Ichimoku Kinko Hyo Indicator Explained - Advanced Forex Strategies

# Ichimoku Kinko Hyo Indicator Explained

By the end of this article, we will have the Ichimoku Kinko Hyo Indicator Explained in the simplest and most direct manner that even a beginner will find it easy to understand.

The Ichimoku Kinko Hyo, also known as Ichimoku Cloud is more than just a simple indicator, but it can be a technical trend trading system in and of itself. The Ichimoku Kinko Hyo is also a Japanese word that can have different translations: ‘one glance equilibrium chart’ or ‘instant look at the balance chart’ and is sometimes referred to as ‘one glance cloud chart’.

• Ichimoku = One glance;
• Kinko = Balance or Equilibrium;
• Hyo = Chart;

This system was basically developed in late 1930 by Goichi Hosoda and the purpose of him creating this system was so that he could analyze the charts with more detail, but less time, so he wanted to be able to do it quickly. Ichimoku Cloud can be used in many different ways: gauging the momentum; finding support and resistance; gives you entry and exit signals; gauging momentum, and it can give you the market bias.

At first glance looking at an Ichimoku Kinko Hyo chart, it may seem a complex system, but if you take the time to learn these components and what they do, then you can start learning the system. The purpose of this article is to help and give you an overview of the Ichimoku Cloud components, how it works and more importantly how to trade using Ichimoku Cloud system.

The Ichimoku Cloud system consists of five components, from which four of them are based on the average of the most recent highs and lows over a given period of time. Without further ado, this is the Ichimoku Cloud components:

1. Tenkan-sen or the Conversion Line: Represent the midpoint of the last nine price bars; and it’s calculated as follows: [(9-period high + 9-period low)/2]. On a daily chart, this line is the midpoint of the 9 day high-low range, which is almost two weeks.
2. Kijun-sen or the Base Line: Represent the midpoint of the last 26 price bars; and it’s calculated as follows: [(26-period high + 26-period low)/2]. On a daily chart, this line is the midpoint of the 26 day high-low range, which is almost one month).
3. Chikou Span or the Lagging Span: Lags behind the price and it’s the most recent price, plotted 26 periods back.
4. Senkou Span A or the Leading Span A: It represents one of the two Cloud boundaries and it’s the midpoint between the Conversion Line and the Base Line: [(Conversion Line + Base Line)/2]. This value is plotted 26 periods into the future and it’s the faster Cloud boundary.
5. Senkou Span B or the Leading Span B: It represents the second Cloud boundaries and it’s the midpoint of the last 52 price bars: [(52-period high + 52-period low)/2]. This value is plotted 52 periods into the future and it’s the slower Cloud boundary.

# How to use the Ichimoku Cloud system

The first step going forward is to understand the Cloud. The Cloud is designed to represent support and resistance, because of Goichi Hosoda understanding of the market the support and resistance are not a single line drawn in the sand, but comprise of other several layers deep and that’s what the Cloud is designed to do.

The most common ways the Cloud is used to assess price action:

• Trend Direction

When the price is above the Cloud it indicates we are in a bullish trend, when the price is below the Cloud it indicates we’re in a bearish trend and if the price is in the middle of the Cloud it indicates a ranging market.

• Support and Resistance

Additionally, support and resistance levels can be predicted by the presence of the Cloud. When the prices are below, the cloud base act as resistance and when the prices are above, the cloud top is support.

• Bullish/Bearish Signals Crossover and Strength

When the Conversion Line crosses the Base Line from below, we have a bullish signal and when the Conversion Line crosses the Base Line from above we have a bearish signal. The strength of this signal is assessed based on these three factors:

1. Price Action relative to Cloud;
2. The Lagging Span relative to Cloud;
3. The crossover relative to Cloud;

The setup is based upon the initial crossover which is the first part of the signal. Where it crosses over determines the strength of the signal. If the cloud represent support and resistance, then for a sell signal or a crossover above the cloud it will be weak because we’re above support, inside the Cloud is considered medium-strength because you’re still inside support and below the cloud is the strongest signal you can get for a sell signal because it has already broken the support. The second part of the signal you need price to break the Cloud before to get in. Ichimoku Cloud is designed to get you 80% of a trend move because it’s a trend following indicator.

The longer the time frame the better this system does because as with most indicators because it keeps you in the long-term trends. Since this is a trend following system, it will not work in ranging markets and it’s recommended to avoid trading in a range trading environment. Ichimoku Cloud it’s designed to reduce the number of false breakouts, but when it catches a good trading market it will keep you in for the most part of the move and on the right side of the market.

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