Understanding Ichimoku Kinko Hyo

Ichimoku Kinko Hyo components

Ichimoku consists of five main lines, each with a specific meaning and function:

1. Tenkan-sen (Conversion Line)

Tenkan-sen is calculated by taking the average of the high and low over the last 9 periods. This line represents a fast-moving average and is used to identify short-term trends.

• Formula : (9-period high + 9-period low) / 2

2. Kijun-sen (Base Line)

The Kijun-sen is calculated in the same way as the Tenkan-sen, but over the last 26 periods. This line acts as a slower moving average and provides information on medium-term trends.

• Formula : (26-period high + 26-period low) / 2

3. Senkou Span A (Relaxation Line A)

The Senkou Span A is the average of the Tenkan-sen and Kijun-sen, projected 26 periods into the future. This line forms one of the two bounds of the Kumo (cloud) and helps define future support and resistance levels.

• Formula : (Tenkan-sen + Kijun-sen) / 2, projected 26 periods into the future

4. Senkou Span B (Relaxation Line B)

Senkou Span B is calculated by taking the average high and low over the last 52 periods, projected 26 periods into the future. This line forms the other boundary of the Kumo and, together with Senkou Span A, creates the cloud.

• Formula : (52-period high + 52-period low) / 2, projected 26 periods into the future

5. Chikou Span (Delay Line)

The Chikou Span represents the current closing price, projected 26 periods into the past. This line is used to confirm trends by comparing current prices with past prices.

• Formula : Current closing price, projected 26 periods in the past

Using Ichimoku in Trading

Identifying trends

The Ichimoku Kinko Hyo is particularly effective for identifying trends. When the price is above the Kumo, the trend is bullish, and when it is below, the trend is bearish. A price inside the Kumo indicates a phase of consolidation or indecision.

Trading signals

Tenkan-sen/Kijun-sen crossings

• Bullish cross (Tenkan-sen crosses above Kijun-sen) Buy signal
• Bearish cross (Tenkan-sen crosses below Kijun-sen) : Sell signal

Chikou Span position

The Chikou Span must be above the price to confirm a buy signal, and below the price to confirm a sell signal.

Levels of Support and Resistance

The Kumo (cloud) acts as an area of support and resistance. The thicker the cloud, the stronger the support or resistance. The edges of the Kumo (Senkou Span A and Senkou Span B) are particularly important in defining these levels.

Practical examples

1. Bullish trend confirmed :

   • The price is above Kumo.
   • The Tenkan-sen is above the Kijun-sen.
   • The Chikou Span is overpriced.

2. Confirmed Kissing Tendency:

   • The price is below Kumo.
   • The Tenkan-sen is below the Kijun-sen.
   • The Chikou Span is underpriced.

3. Consolidation :

   • The price is inside the Kumo.
   • The market is in a phase of indecision, and it's best to wait for a clear break above or below the cloud before taking a position.

Conclusion

The Ichimoku Kinko Hyo is a comprehensive tool that offers a wealth of information at a glance. By understanding and using its five main lines, you can better analyze market trends, identify support and resistance levels, and make more informed trading decisions.

Remember that, as with any technical indicator, it's important to combine the Ichimoku with other tools and analyses to confirm your decisions. Practice using the Ichimoku on different assets and timeframes to master this powerful indicator.