Tue. Jul 28th, 2020

Trade With Ichimoku

Improve Your Trading Results With Ichimoku Kinko Hyo

What Is The Ichimoku Cloud? A Trend Trader’s Best Friend

What is the Ichimoku Cloud?

The Ichimoku Cloud

The Cloud is the main component of a unique market analysis charting method named ‘Ichimoku Kinko Hyo.’ See a Bullish, Bearish, or Ranging market – instantly.

The Japanese name means ‘one glance equilibrium chart.’ The Cloud, when painted over the price history of any traded symbol on a chart, is a picture showing traders the actual condition of that market in real-time. Ichimoku confirms trends and trend reversals on any chart, in any timeframe, with one glance at any price chart.

The Purpose of Ichimoku

By looking at the current price in relation to the Cloud, a trader can instantly determine if the market bias is bullish, bearish, or sideways (not trending.) If the price is above the Cloud, the market preference is bullish. If inside the Cloud, the bias is sideways/flat. If below the Cloud, the bias is bearish.

Ichimoku is meant to be used to identify and trade trending markets.  Traders should ignore the Ichimoku lines at times when the price is not respecting the Cloud as support or resistance, where the price is trading in a range.  There are ways to use the Ichimoku lines to trade in ranging markets, but I will describe those strategies in future articles and in live trading room video tutorials.

By combining the price and the Cloud with the three other lines of Ichimoku (Tenkan Sen, Kijun Sen, and the Chiko Span), the trader can then form a realistic expectation of where price might likely move when it touches those lines.

A Brief History of Ichimoku Kinko Hyo

In the 1930s, Goichi Hosoda, whose pen name was ‘Ichimoku Sanjin,’ created the technical analysis equations that became the Ichimoku indicator. Initially, the system was named ‘Shinto Tenkan Sen’ (神道天観銭), or roughly translated, ‘Market Turning Line.’

Goichi Hosoda
Goichi Hosoda

Hosoda was a journalist for the leading financial Japanese newspaper of the time called Miyako Shinbun (都新聞), now named Tōkyō Shinbun (東京新聞), or Tokyo Newspaper. But Hosoda was not just a writer and analyst. He was also a successful trader and investor. He was fascinated with markets and created price charts since the age of 10. He spent over 30 years refining and testing his theories on investing and portfolio management.

For many years, he carefully guarded his observations and trading methods, only sharing his philosophy privately with a close group of friends. Eventually, Hosoda started his own investment research company, where he combined technical analysis with his knowledge of philosophy, math, and science to create the tool he called Ichimoku Kinko Hyo.

He finally revealed his trading philosophy and methods to the Japanese public in a book published in 1969. The whole of his work spans seven volumes. Four are currently in-print in Japan. One can only read the other three at the National Diet Library in Tokyo.

 

 

The four books currently in-print in Japan are:

1. Ichimoku Kinko Hyo

2. Ichimoku Kinko Hyo Complete

3. Ichimoku Kinko Hyo Weekly

4. Ichimoku Kinko Hyo My Best Spectrum

While one may use the five lines of Ichimoku Kinko Hyo as a standalone technical indicator and trading system, the lines are only part of Goichi Hosoda’s teaching. Ichimoku is not merely an indicator but an integrated market philosophy as well.

Ichimoku Cloud Components and Calculations

Cloud calculations use standard values. These values can be easily adjusted on a charting platform, such as Tradingview.com, to suit an individual trader’s needs. However, I recommend sticking with the standard settings. They have been thoroughly back tested and forward tested in real trading for over 60 years and have been proven to be the best values to use regardless of the time frame or market you are trading.

Here Are All 5 of the Ichimoku Line Calculations


  1. Tenkan Sen (Conversion Line): midpoint of the last nine price bars: [(9-period high + 9-period low)/2]Tenkan Sen
  2. Kijun Sen (Base Line): midpoint of the last 26 price bars: [(26-period high + 26-period low)/2]Kijun Sen
  3. Senko Span A (Leading Span A): midpoint of the above two lines: [(Conversion Line + Base Line)/2]. This value is plotted 26 periods into the future.Senko Span A
  4. Senko Span B (Leading Span B): midpoint of the last 52 price bars: [(52-period high + 52-period low)/2]. This value is plotted 26 periods into the future.Senko Span B
  5. Chiko Span (Lagging Span): current price, plotted 26 periods back.Chiko Span

How to Use the Lines – Always Start with the Cloud

Since it is easy to interpret and provides both current and possible future support and resistance levels, analysis should always begin by looking at the current price and the Cloud.

Trend and Bias Confirmation

1. When the price is above the Cloud, it indicates an uptrend/bullish bias.

2. When the price is below the Cloud, it indicates a downtrend/bearish bias.

Trend Strength / Weakness

1. When Span A is moving up and away from Span B, this means the uptrend is gaining momentum.

2. When Span A is stepping down and away from Span B, it means the downtrend is accelerating.

3. In any case, a thickening cloud helps confirm the current trend. A thin cloud shows indecision and a potentially weakening trend environment.

Support and Resistance

1. The leading edge of the Cloud is projected out 26 price bars to the right of the current price. The area between Span A and Span B provides a potential zone of support and resistance that price may respect in the future.

2. The Cloud area below the current price (the ‘historic cloud’ – the way it was 26 periods ago) is showing current potential support and resistance.

3. The price will often bounce off the Cloud during retracements and then resume the trend. Therefore, the Cloud presents opportunities to enter the market with the trend.

Crossover Signals

1) If the price is above the Cloud and Span A is above Span B, and the Conversion line falls below the Baseline and then rallies back above it, it can signal a long entry.

2) Another long entry signal involves the price and the Baseline (one can also use the Conversion line). If the price is trending up, and the price drops below the Baseline, one can buy when the price crosses back above the Baseline.

3) If the price is below the Cloud and Span A is below Span B, and the Conversion line crosses above the Baseline then drops back below it, it can signal a short entry.

4) Another short entry signal involves the price and the Baseline (one can also use the Conversion line). If the trend is down and the price moves above the Baseline, one can sell when the price drops back through the Baseline.

Use Ichimoku To Trade Reversals with Confidence

Notice that these strategies always follow the current trend. By understanding how the lines confirm a trending market, they can also be used to show when a trend is reversing. (I use Ichimoku to trade trend reversals almost exclusively.)

Ichimoku Is Great, But Make Sure You Practice Your Analysis Before Trading Real Money

Even though the Cloud projects potential support, resistance, and reversal levels, please understand that it is not predictive.

Ichimoku is valid in the time frame you are analyzing. However, broader trends may be at work on a higher time frame. The lines may generate false trade signals. For example, if you are trading on a 1-hour chart, the trend may be down, but the price could rally above the Cloud on a pullback, only to continue rising within a broader daily uptrend or sideways market.

Trade signals may be false because short-term price movements may not repeat in the future.  So I recommend always starting with the Daily Chart (or even the Weekly chart) to see if there is a dominant trend or sideways condition on the higher time frames first.  Then, if you have a trading bias, move down to the lower timeframes if you want to look for swing trading or even scalping opportunities.

Ichimoku does work on all timeframes, as markets are fractal, meaning self-similar.  However, going lower than the 1-hour chart is not recommended unless you are an highly experienced and successful trader.  The signals come so fast and furious at lower time frames that the spread costs alone can destroy any profits you may make.  So, again, stick to the higher time frames when trading.

The Bottom Line

The Ichimoku Cloud is a useful indicator, especially for new traders who want a data-driven symbol to highlight trend direction, momentum, spot trend reversals, and find potential trade entry points. However, nothing and no one can predict the future with complete certainty.

Traders must control risk through the proper use of:

1) leverage

2) position size

3) planned entries and exits.

Remember, from now on, when you look at a chart, always start with the Cloud.


Coming Soon: A Deep Dive Into Ichimoku! 

Try charting Ichimoku yourself today for FREE!


Feedback is Welcome! 

Please feel free to comment or send me a question by using the Leave Comment link below.  I am always happy to answer your questions.

Please let me know, also, if there is anything I can do to improve your experience on the site.  If there is a topic related to Ichimoku or trading in general that you would like me to cover here, let me know that, too.  Thank you!

 

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