Trading with the Ichimoku Kinko Hyo

[RichardCox 10]

Ichimoku Kinko Hyo is a trend-based charting method that can be applied to any asset market and is unique in its utilization of a variety of data points that allow traders to view price activity in a more objective manner. Ichimoku analysis is largely visual in nature and this allows traders to quickly analyze price activity and discover trading opportunities that have high probabilities of success.

 

The Ichimoku Kinko Hyo was originally developed in the 1930s by a Japanese newspaper writer that was researching price behavior in rice markets. For the most part, traders in the West have not paid much attention to the method but, starting since the 1990s, its popularity has gradually increased as traders begin to truly understand the enhanced predictive ability that can be achieved with this type of chart analysis.

 

Identifying Price Equilibrium

 

Ichimoku Kinko Hyo is Japanese for “one glance at the balance chart” and this is an accurate description of what the system looks to identify. Each Ichimoku component part should be viewed in tandem (not individually) as these combine to form a cohesive whole. Quickly viewing the Ichimoku charts can allow traders to understand the underlying momentum and trend activity in your chosen market. In addition to this, traders can also quickly assess the strength of these trends by looking at other areas of the chart.

 

The main goal of the chart indicators is to gauge the equilibrium or balance in the current price action. This looks at the cyclical nature of market activity and the tendency for prices to gravitate back to their longer term averages. The five components of the Ichimoku analyze prices in terms of this balance and trading opportunities are generated based on this activity.

 

5 Elements of Ichimoku Charts

 

Ichimoku charts appear difficult to understand when first exposed to the method but when each element is taken individually, some of the mystique is removed. Ichimoku is comprised of 5 essential elements: The Tenkan Sen (or turning line), the Kijun Sen (or standard line), the Chikou Span (or lagging line), the Senkou Span A (or first leading line), and the Senkou Span B (or second leading line). These last two components work together to form the central piece of the Ichimoku chart, the “cloud” or Kumo.

 

Trading Signals

 

In Ichimoku analysis, trading signals are generated when the various line cross over, similar what trading signals generated by moving average crosses. Relative to the cloud, when price activity is seen to the upside, trend momentum is positive. Prices below the cloud are representative of a downtrend. Prices inside the cloud suggest sideways (or neutral movement). In this case, trades should not be entered as predictive ability is diminished.

 

Other signals can be seen when the various chart lines cross. For example, an upward sloping Tenkan Sen that crosses above the Kijun Sen would indicate a buy signal. Similar results can be seen when the price level crosses above the Chikou Span, but in reverse, as an upward cross in the Chikou Span would indicate a sell signal. Price activity inside the cloud tends to move in the same direction as the Tenkan Sen but the strength of the signal is not enough to produce a tradable position signal. It should also be noted that both the Kijun Sen and the edges of the cloud should be viewed as significant support and resistance levels that are likely to hold on first test.