Ichimoku Kinko Hyo Strategy - Advanced Forex Strategies

Ichimoku Kinko Hyo Strategy

Ichimoku Kinko Hyo Strategy or Ichimoku for short is a complete trading system developed by the Japanese. In English, the term Ichimoku Kinko Hyo refers to price in equilibrium. The Ichimoku trading indicator is a complete trading system in itself and has been widely used since its discovery decades ago. At the outset, the Ichimoku trading system is a trend following strategy and therefore works best in trending markets. However, since its discovery, traders have come up with various methods to trade the Ichimoku trading system.

In this article on Ichimoku Kinko Hyo, we revisit the original trading rules as the system was supposed to be traded. For best results, it is ideal to make use of the Ichimoku Kinko Hyo Strategy on a daily chart and higher, but even H4 works best. It is not recommended to trade the Ichimoku system on lower time frames especially when the markets are ranging sideways and there is no clear trend established.

As obvious by now, the Ichimoku trading system requires a lot of patience and is suitable for swing trading, when applied according to the original rules. It is therefore not recommended for all traders and definitely not for intraday scalpers.

What is the Ichimoku trading system made up of?

The Ichimoku trading system or indicator comprises of the following indicators:

Chikou Span: This is nothing but price projected 26 bars ago as a line and is used to indicate if current price is above or below price 26 bars ago

Tenken Sen: The Tenken Sen is a 9 period moving average. It is calculated as a 9 period average between the highest high and the lowest low.

Kinun Sen: The Kijun Sen is a 26 period moving average calculated by the highest high and the lowest high of the period

Cloud: The most obvious visual depiction of the Ichimoku trading system is the Cloud, also known as the Kumo. The cloud is made up of Senkou Span A which is the average of the price difference between the Tenken and the Kijun Sen. Senkou Span B is the difference between the highest high and the lowest low of the look back period divided by 2. Together, Span A and B form the Kumo. This is often referred to as the Support/Resistance on the Ichimoku trading system. The Cloud is also projected 26 periods into the future and signifies potential future support/resistance levels. The more wider the Cloud is, the more stronger the support or resistance zone is likely to be, while a thin or a flat Kumo usually signifies weak levels of support and resistance.

Once the Ichimoku trading system is applied to the chart, it should look as shown belowIchimoku Kinko Hyo StrategyIchimoku Kinko Hyo Strategy


Ichimoku Buy Signals

For the Ichimoku buy signals, all the following criteria need to be met.

  1. Price must trade above the Cloud, where Span A is > Span B
  2. Tenken Sen must give a bullish crossover the Kijun Sen
  3. Chikou Span must be above price

When all the above conditions are met a long signal is initiated. Initial stops can be set to the nearest low and once price starts to move in the intended direction, traders can either book profits when the market starts to show signs of exhaustion to the trend or simply trail stops along the Kijun sen until you get stopped out. The chart below shows an example of the Ichimoku Buy Signal.

Ichimoku Kinko Hyo Strategy - Buy_Signal
Ichimoku Kinko Hyo Strategy – Buy Signal

Ichimoku Sell Signals

For sell signals, the following criteria must be met.

  1. Price must be trading below the Cloud where Span B > Span A
  2. Tenken Sen must give a bearish crossover on the Kijun Sen
  3. Chikou Span must be below price

The chart below illustrates a sell signal based off the Ichimoku trading system.

Ichimoku Kinko Hyo Strategy - Sell_Signal
Ichimoku Kinko Hyo Strategy

Ichimoku Kinko Hyo Strategy – Important to Traders

The Ichimoku trading system as illustrated above is a very simple trading system that can keep you on the right side of the markets and is a trend following system. However, to the downside, traders need to be very patient for the right set ups to form (which is one of the reasons there are many subsystems developed off this classic Ichimoku trading system). With good money management and patience, traders can definitely make some big profits when applying the Ichimoku trading system as outlined.

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