Warm wishes
to all. Interest in financial markets has been steadily increasing in recent
times. The size and accessibility of financial markets have made it an
attractive investment instrument. The Forex market offers higher
profit opportunities compared to other financial markets. Accordingly, there
are participants from all over the world who desire to achieve higher returns.
Technological advancements have made it easier to access the Financial markets. Now,
it is possible to trade in the Financial markets from anywhere in the world via the
internet. This has made the Forex market the largest financial market in the
world. With average daily trading volumes of approximately $5.5 trillion, the
Forex market is larger than the total of all the world’s money markets. To
claim our share of this profit, we need to learn and apply technical and
fundamental analysis to our trades. If we want to succeed in financial markets,
we must learn technical indicators, which are tools that help predict future
price movements by analyzing past price actions. In this article, we will
discuss the "Ichimoku Kinko Hyo" indicator.
What is the Ichimoku Kinko Hyo indicator?
The
Ichimoku Kinko Hyo (Ichimoku) indicator is a technical tool preferred by many
traders in the market. It was developed by Japanese journalist Goichi Hosoda in
the late 1960s to make it easier to use Japanese Candlestick Charts and to
perceive price movements more comfortably on charts. "Ichimoku" is a Japanese
word that means "a glance at a balance chart." When it was first introduced, it
was known by only a few and was primarily used in the stock market. However,
now it is known by almost everyone and is used in all financial markets.
Although it may seem complex at first glance, it becomes easier to understand
with practice. We often use the Ichimoku indicator to determine an asset’s
trend, momentum, and support and resistance levels. Additionally, we can use
this indicator to find the most suitable entry and exit points in the market.
The Components and Calculation of the Ichimoku Kinko Hyo Indicator
The
Ichimoku indicator consists of five different components that include both
lagging and leading data about the trend. These are listed below:
1.Tenkan-Sen
(Conversion Line, blue). This is the default 9-day moving average. It can also be used as
support and resistance. This line is the shortest of the four lines in the
Ichimoku indicator and is calculated using the following formula:
Tenkan-sen
= (9-day high + 9-day low) / 2
2.Kijun-Sen
(Base Line, Main Line, red). This is a 26-day moving average and is one of the four lines in the
Ichimoku indicator. Along with the Tenkan-sen line, it is used to determine the
direction and momentum of the trend. It also serves as stronger support and resistance compared to Tenkan-sen. The calculation formula is as follows:
Kijun-sen
(base line) = (26-period high + 26-period low) / 2
3.Chikou Span
(Lagging Span, green line). This is a default value obtained by shifting the closing price 26
periods back.
Chikou Span
= last 26 closing price - closing price 26 periods ago
4.Senkou Span
A (Leading Span A, white line). Known as the upper line of the cloud, it is obtained by shifting the
value derived from adding Tenkan-Sen and Kijun-Sen, divided by two, 26 periods
forward. The formula is as follows:
Senkou Span
A = (Tenkan-Sen + Kijun-Sen) / 2
5.Senkou Span
B (Leading Span B, pink line). Forms the lower line of the cloud. This line is created by shifting the
value obtained from adding the highest and lowest values within a 52-period
range, divided by two, 26 periods forward. The formula is as follows:
Senkou Span B = (52 Period High + 52 Period Low) / 2
The zone
between Senkou Span A and Senkou Span B forms the Ichimoku Cloud (Kumo).
Depending on the market's trend, the Kumo can be identified in cool-toned red
and cool-toned green colors. All the mentioned colors above can be customized
in the indicator settings.
Trading with the Ichimoku Kinko Hyo Indicator
In the
Ichimoku indicator, when prices are arranged above the cloud (kumo), it
indicates an uptrend, and when they move below it, it signals a downtrend.
If the
Tenkan-sen line (Blue line) crosses above the Kijun-sen line (Red line) within
the cloud (stronger), inside the cloud (neutral), or below the cloud (weaker),
it generates a Buy signal. Conversely, if the Tenkan-sen line (Blue
line) crosses below the Kijun-sen line (Red line) above the cloud (weaker),
inside the cloud (neutral), or below the cloud (stronger), it is known as a Sell
signal.
The primary
role of the ChikouSpan line (Green line) is to confirm the Buy and Sell signals
given by the Tenkan-sen and Kijun-sen lines. After a Buy signal, Chikou Span is
expected to be above the prices, while after a Sell signal, it should be below
the prices.
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| Trading via Ichimoku in GBP/CAD |
If Senkou
Span A (White line) crosses above Senkou Span B (Pink line), it is anticipated
that an uptrend is beginning, while if it crosses below, it suggests the start
of a downtrend. In uptrends, Senkou Span A (White line) serves as the first
support level, and Senkou Span B (Pink line) acts as the subsequent support
level. In downtrends, Senkou Span A (White line) is considered the initial
resistance level, and Senkou Span B (Pink line) is seen as the subsequent
resistance level. In uptrends, the Ichimoku clouds take on cool-toned green
colors, while in downtrends, they exhibit cool-toned red. On charts, if an
asset’s price crosses above the Ichimoku clouds, it signals a Bull market, and
if it crosses below, it indicates a Bear market. If prices move within the
clouds, it signifies a period of indecision in the market.
Retain
in your consciousness. In the Forex market, where price movements are highly volatile, no
single technical indicator is sufficient for making price predictions on its
own. Like most indicators, the Ichimoku indicator also carries the possibility
of producing incorrect signals. For this reason, combining it with other
technical tools may yield better results. When trading in financial markets,
please make sure to consider risk management strategies. Trading
triumph and best wishes!