This indicator looks by far the most complicated, but don’t get scared by the numerous lines and “clouds”. The Ichimoku indicator was not created by a mathematician or a rocket scientist, as a matter of fact it was created by a journalist, Goichi Hosoda, and a couple of assistants in 1968. Since then, the Ichimoku indicator has had a major role in the Japanese trading strategies, because it provides powerful tools for consistent, highly profitable trades.
Today, the Ichimoku indicator is used in equities, Forex and futures, because it provides more data than its rivals. The other name for the Ichimoku is the “equilibrium chart”, because if you take just one look, you can quickly understand the trend and the signals that indicate reversals or continuance.
The Ichimoku indicator was initially introduced with four elements, but the Chikou Span was added later on. Without any more nonsense, here are the basic elements, their default settings and calculation principles.
Tenkan-sen (Red) – By default the line is calculated on a 9-period basis, using the highest and lowest prices in this period (if we are looking at a daily chart, 9 period means 9 days, etc.). The formula is: (highest price + lowest price)/2 Notice that this is slightly more different than the SMA (high 9), because the SMA (simple moving average) will take the sum of the highest prices during this 9 period and then divide it by 9 or (p1+p2….+p9)/9. This way the Tenkan-sen is more conservative, but it is also a more accurate level of support than the SMA (high 9).
Kijun-sen (Blue) – This indicator is calculated using the same principle of the Tenkan-sen, but instead of the 9-repiod basis, here we have a 26-period basis.
Chikou Span (Green) – This is an extremely powerful and interesting feature of the Ichimoku indicator. There is no fancy and mysterious calculation here, Chikou Span takes the current closing price and takes it backwards 26 periods. This may sound confusing at first, but you can use this line to compare the current closing price with the price from 26 periods ago; this way you can clearly determine the trend direction.
Senkou Span A (Brown/Yellow) – This is the first ingredient of the most important Ichimoku function – the Ichimoku Cloud. Senkou Span A finds the average of the Tenkan-sen and the Kijun-sen and takes it 26 periods forward. This is why the Ichimoku is so powerful – you have indicators that move behind the price and indicators that move ahead of the price. The formula is:
(Tenkan-sen + Kijun-sen)/2 and then shifted 26 periods ahead.
You may ask “Why do you need this?” Well, there are two main reasons:
Senkou Span B (Black) – This is the other piece of the Ichimoku cloud. The Senkou Span B is also a level of equilibrium, but the time period is much greater. This line is calculated using the same technique as Senkou Span A, but the data is from the past 52 periods and the result is again taken 26 periods forward.
There are several trading strategies that involve the Ichimoku indicator, but we really like two of them, so here they are.
If you take a look at the image above, you can easily notice the vertical black lines between the Senkou Spans A and B. This is the so-called Ichimoku Cloud and it basically servers as strong support or resistance levels. Using the cloud is very easy and pretty straight forward. First of all, we strongly advise you not to trade while the price is inside the cloud. You should open a trade as soon as the price leaves the cloud. If you take a look at the image, you can see the “First resistance level”. Here the price enters the cloud and some brave traders can open a buy, but the price can make sum corrections and go down, so we advise you to wait and see what will happen. So, we are patient and we see that the price remains near the border of the cloud, but then finally it enters it. We have read CTrust Network Stocks and we know that we shouldn’t trade while the price is inside the cloud. As soon as the price exits the cloud at the “Second resistance level” we have out signal for buy. You can see the result.
Most traders never use any of the features of Ichimoku, besides the cloud. However we are far cleverer and we will should you how to use the Chikou Span. You can use the tops and bottoms in the Chikou Span chart to draw horizontal lines. These lines indicate strong levels, either support or resistance. Sure you can find the strong levels by yourself, but the Chikou Span illustrates them very clear and you will never miss another strong level again. These strong levels work exactly the same as the normal trend lines.Stochastic Indicator Relative Strength Index MACD
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