The Ichimoku Kinko Hyo Indicator
When you first hear the name of this indicator, you probably think you’re at the wrong place. Most traders are so used to hearing the regular names of indicators that when you bring a whole different language into the mix, things tend to get a bit confusing. But don’t worry, this is still a forex trading indicator and it should work for you even if you’re not Japanese. In fact, this is one of the very few indicators that take virtually everything into account which means it has got you covered from all bases. This is also why this strategy is very popular all around the world.
It’s even more intriguing when you realize that the creator of this indicator was actually just a Japanese newspaper writer. Goichi Hosoda took the help of several of his assistants who all did quite a lot of mathematical calculations in order to finally come up with this masterpiece of a trading strategy. Since Hosoda was just a newspaper writer and most developers of other popular indicators were analysts who specialized in this field, people were quick to assume that his strategy did not work. However, it was only once people actually gave it a try that they realized that this strategy is actually pretty good.
The Ichimoku Kinko Hyo is an indicator that predicts the future price momentum of a price chart and also determines the future areas of support and resistance levels. This is pretty unique since most indicators only do one or the other of these tasks but this indicator does it all combined. For most people, the name of this indicator is pretty hard to pronounce so it actually has its own nickname as well. Most people like to refer to this indicator as the Ichimoku Cloud indicator. Now the reason why it is commonly known as Cloud will be answered in a bit more detail in the next session.
Let’s just say there is a cloud in this indicator which is why it is called the Ichimoku Cloud indicator. Some traders actually wonder if Ichimoku Kinko Hyo actually has a meaning to it or if it’s just a bunch of Japanese words put together. You should know that it does have a meaning and a pretty important one too. Ichimoku means ‘a glance’, Kinko means ‘equilibrium’, and Hyo means ‘chart’. So if you think about it, the name of this indicator pretty much gives away what it actually does. This indicator literally means, ‘a glance at a chart’s equilibrium’. Read on to find out more about this unique indicator and what sort of strategies you can come up with while using it in order to make optimum profits while utilizing the lowest risk possible.
Breakdown of the Ichimoku Indicator
When someone first looks at a chart with the Ichimoku indicator already installed, they’re often left quite confused and wondering if this is something that they’ll even be able to understand. Honestly, just like how the name of this indicator was confusing at first, we pretty much expected the actual indicator to be confusing as well. But don’t back out so quickly. Once we explain every little bit of this indicator, you’ll actually come around saying it was way easier than you first expected. The only reason the chart looks pretty confusing is that, unlike most indicators which take only factors into account, this Cloud indicator likes to look at all the determining factors in one go. Let’s look at the different components of this indicator:
Remember earlier we mentioned that most traders like to refer to the Ichimoku Kinko Hyo indicator as the Ichimoku Cloud indicator? Well, it’s basically because one of the main components of this indicator is actually a cloud. In other indicators, when a cloud is formed, it is usually referred to as a shadow. However, in the Ichimoku indicator, it is referred to as a cloud. So this cloud plays a very important role in helping us determine or predict the future price movements in any chart. The way it does this is by changing color. The cloud in an Ichimoku indicator often switches between the red and green colors. When this indicator believes that the market is becoming bullish, the cloud changes from a red to a green color. Similarly, when the indicator believes that the market is becoming bearish, the cloud changes from a green to a red color. Understanding the changes in the cloud colors is crucial in understanding how this indicator works.
This indicator consists of quite a few lines. And all these lines are in Japanese. These two factors combined are the main reasons why most people don’t even bother to understand this indicator since they just assume it is way too complicated. The Kijun Sen is represented by a blue line on the Ichimoku chart. This line is also commonly known as the standard line or the baseline. It is basically the average of the highest high and the lowest low for the last 26 periods. This line is usually known to be more accurate than the other lines we’re going to be discussing. This is mainly because it takes into account a larger time frame than the rest. In order to understand which direction the trend is moving, we often refer to the blue Kijun Sen line. When the price rises above the Kijun Sen line and also above the cloud, it is a great opportunity to open a buy position. Similarly, if the price falls below the Kijun Sen line and also below the cloud, it is a great opportunity to open a sell position.
The Tenkan Sen line is shown prominently on the Ichimoku indicator by the red color. It is also commonly called the turning point line which we’ll get to in just a bit. This line is a bit similar in its technicalities to the Kijun Sen line. It is basically the average of the highest high and the lowest low for the last nine periods. Since it only represents the last nine periods, traders often think it is probably not as useful as the Kijun Sen line. However, this line serves its own purpose. It measures the equilibrium and the turning point in any given chart. You can even spot momentum using this line. You can do this by examining the direction of this line and whether it is ascending or descending. This is why you shouldn’t completely ignore this line when following an Ichimoku strategy. Each line in Ichimoku serves its own purpose and is very useful overall.
Next, let’s look at the Chikou Span line. This line is represented by the green color. It is basically the current market price, just plotted 26 periods behind. Now I know what you all must be thinking. Why on earth would the creator of this indicator think plotting something so far back be important in any strategy? Trust me, we thought the same thing at first. In reality, this line serves a very important purpose. The entire reason why this line is plotted 26 periods behind is to help you visualize how the current price compares to the price of the market 26 periods prior. This helps you understand the current trend much more efficiently. Now let’s translate this into trading terms. If the current market price is higher than the price of the market 26 periods prior, it means the trend is expected to continue and the market is bullish. Similarly, if the current price of the market is below the price of the market 26 periods prior, it means the trend is expected to continue and the market is bearish.
The Senkou Span is actually a bit different than the previous three lines we just discussed. This is because it is actually two lines instead of just one. The Senkou Span is represented by two orange lines on the Ichimoku indicator. The first line is also commonly known as the Leading Span A Line. Similarly, the second line is also commonly known as the Leading Span B Line. A fun fact that you’ll probably notice if you look closely, both these lines come together to engulf the Cloud which we just talked about earlier. Now you must be wondering, do these lines have an actual purpose besides just being outlines for the Cloud? As a matter of fact, yes it does. Basically, when the Leading Span A Line crosses above the Leading Span B Line, this signals a strong uptrend. When this happens, the cloud also turns green. Similarly, when the Leading Span A Line falls below the Leading Span B Line, it signals a strong downtrend. When this happens, the cloud also turns red. Now that you’ve understood the purpose of each of the components of the Ichimoku strategy, it probably makes more sense why each of these elements is just as important as the other in order for this strategy to work.
Conditions for the Ichimoku Strategy
There are a ton of different indicators and other strategies and tools in the forex industry. Some of these strategies only work with certain assets, some only work with certain market conditions, some only work with certain brokers, and some only work with certain time frames. Whenever you’re about to try a new indicator or trading strategy, you often go through its ‘terms and conditions’ in order to understand if you’re even performing it correctly. And the main reason why most of these indicators have terms and conditions is that they only take into account a specific factor and they rely on you to take care of all the other external factors which may cause the strategy to not function like how it’s supposed to.
This is not the case for the Ichimoku strategy. The Ichimoku strategy does not come with any terms and conditions. The explanation behind it is actually pretty surprising. You see, the creator of this strategy was a simple Japanese newspaper writer. He was a simple man who didn’t know much about mathematical technicalities and he relied on his assistants to help him with it. Therefore, he wanted to create a strategy that would be simple for the average man. He didn’t want traders to have to worry about if their trading conditions are perfect enough for this strategy to work. Therefore, he created an indicator that could work under any market circumstances. Another more better explanation of why this indicator does not have any specific conditions is that it takes into account all the factors that may impact the market prices. This is why it doesn’t have to rely on you to do so for it.
The Ichimoku Cloud Buy Signal
Now that we’ve understood every component of the Ichimoku strategy and how they function, let’s combine them all together and understand what a buy signal looks like with this strategy and how it is formed. In order for a buy signal to take place, the first thing that needs to happen is the cloud needs to turn green. In order for the cloud to turn green, we have to look at the orange lines which are the Leading Span A and Leading Span B lines. Basically, when the Leading Span A Line crosses above the Leading Span B Line, this signals a strong uptrend. When this happens, the cloud also turns green.
Next, we have to look at the blue Kijun Sen line. In addition to the price rising above the cloud, if it also rises above the blue Kijun Sen line, it is a strong indication that this is a good time for a buy position. The last thing we have to look at in order to confirm the buy signal in the Ichimoku strategy is the red Tenkan Sen line. Basically, if the red Tenkan Sen line crosses above the blue Kijun Sen line, a buy signal will take place. Now putting it all together, the cloud has to turn green, the price has to move above the Kijun Sen line, and the Tenkan Sen line also has to move above the Kijun Sen line and the buy signal will finally be confirmed.
The Ichimoku Cloud Sell Signal
The Ichimoku Cloud sell signal is basically the opposite of the Ichimoku Cloud buy signal. If you understood our explanation of how the buy signal takes place, this would be a piece of cake. In order for a sell signal to take place, the first thing that needs to happen is the cloud needs to turn red. In order for the cloud to turn red, we have to look at the orange lines which are the Leading Span A and Leading Span B lines. Basically, when the Leading Span A Line crosses below the Leading Span B Line, this signals a strong downtrend. When this happens, the cloud also turns red.
Next, we have to look at the blue Kijun Sen line. In addition to the price falling above the cloud, if it also falls below the blue Kijun Sen line, it is a strong indication that this is a good time for a sell position. The last thing we have to look at in order to confirm the sell signal in the Ichimoku strategy is the red Tenkan Sen line. Basically, if the red Tenkan Sen line crosses below the blue Kijun Sen line, a sell signal will take place. Now putting it all together, the cloud has to turn red, the price has to move below the Kijun Sen line, and the Tenkan Sen line also has to move below the Kijun Sen line and the sell signal will finally be confirmed.
Does the Ichimoku Have Accurate Results?
The Ichimoku Kinko Hyo trading strategy is probably one of the most detailed and technical strategies on the market. It takes into account a ton of factors that could impact the markets and puts them all into a single indicator. However, just like any other trading strategy, this indicator works on predictions and no actual verified information. It just analyses the past data and makes its own predictions accordingly. Therefore, even if this strategy is showing some really promising results, we don’t recommend putting your full trust in it as no strategy is better than manually analyzing the market yourself. The best way we think this strategy would be useful is to confirm your own predictions. If you have an idea about which direction the market may turn, you may use this strategy in order to confirm your predictions. Most people don’t even try out this strategy since they see a lot of lines and difficult words and think it’s too complicated. But, once you understand how each component works, it’s really not that difficult to understand.