Ichimoku Indicator
Ichimoku is a Japanese charting method that was developed before by a Japanese newspaper writerjournalisteditor, with the pen name known of as Ichimoku Sanjin.
- Ichimoku means: 'a glance' or 'a look'
- Kinko meaning 'equilibrium' or 'balance'
- Hyo is the Japanese word/term for "chart"
Thus, Ichimoku means, 'a glance at an equilibrium chart'. Ichimoku attempts to identify the likely direction of price and help the trader to figure out the most suitable trading time to enter or exit the market.
Calculation
This indicator consists of five lines drawn using the midpoints of previous highs and lows. The 5 lines are calculated as follows:
1) Tenkan-Sen: The Conversion Line: Red Line (Highest High + Lowest Low) / 2, for last 9 price periods
2) Kijun-Sen: Base Line: Blue Line (Highest High + Lowest Low) / 2, for last 26 price periods
3) Chikou Span: Lagging Span: Green Colored Line Today's closing price drawn 26 price periods behind
4) Senkou Span A: Leading Span A = (Tenkan Sen + Kijun Sen) / 2, plotted 26 price periods ahead
5) Senkou Span-B: Leading Span-B: (Highest High + Lowest Low)/2, for the past 52 price periods, drawn 26 price periods ahead
Kumo: Cloud: area between Senkou Span A and B
Technical Analysis and Generating Trade Signals
Bullish trading signal - Tenkan-Sen crosses the Kijun-Sen from below.
Bearish trading signal - Tenkan-Sen crosses Kijun-Sen from above.
However, there are different areas of strength for the buy and sell stock signals generated.
Technical Analysis in Indices Trade
Bullish cross-over signal forms above the Kumo (clouds),
Strong buy signal.
Bearish cross-over signal forms below Kumo (clouds),
Strong sell trade signal.
If a bullish/ bearish cross-over trading signal takes place within the Kumo (clouds) it's considered a medium strength buy or sell trade signal.
A bullish crossover that occurs below the clouds is considered a weak buy signal while a bearish crossover that occurs above the clouds is considered a weak sell trade signal.
Support & Resistance Zones
Support & resistance areas can be predicted by the presence of Kumo (clouds). The Kumo can also be used to identify the current trend of the market.
- If price is above the Kumo, current trend is said to be upwards.
- If the price is below the Kumo, current market trend is said to be downward.
The Chikou Span or Lagging Span also is used to measure the energy of the buy/sell trade signal.
- If the Chikou Span indicator is below the closing price of the last 26 periods ago and a sell short signal is given/generated, then the strength of the market trend is downward, otherwise the signal is considered to be a weak sell signal.
- If there is a bullish signal & the Chikou Span is above the price of the last 26 periods ago, then the strength of the market trend is to the up-side, otherwise it is considered to be a weak buy signal.
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