Much like their animated features and their high tech gadgets, the Japanese have also been able to contribute greatly to the world of trading and financial markets – this time in the form of Ichimoku Kinko Hyo.
In the forex market, we have a lot of tools and techniques that have a Japanese background. Perhaps among them the most well-known is the candlestick approach to charting and the subsequent candlestick patterns that are quite practical too.
But in this article, we are going to discuss another aspect of the Japanese contribution to trading, known as Ichimoku Kinko Hyo. Simply put, Ichimoku Kinko Hyo is the Japanese equivalent for a technical indicator. And in essence, that’s exactly what Ichimoku is – an elaborate technical indicator with a lot of functions.
What Exactly Is the Ichimoku Indicator?
As we touched upon it a little bit in the introduction, Ichimoku Kinko Hyo is literally the term for technical indicator. But it is not just a simple indicator, in fact to reiterate, Ichimoku is an elaborate indicator. It means that it provides traders with a lot of information.
To provide this breadth of information, Ichimoku Kinko Hyo consists of five different lines that make up the whole indicator – we will discuss each line in the following sections.
The idea behind this indicator was to develop a technique for chart and market analysis that does not require a whole bunch of different formulas and indicators. A sort of one size fits all, or rather, one indicator fits all!
This is why, when you first try to implement and understand this indicator, it might be a bit intimidating and formidable. But once you go through the initial shock, you will see that Ichimoku Kinko Hyo is truly an all-encompassing technical indicator.
So we learned about the literal meaning of this indicator and also the idea behind its development. But what information does it exactly provide for traders?
What Information Does Ichimoku Provide?
Due to the very nature of the Ichimoku Kinko Hyo, it is not used in order to obtain information with regard to only one aspect of the chart or price movements. In fact, this indicator can provide traders with three major pieces of data.
The first one is momentum, which is itself one of the most important factors in financial market analysis. Momentum is the strength by which prices change. So it is the power behind the price movement.
The second and third pieces of data that are obtained with the help of Ichimoku Kinko Hyo, are areas of support and resistance – two of the most fundamental lines or levels on any trading chart. They describe the lowest prices can drop to or the highest prices can climb to, respectively.
So momentum, support, and resistance. These are the information provided by the Ichimoku Kinko Hyo. But we mentioned there are 5 lines in this indicator. How do they work together to provide these three factors and what does each line mean?
The Different Aspects of Ichimoku Kinko Hyo
Any indicator is made up of lines that put together define that indicator and are used in the calculation of the data and information. The same is true for Ichimoku. This indicator has 5 lines. In this section we will discuss each line separately.
This line is used to represent support and resistance. The way this line is drawn is to add up the highest high recorded in addition to the lowest low recorded in the last 9 periods. Then, this figure is divided by two. But this line can also be used as a gauge to measure and predict trend reversals.
This line is similar to the previous one in terms of its calculation. It is also calculated by adding the highest high and the lowest low, but in the last 26 periods. The final figure, or represented line on the chart, can exhibit support and resistance. But in addition to that, this line is also a trailing stop loss. A trailing stop loss is sort of like a dynamic stop loss that moves along as prices change so it does not remain static like a normal stop loss.
This line is perhaps the most different line among the five lines that make up the Ichimoku Kinko Hyo. The reason is that it is a lagging line. Lagging indicators stand in opposition to leading indicators. Most indicators are leading, which means that they are used to predict the future movements and changes in the market. But a lagging one is specifically used to look at the past movements, and not for the purposes of predicting the future.
Senkou Span A and Senkou Span B
The fourth and fifth lines are both leading lines, which means they are used to predict a factor belonging to the future. The way these lines are calculated is by adding the first and second lines together and then dividing them by two, and also by adding the highest high and the lowest low of the last 52 periods and then dividing them by two as well.
Now that we know the different aspects of the Ichimoku Kinko Hyo, it is time to see how this indicator can be applied to the forex market and in actual trading.
How to Use Ichimoku Kinko Hyo in Forex Trading?
This indicator is applicable to all sorts of markets in various conditions. But similar to many other indicators and analysis methods, the Ichimoku is not practically applicable when there is a trend in the market. This is when the market is trending in a sideways direction.
But in most cases the market is either falling or rising, with various momentums and at various speeds. In these cases you can of course apply this indicator. But to be more precise about the application of Ichimoku, we need to discuss each line separately again.
In the case of the Senkou line, the prices might be either higher than this line or lower. If they are higher, then the higher line is the first support and the lower line is the second support.
On the other hand, if prices are lower than the Senkou line, then the higher line is the first resistance and the lower line is the second resistance.
Another important line in this indicator is called the Kijun Sen line. If prices are above this line, then it can indicate coming price increases. And if prices are below this line, it can be a sign of coming price decreases.
Though we already discussed the function of the Tenkan Sen line, it needs to be mentioned that in forex trading, traders can use this line as a trend indicator. This means if this line is going upwards, then so will the trend, and vice versa.
The last two lines in this indicator are the Chikou Span A and B. If either line breaks the price line toward up, then it is a sign to start buying. And if either line breaks the price line downward, then that would be a sign to start selling.
Ichimoku Kinko Hyo is a complex technical indicator that has been developed to make chart analysis easier. This Japanese term literally means looking at the chart in a balanced manner. So it can provide traders with a balanced approach to chart analysis. This indicator consists of 5 different lines, each of which can have a different application and be used to provide different information in forex trading.