ichimoku cloud shows off 26 price bars to the right of the most recent price, thereby offering traders a hint of where support and resistance may develop going into the future.

When price is surging higher, there’s a possibility that it’ll bounce off the Cloud during pullback and then continue the surge higher.

This implies that the Cloud offers entry opportunities into such pullbacks.

Combining the Ichimoku with oscillators like the Stochastic and RSI is a big plus.

3. Crossover  

If price surges higher, with price trading above the cloud and the Up Kumo is above Down Kumo, while the Tenkan-sen dips below the Kijun-sen and then retraces back above it, a buy entry is imminent.

If price dips lower, with price trading below the cloud and Up Kumo is below Down Kumo, while the Tenkan-sen surges above the Kijun-sen and then retrace back below it, a short entry is looming.

Price and the Kijun-sen (we may alternatively deploy the Tenkan-sen) can also constitute another entry level signal.

If the trend is bullish and price dips below the Kijun-sen, initiate a buy entry when price retraces back above the Kijun-sen.

If the trend is bearish and price surges above the Kijun-sen, short-sell when price retraces back through the Kijun-sen.

Keep an eye on how these tactics exploit the current trend.

If you understand how this indicator confirms a trend, then you’ll be able to deploy it in knowing when a trend is making a U-turn.

Ichimoku Kinko Hyo trading strategies for scalpers

Scalping with the Ichimoku Kinko Hyo indicator (6, 13, 26) is able to filter unwanted trade signals.

We would adopt the “Trend Signals” trading strategy on our 1-minute, 5-minute, and 15-minute charts.

The DeMarker indicator is used to confirm entries.

If the Kijun-sen (blue line) trends below Tenkan-sen (red line). This indicator position relative to the price confirms the bullish trend.

We will be eyeing for Demarker crossing below 0,3 line. Once it closes back above it, we initiate a long position.

The opposite is true for a bearish signal.

Look here for a scalping example using the Ichimoku Kinko Hyo indicator.

Ichimoku Kinko Hyo trading strategies for day traders

The Ichimoku Kinko Hyo indicator deploys various trend-following indicators and day traders can use the indicator in its raw form on the 1-hour, 4-hour and 1-day charts.

Our bullish trade setup should be such that price is trading above the Kumo, Tenkan-sen is above the Kijun-sen, the Chikou Span is above price from 26 periods ago, Up Kumo is above Down Kumo, price is hovering not far from Kijun-sen and Tenkan-sen and Tenkan Sen, Kijun Sen, and Chikou Span are not in Kumo.

If these conditions are met, a bullish entry is advised, however, if the reverse each of the rules aforementioned is observed, a bearish signal is underway.

Check here to see how day traders take advantage of the Ichimoku.

Ichimoku Kinko Hyo trading strategies for swing traders

The Ichimoku Kinko Hyo can deliver trade signals in both directions and on all timeframes, as such, it is a powerful tool for swing traders.

Its complex market analysis offers a single visual representation that takes into account price, momentum and trend.

The crossover trading strategy as explained above can be adopted for swing traders on the 1-hour and 4-hour timeframes.

Here is an example of the Ichimoku performing well for swing traders.

Conclusion

The Ichimoku Cloud is a convenient indicator, especially for newbies who want some coaching with measuring trend momentum, direction, pinpointing reversals and locating entry levels.

Traders are still required to manage risk with stop loss and look for how best they can profitably exit their positions.

All the lines on the Ichimoku can make it appear quite scary, but essentially, if price is above the Cloud, it is a bullish signal; look for long entries and avoid short positions.

Conversely, if price is below the Cloud, it is a bearish signal; look for short entries and avoid long orders.

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