The Ichimoku Kinko Hyo Japanese charting technique, developed before World War II, aimed at portraying, in a snapshot, where the price was heading and when was the right time to enter or exit the market. This was all performed without the aid of any other technical analysis technique (or study).
The word Ichimoku can be translated to mean 'a glance' or 'one look'. Kinko translates into 'equilibrium' or 'balance', with respect to price and time, and Hyo is the Japanese word for 'chart'. Thus, Ichimoku Kinko Hyo simply means 'a glance at an equilibrium chart', providing a panoramic view of where prices are likely to go and the position one should undertake.
Invented by a Japanese newspaper writer with a pen name of 'Ichimoku Sanjin', meaning 'a glance of a mountain man', Ichimoku charts have become a popular trading tool in Japan, not only within the equity market, but in the currency, bond, futures, commodity, and options markets as well. The technique was published over 30 years ago but has only gained international attention only within the last few years.
Calculation
The Ichimoku chart consists of five lines and the calculation of these five lines involves only taking the midpoints of previous highs and lows, similar to the Moving Average studies. Even with its simplicity, the completed chart is able to present a clear perspective into the price action of the security at hand.
The five lines are calculated as follows:
1) Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) / 2, for the past 9 periods
2) Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, for the past 26 periods
3) Chikou Span = Lagging Span = Today's closing price plotted 26 periods behind
4) Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead
5) Senkou Span B = Leading Span B = (Highest High + Lowest Low) / 2, for the past 52 periods, plotted 26 periods ahead
Kumo = Cloud = area between Senkou Span A and B
An example of an Ichimoku chart is illustrated above.
Interpretation
As can be seen from the formulas, Ichimoku is very similar to the Moving Average studies. And like moving averages, buy and sell signals are given with the crossover technique.
A bullish signal is issued when the Tenkan-Sen (green line) crosses the Kijun-Sen (purple line) from below. On the other hand, a bearish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above.
Moreover, there are, in fact, different levels of strength for the buy and sell signals of an Ichimoku chart.
First, if there was a bullish crossover signal and the crossover occurred above the Kumo (or clouds), this would be considered a very strong buy signal (indicated with three green up arrows). In contrast, if there was a bearish crossover signal and the crossover occurred below the Kumo, this would be considered a very strong sell signal (indicated with three red down arrows, as above).
Secondly, a normal buy or sell signal would be issued if the crossover took place within the Kumo (or clouds). These signals would be indicated with two green up arrows, for a buy signal, and two red down arrows, for a sell signal.
Thirdly, a weak buy signal would be issued if there was a bullish crossover that occurred below the Kumo (or clouds). This is indicated with only one green up arrow (as above). On the other hand, a weak sell signal would be issued if there was a bearish crossover that occurred above the Kumo. This is indicated with only one red down arrow.
Another striking feature of the Ichimoku charting technique is the identification of support and resistance levels. These levels can be predicted by the presence of Kumo (or clouds). The Kumo can also be used to help identify the prevailing trend of the market. If the price is above the Kumo, the prevailing trend is said to be up. And if the price is below the Kumo, the prevailing trend is said to be down.
A final feature of the Ichimoku chart is the Chikou Span (or Lagging Span). This line can be used to determine the strength of the buy or sell signal. If the Chikou Span is below the closing price for 26 periods ago and a sell signal is issued, then the strength is with sellers, otherwise it is a weak sell signal. Conversely, if there was a buy signal and the Chikou Span is above the price for 26 periods ago, then there is strength to the upside, otherwise, it can be considered a weak buy signal. This feature can also be incorporated into the other signals.
Parameters
There are three key time periods - 9, 26, and 52. When these indicators were created back in the 1930s, a trading week was 6 days long.
9 periods or days = one and half week
26 periods = one month
52 periods = two months
Now that the trading week is 5 days, one may want to modify the parameters to the following:
7 or 8 periods or days = one and half week
22 periods = one month
44 periods = two months
The Visual Trading sets the Ichimoku Kinko Hyo to the default parameters of 9, 26, and 52 periods.
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