Ichimoku Kinko Hyo indicator is a very useful and informative technical indicator. It shows the direction of the dominant trend; its lines may serve you as solid supports and resistances, and its clouds will allow you to visualize momentum and trend strength. At first glance, Ichimoku Kinko Hyo might look very intimidating and mind-boggling, but once you understand how to read it, you will see that the information and the signals it provides are very helpful. In the following tutorial, we will tell you about the Ichimoku lines generating different trading signals, the so-called Kumo-clouds and lags. Then, we will explain how to analyze the market with this wonderful technical tool. So, let us cast a “glance at a chart in equilibrium” (literal translation of the phrase Ichimoku Kinko Hyo).
Kijun Sen (blue line, base line): it is a major indicator component of the Ichimoku Kinko Hyo indicator, it is used to measure medium-term momentum. It is calculated by averaging the highest high and the lowest low for the previous 26 periods. In lay terms, it marks the middle of the range of the past 26 candles.
Tenkan Sen (red line, conversion line): It is another turning line which is derived by averaging the highest high and the lowest low for the past nine periods. It shows the middle of the range of the previous 9 candles.
Chikou Span (green line): It is a lagging, delayed line. Its closing price can be found by shifting to the left for 26 periods. Think of it as of a reflection back to what’s already happen, as of a repaint.
Senkou Span (orange lines): The first Senkou line is the average of Tenkan Sen and the Kijun Sen shifted 26 periods ahead. The second Senkou line is the average of the highest high and the lowest low for the previous 52 periods and it is plotted 26 periods ahead.
Kumo (cloud): it is the shaded area between the two Senkou Span lines. The cloud is perceived as a price attractor. The price tends to retrace to its borders which are the price’s formal levels. In other words, the price very often revisit the levels it tested earlier.
How to trade with Ichimoku components
Now, let us see what these components might tell us
Equilibrium lines (Kijun-Sen and Tenkan-Sen)
The equilibrium lines can show us the direction of the trend at the present moment. The cloud is a predictor of the future direction of a trend. Its crossovers are the signals for the identification of market reversals.
Kijun-Sen trading signals
A bearish trading signal occurs when the price crosses the Kijun-Sen line from up to down.
A bullish trading signal occurs when the price crosses the Kijun-Sen from the bottom upwards
A weak bullish signal occurs when the cross is below the cloud
A neutral bullish signal is in place when the cross is inside the Kumo
A strong bullish signal occurs when the cross is above the cloud.
Tenkan Sen trading signals
A bearish signal is present when the Tenkan Sen crosses from up to down the Kijum Sen line.
A weak bearish signal occurs when the cross is above the cloud
A neutral signal occurs when the cross is inside the cloud
A strong signal occurs when the cross is below the cloud
The borders of the cloud (Senkou spans) are good resistance and support lines.
The cloud’s bandwidth is a proven measure of market volatility. The wider the cloud the more volatility and less certainty on the future price direction is present. Narrow, flat clouds are the signs that the marker is stable.
You may also use Kumos to identify the direction of the dominant trend. If the price is above the cloud, it means that un uptrend is in place and that there are lots of buying opportunities. If the price is below the cloud, it is better to look for shorts instead of longs. For more detail look at the table below
A weak bullish signal is present when the price is below the Kumo
A strong bullish signal is present when the price is above the Kumo
A bullish signal occurs when the price moves up and breaks the upper border of the Kumo
A bearish signal occurs when the price falls and breaks the lower border of Kumo
The twists (crossovers) of Senkou spans (the lines that form the Kumo) are generally used for identification of the reversal points. A bullish trading signal occurs when the Senkou Span A cross from the bottom upwards the Senkou Span B. A bearish signal occurs when the Senkou Span A crosses from up to down the Senkou Span B.