Ichimoku Indicator
Ichimoku is a Japanese charting technique that was created before by a Japanese newspaper writer, with the pen name of Ichimoku Sanjin.
- Ichimoku means 'a glance' or 'one look'
- Kinko means 'equilibrium' or 'balance'
- Hyo is the Japanese word 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 time to enter or exit the market.
Calculation
This indicator consists of five lines drawn using the midpoints of previous highs & lows. The five lines are calculated as follows:
1) Tenkan-Sen: Conversion Line: Red Line (Highest High + Lowest Low) / 2, for last 9 price periods
2) The 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 trading 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[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 Trading Signals
Bullish signal - Tenkan-Sen crosses Kijun-Sen from below.
Bearish 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 Trading
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 Levels
Support and resistance zones 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, the current market trend is said to be upwards.
- If price is below the Kumo, the current market trend is said to be downwards.
The Chikou Span or Lagging Span is also used to determine the strength of the buy or sell trade signal.
- If the Chikou Span indicator is below the closing trading price of the last 26 periods ago and a sell short signal is given, then the strength of the trend is down-wards, otherwise the signal is considered to be a weak sell trade signal.
- If there is a bullish signal and the Chikou Span is above the price of the last 26 periods ago, then the strength of the trend is to the upside, otherwise it's considered to be a weak buy trading signal.
