How to Use Ichimoku Kinko Hyo in Trading the Financial Market

Ichimoku Kinko Hyo
Ichimoku Kinko Hyo




 

Ichimoku Kinko Hyo? Sounds a bit strange doesn’t it and probably looks ugly and confusing too. But if you patiently read this article to the end you will understand not only how to use this indicator but some secrets that will enhance how you interpret the price and directions of the financial assets.

Ichimoku Kinko Hyo happens to be the first indicator I used in trading the financial market, so I can gladly tell that it is a good indicator from experience. If you do not know what the financial market is then I suggest you read this article first Which Financial Market to Trade?

What Is Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo is a versatile indicator which is used for numerous reasons to identify support and resistance level, spot trend direction, gauge momentum. This indicator was first developed in the early 20th century (1930 to be precise) by a Japanese newspaper writer who used to be known as Ichimoku Sanjin which translate to “what a man in the mountains sees” he spent 30 years perfecting the technique before releasing his finding to the general public in the late 1960’s.




The word Ichimoku Kinko Hyo means “one glance equilibrium chart or one glace” this is because if one look at the graphic presentation of the indicator, one will be able to tell if the market is trending up or down, will be able to spot the support and resistance zone, volatility in the market etc.

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More on Ichimoku Kinko Hyo

The first time I saw this indicator was when I was still learning the basics of The Foreign Exchange Market, it was looking so crazy and confusing to me because of the colours, graphical representation and lines but when I finally got a hang of it, it became simple and easy to use. The same thing might happen to novice traders, but with understanding of how the indicator works, then the puzzles will disappear.

This indicator is considered as a 5-in-1 indicator, because it is made up of:

  1. Tankan-Sen
  2. Kijiun-Sen
  3. Senkou-Span A
  4. Senkou-Span B
  5. Chikou-Span




Yep, I know it is difficult to pronounce or even spell but they offer a great assistance when analysing the markets.

The Component of Ichimoku Kinko Hyo

The Ichimoku Kinko Hyo is made of 5 components as mentioned above. These component all represent a certain information on the chart and to the user. I will explain what each term mean as we proceed further in this article. When using a trading platform, such as MT4 the default setting is as follows:

Tankan-Sen———–9

Kijiun-Sen————–26

Senkou-Span B——52




NOTE: There is no setting for Senkou-Span A and Chikou-Span, as there valued is derived from other components.

Tankan-Sen

The Tankan-Sen or TS for short, is primarily used as a signal line. The TS also serve as a bit of support and resistance line and the default colour for it is RED.

Tansen-Sen
Tansen-Sen




 

The Tankan-Sen can be used as an independent indicator all by itself and can be used without the full kit of the other component of Ichimoku Kinko Hyo though it is not recommended as you would need to confirm that each signal is not false.




If the TS (red line) is pointing up-ward, it means the market is in a bullish trend and if down-ward it shows a bearish trend, when it moves horizontally it indicate the market is ranging that is why it is considered a signal line.

READ: Who are the participants in the forex market?

Kijiun-Sen

The Kijiun-Sen or KS is the confirmatory line for future price movement unlike the Tankan-Sen that is a signal line. The Kijiun-Sen can be used for trailing stop, the default colour for this is Kijiun-Sen BLUE.




Kijun-Sen
Kijun-Sen

 




The KS can be used as a standalone indicator that is without other Ichimoku Kinko Hyo components, for example, if price of a financial asset should go higher than the Kijiun-Sen, it means that the price of that asset will keep going higher and if the price go lower than the Kijiun-Sen, is shows the price will fall.

Tankan-Sen (TS) and Kijiun-Sen (KS) Cross Over Strategy

The KS and TS can be used together, if the Tankan­-Sen should cross the Kijiun-Sen from bottom up it is a confirmation of a bullish trend and if the cross should happen from top down it is the continuation of a bearish trend.




That is why the Kijiun-Sen (KS) act as a confirmatory of future price movement

Senkou-Span A

Senkou-Span A
Senkou-Span A

 

Another name for the Senkou-Span A is the leading span 1 or leading span A. This line form one part of the KUMO or CLOUD (which I will explain later). The Senkou-Span A can serves as a support or resistance zone and the default colour is Sandy Brown.

Senkou-Span B

Senkou-Span B
Senkou-Span B




 

A Senkou Span B also called leading span 1 or leading span B. Forms the other part of the line of the Kumo.

Interesting fact about the Senkou Span B

If price is above the Senkou Span B the top line serves as the first support level while the bottom line serves as the second support level.

If the price is below the Senkou Span B the top line form the first resistance level while the top line is the second resistance level, the default of Senkou Span B colour is thistle

Kumo

The Kumo or clouds as it always called, is the space between the Senkou Span A and Senkou Span B. The Kumo can be used as a totally independent indicator on its own. The Kumo change in colour, height and shape depending on how the price of a financial asset change.




Kumo
Kumo

 

The edges or lines of the cloud can be used to identify future support and resistance. When the height between the senkou span A and Senkou Span B (cloud)  becomes large it represent a huge volatility  in the market thus, creating a stronger support and resistance and a smaller cloud represent a weaker support and resistance, which can be broken any time.

As earlier said, the Kumo can be used as an independent indicator on its own. When Senkou-Span A is above Senkou Span B, it means the market is bullish and when Senkou Span A is below Senkou Span B it shows the market is bearish.



Generally, traders can look for a change or twist between the Senkou-Span A and Senkou Span B. Which is another change for a reversal in price.

CHECK OUT: How money is made trading the forex market

Chikou-Span

Chikou Span is another part of the indicator, Ichimoku Kinko Hyo, that people barely pay attention too. This may be because the Chikou Span is a lagging indicator – that means it always react late to price movement.

Chikou-Span
Chikou-Span




 

One funny thing about the Chikou Span is that it uses the current day closing price which is projected back 26 days on the chart, so it always 26 period behind the current price.

The default colour of the Chikou Span is green and the Chikou Span can also be used as a signal indicator. If the Chikou Span crosses price from top down, it indicate that the future price movement is going to be a sell signal and if it crosses from bottom to the top it shows a looming buy signal.

Calculation

Though this is not necessary, but I think I should share it with you all. Since the Ichimoku kinko hyo is made of 5 separate indicators, that are and can be independent of each other, I think it is necessary I discuss them.

Tankan-Sen

((9 days period high + 9 days period low)/2)




The Tankan-Sen is gotten by getting the 9 days high price with the 9 days low price summed together then divided by two.

Kijiun-Sen

((26 day period high + 26 day period low)/2)

Unlike the Tankan-Sen that is short in period, the Kijiun-Sen is calculated using the 26 days period high price and low price summed together divided by 2

Senkou Span A (Leading Span A)

((Tankan-Sen + Kijiun-Sen)/2)

The Senkou Span A is simply derived from other indicator value (Tankan-Sen and Kijiun-Sen)

Senkou Span B (Leading Span B)

((52-period high + 52-period low)/2)

The Senkou Span B is different from the Senkou Span A in terms of calculation, the Senkou Span B uses 52 days period high price and 53 days period low price which is then summed together and divided by 2.

ALSO READ: Is Bitcoin The Future Digital Money In Nigeria?

Chikou Span (Lagging Span)




Chikou Span is simply the closing price plotted 26 days in the past

Conclusion

The Ichimoku Kinko Hyo has been widely use in the financial market for a long time but because of the complexity many traders have rather choose a simpler indicator to use.

There are many strategies that can be used with this indicator if one is patience and determine to learn and study.

When I came into trading the financial markets, I used this indicator pretty well and I have noticed that it can be used by anyone both scalpers and swing traders and each setting is based on the perspective of the trader.

In the future I will show you guys how we can use the different component indicator as a standalone indicator and be profitable

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