By Eadfrith Scott | Submitted On August 01, 2011In this article I will go over an indicator that is very dear to my heart, the mighty Ichimoku Kinko Hyo.The Ichimoku Kinko Hyo has been around since before World War II when Goichi Hosoda created it for use on the Asian stock markets. He tested it until 1968 before releasing it to the public. It was only in the 1990s when it became noticed in the West.The name Ichimoku Kinko Hyo translates to "Equilibrium Chart At A Glance" which is a perfectly apt description of how the indicator works. It shows the trader, at a glance an extremely detailed picture of price sentiment, strength of trend and support and resistance. A holistic picture if you will, that allows the experienced practitioner to tell very quickly whether a potential trade is a high probability or low probability in terms of banking profits.An Ichimoku chart is actually made up of five distinct indicator lines that form the overall picture. These are described below:
  • Tenkan Sen which is the highest high plus the lowest low all divided by two, over the previous nine periods.
  • Kijun Sen which is the highest high plus the lowest low all divided by two, over the previous twenty six periods.
  • Chinkou Span which is the current closing price shifted twenty six periods into the past.
  • Senkou Span A which is the Tenkan Sen plus the Kijun Sen all divided by two and shifted twenty six periods into the future.
  • Senkou Span B which is the highest high plus the lowest low for the last fifty two periods, all divided by two, shifted forward twenty six periods into the future.
Another important Ichimoku structure is The Kumo, or "Cloud". This is the area between the Senkou Span A and Senkou Span B and is a key part of the Ichimoku Kinko Hyo. It represents key support and resistance levels but compared with traditional support and resistance lines, the Kumo shows a multi-dimensional picture. The thickness of the Kumo is an indication of how strong the support or resistance is. The thicker the cloud, the stronger the support or resistance will be. Also, given how the Kumo is plotted into the future, it gives a prediction of support and resistance levels to come. This is incredibly powerful, since most indicators are all lagging and reacting to price.For example, if price was to quickly break through a thick Kumo you would have an indication that the move was extremely strong. The area in the middle of the cloud is called the equilibrium area and price in this zone is unpredictable and the experienced Ichimoku trader will not place trades in these areas.The Kumo also has it's own built-in sentiment which you can use in conjunction with the price sentiment. Notice in the chart above that the Kumo changes colour after it pinches together. When the Senkou Span A is above the Senkou Span B, the Kumo is said to be bullish. Conversely when the Senkou Span B is above the Senkou Span A, the Kumo is said to be bearish. Again, because the Kumo is plotted into the future it can give you advanced warning of a change in price sentiment. Try getting that from a couple of Moving Averages!The Kumo can also have flat tops and bottoms and these are important structures. They exert an almost gravitational pull on price. You will notice that when price breaks out of the Kumo and there is a flat top or bottom that price will often snap back to the flat Kumo. With experience you will be aware of these and ensure you do not get into a fake breakout trade by ensuring that price has broken free of the gravitational pull of the Kumo.With all that said, how does one go about trading based on the Ichimoku Kinko Hyo? Well a full discussion of this is beyond the scope of this article but there a few basic situations that constitute trading signals of varying strengths and these are discussed below.Tenkan Sen Kijun Sen CrossIf the Tenkan Sen crosses the Kijun Sen then that is a potential signal. If the the Tenkan Crosses above the Kijun then it is a bullish signal and if it crosses below the Kijun Sen it is a bearish signal. Fortunately the Ichimoku gives us more information to help us refine these signals. If a bullish cross takes place above the Kumo, then this is a strong bullish signal. If the bullish cross takes place below the Kumo then it is a weak bullish signal. Finally if the bullish cross occurs inside the Kumo then it is seen a a neutral bullish signal. The opposite is true for bearish crosses. A strong bearish cross would be the Tenkan crossing below the Kijun underneath the Kumo and so on.However we are still not fully refined in terms of the strength of the signal. We can also consider the Chinkou Span. This is often referred to as the "final arbiter" that can either confirm or deny a trade. The general rule is that if the Chinkou Span is above the price action when a bullish cross has takes place, it adds more weight to the signal strength. The reverse is true for bearish signals, the Chinkou Span being below the price action adds more weight to a successful outcome of a short trade.So one very powerful trading strategy is to wait for a strong bullish or bearish Tenkan/Kijun cross with Chinkou Span confirmation. These require patience but are very reliable signals.Kumo BreakoutThis signal is where price breaks clear of the Kumo, either above or below. A long trade would be indicated when the price action breaks above the Kumo and a short trade would be indicated when price breaks below the Kumo. You can also use the Chinkou Span as in the Tenkan / Kijun cross described above. You should also use the Kumo's built-in sentiment to confirm a long or short trade. Finally by paying attention to the dangers of the flat top or flat bottom Kumos, one can further add to the strength of the signal or discard it as too risky.Hopefully this has given you a good introduction into the Ichimoku Kinko Hyo. If you have any questions, please just drop me an email and I will be happy to help you. I have been trading this for over a year on the longer time frames and it works extremely well.Click HERE to get my free weekly Forex trading newsletter that covers trading strategies, indicators and trading mentality. If you are struggling to be consistently profitable in your trading then I urge you to read more at http://profit-with-forex.comArticle Source: http://EzineArticles.com/?expert=Eadfrith_Scott Article Source: http://EzineArticles.com/6464263
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