Ichimoku Cloud - Ichimoku Kinko Hyo
The Ichimoku cloud charting approach was originally invented by a Japanese journalist named Goichi Hosoda and then subsequently released to the public during the end of the 60′s. The charts look confusing when seen for the first time but reveal many things regarding the underlying price dynamics. This post takes a brief look at the parts that make up the Ichimoku chart. At its most basic level if price is above the cloud the outlook is deemed to be bullish and vice versa when price is below the cloud. We often reference the Ichimoku charts when doing our top down analysis – especially when looking at the USD/JPY currency pair.
From a purist perspective the Ichimoku cloud approach is used in its entirety but some traders may want to take certain elements and incorporate them into their respective methodologies. With this in mind we will look at the seperate elements and then an example of how they can be utlised.
The Ichimoku Kinko Hyo charting system consists of the following six elements.
The tenkan sen bears a similarity to the 9 period SMA but differs in the respect that it calculates the average of the ultimate high and lows over the previous 9 periods. A sum of the highest high and lowest low is divided by two to plot this level on the chart. Followers of the Ichimoku approach often say that the tenkan sen frequently demonstrates a more accurate representation of price action than the 9 period SMA given that it makes use of the median from the ultimate high and low as an alternative to the average associated with the closing level. In times of range bound price action, the tenkan sen is going to represent the midpoint from the range, the tenkan sen is often used to give an indication of near term momentum.
- This level basically gives the midpoint of the range for 9 periods.
- If this line is flat then the price has not broken out of the range for 9 periods.
- The Tenkan Sen is sometimes referred to as the conversion line or turning line.
- Price is seen as bullish if above the Tenkan Sen and bearish if below; if this level is flat then price may be in consolidation mode.
- Tenkan Sen is seen as potential short term support and resistance.
- If price moves too far from the level it could be ready to move back into equilibrium.
The kijun sen has many uses when trading with the Ichimoku charting approach. As with the aforementioned tenkan sen, this kijun sen calculates the average associated with the ultimate high and low, but over 26 periods instead of the tenkan sen’s 9 period calculation
The kijun sen can be a more effective indicator regarding short-term sentiment, momentum and balance compared to the tenkan sen and is oftenused as a support/resistance level when the right elements are in place. This is often sed as a trailing stop loss area as well. The slower respond to whipsaw price action gives a more balanced reference point then the tenkan sen.
- This level basically gives the midpoint of the range for 26 periods.
- If this line is flat then the price has not broken out of the range for 26 periods.
- The kijun sen is sometimes referred to as the base line or reference line.
- Price is seen as bullish if above the Kijun Sen and bearish if below; if this level is flat then price may be in consolidation mode.
- This level represents the medium term price movement.
- On the daily timeframe this indicator represents roughly one month.
Chikou Span (lag span)
The chikou span is something that sets Ichimoku apart from many other systems. This involves transferring a line back as a means to obtain a better viewpoint of price action and to discover how the current price action measures up to the action from 26 periods ago; this is used in order to gain perspective on the current trend and see where price is relative to historical data. If price is above this level then it is bullish – vice versa if price is below.
Senkou A (leading span A)
Senkou span A is displayed near to the Senkou span B. The overriding trend is often considered up if Senkou span A is currently positioned over Senkou span B. This is is ultimately often utilised for support and resistance purposes.
- This level basically gives the midpoint of the range for 18 periods.
- If this line is flat then the price has not broken out of the range for 18 periods.
Senkou B (leading span B)
Similar to as above but the ultimate high and low over the previous 52 periods and subsequently moved forward.
- This level basically gives the midpoint of the range for 52 periods.
- If this line is flat then the price has not broken out of the range for 52 periods.
The kumo is often regarded to be the essence of any Ichimoku Kinko Hyo approach and the most visibly recognisable Ichimoku element due to the unique appearance and perspective it gives on a chart. This cloud gives an insight into where price is located in relation to the overiding trend on the timeframe at hand. This area of dynamic support and resistance provides a zone that subsequently expands or contracts in varying ways which are determined by the price action. The kumo, which is often referred to as the “Ichimoku cloud” is definitely the basis of the Ichimoku Kinko Hyo charting system. This level is moved forwards by 26 periods which gives a dynamic support and resistance level. The kumo is also called the 1st leading line.
The aforementioned Senkou A & B elements provide the outer areas of the kumo and provide the holistic viewpoint of dynamic and evolving support and resistance levels.
How are the Ichimoku elements calculated?
• Tenkan Line is the (ultimate high + ultimate low)/2 and calculated over previous 9 periods.
• Kijun Line; (ultimate high + ultimate low)/2 calculated over the previous 26 periods.
• Chikou Span is the current closing price plotted 26 time periods back in time.
• Senkou Span A; (Tenkan + Kijun)/2 plotted 26 time periods ahead
• Senkou Span B; (ultimate high + ultimate low)/2 calculated over the previous 52 time periods, and subsequently plotted 26 periods ahead.
Ichimoku Chart Elements
You may notice that most of the above are worked out based on range rather than the closing price. Followers of the Ichimoku approach often believe that this helps give the respective indicators better support and resistance characteristics. The close is seen as a somewhat arbitrary level; the midpoint is the preferred support/resistance level. This midpoint likewise relates to the 50% retrace level as used by Fibonacci traders.
These are some of the triggers utilised by Ichimoku traders to enter a trade – or to give a directional bias if additional entry criteria is utilised.
- Kumo breakout
- Tenkan/Kijun sen cross
- Kijun sen cross
- Chikou span cross
- Senkou span cross
Ichimoku chart example showing how the elements can be used
This chart shows how the Kijun Sen falls at the 50% level. This is because the highest high and lowest low of the previous 26 periods has been utilised and is also the prominent transient high and low – as would be used by Fibonacci type traders. This particular example entry is of additional interest because price has hit a previous swing low, at the same time, which gives extra confluence. The chikou span is also above price – which is another element that can be referenced. This means the concept of an uptrend is valid in this scenario.