Ichimoku Kinko Hyo – Strategy, Rules, Settings

In the fast-moving world of financial markets, traders are always for that one indicator that can tell them all they want to know about market movements, and it seems Ichimoku Kinko Hyo fits that description. What do you know about the Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo is an all-in-one technical indicator that was initially developed for the Japanese markets in the late 1960s. The indicator shows the direction of the prevailing trend, the strength/momentum of the trend, and potential areas of support and resistance, as well as generates reliable trade signals.

In this post, we will take a look at most of the questions you may have about Ichimoku Kinko Hyo: what it is, how it works, and how you can improve your trading strategies with it. Let’s dive in!

Key takeaways

• Ichimoku Kinko Hyo is an all-in-one technical indicator developed in the late 1960s for Japanese markets.
• It provides insights into the market trend, momentum, support and resistance areas, and generates trade signals.
• The indicator is made up of three lines: Tenkan-sen, Kijun-sen, and Chikou span, as well as a cloud (Kumo) formed by Senkou span A and Senkou span B.
• The price’s interaction with these lines and the cloud helps in interpreting market signals.
• “Ichimoku Kinko Hyo” translates to “a glance at a chart in equilibrium,” reflecting its ability to quickly convey the market’s trend, momentum, and key levels.
• More top trading indicators if you click here.

What is Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo is an all-in-one technical indicator that was developed for the Japanese markets in the late 1960s. The indicator shows the direction of the prevailing trend, the strength/momentum of the trend, and potential areas of support and resistance, as well as generates reliable trade signals.

It consists of three lines named the Tenkan-sen, Kijun-sen, and Chikou span, and a cloud (Kumo) that is formed by two lines — Senkou span A and Senkou span B. The interaction of the price and these lines and the cloud are used to interpret the indicator and its signals.

The indicator’s name, Ichimoku Kinko Hyo, is a description of what the indicator represents. The Japanese word Ichimoku means “at a glance”; Kinko translates to “equilibrium or balance”, while Hyo implies “a chart.” Thus, the name, Ichimoku Kinko Hyo, translates to “a glance at a chart in equilibrium.” Just as the name implies, At a glance, you can get everything you need to know about the state of the market — the direction of the market, its momentum, and where to anticipate support or resistance.

Ichimoku Kinko Hyo trading strategy – rules, settings, and returns

A backtested strategy is coming shortly.

How does Ichimoku Kinko Hyo work in trading?

In trading, Ichimoku Kinko Hyo works as an all-in-one technical indicator that can be used to identify the direction of the prevailing trend, gauge the strength or momentum of the trend, and spot potential areas of support and resistance. The indicator can also be used to generate reliable trade signals. All can be interpreted from the interactions of the various components of the indicator with one another and with the price.

With five different lines and a shaded area called the cloud, the indicator can easily make a novice feel overwhelmed, as there are many components to interpret. However, the indicator can be very informative once you understand what the different parts represent and how to interpret their interactions.

What are the key components of Ichimoku Kinko Hyo?

The key components of Ichimoku Kinko Hyo are as follows:

• Tenkan Sen: Colored blue in the chart above and also called the conversion or turning line, this is the median of a 9-period range. It is calculated by adding the highest high and lowest low over the last 9 periods and dividing the sum by 2. This is done for every new period to get the continuous line plot.
• Kijun Sen: This is also called the Base Line. Colored red in the chart above, this is the median of a 26-period range. For every new period, the highest high and lowest low of the last 26 periods are added, and the sum is divided by 2 to the values to plot this line.
• Chinkou Span: Colored green in the chart above, this is also called the Lagging Span. It is the current closing price plotted 26 periods behind. The line is usually described as the market memory because it places the current closing price with the price action of 26 periods ago so you can see if the price is at a key level in the past.
• Kumo (Ichimoku Cloud): Shaded red/green in the chart above, the cloud is made up of 2 lines — Senkou Span A and Senkou Span B — and the shaded space between them. It is projected 26 periods ahead to predict potential support or resistance zones. Senkou Span A is the faster-moving border of the Kumo (colored yellow in the chart). It is computed by averaging the Tenkan Sen and the Kijun Sen and projected 26 periods into the future. Senkou Span B is the slower-moving border of the Kumo (colored brown in the chart). It is computed by averaging the highest high and the lowest low for the past 52 periods and projected 26 periods into the future.

How do I interpret the Ichimoku Cloud (Kumo)?

To interpret the Ichimoku Cloud (Kumo), you have to check the position of the price relative to the cloud and the slope of the cloud. The price staying above the cloud means the market is likely in a bullish trend while staying below the cloud means the market is possibly in a downtrend. The price trading inside the cloud means the market is likely moving sideways, or the previous trend is in the process of reversing.

Also, an ascending cloud indicates an uptrend, while a descending cloud indicates an uptrend. An early sign of an ascending or descending cloud is the Senkou Span A crossing above or below the Senkou Span B. This changes the color of the Cloud’s shade to green or red, as the case may be. A flat cloud shows a ranging market.

One more thing, the Cloud can act as a support and resistance zone. When the price is above the cloud, the Senkou Span A and Senkou Span B act as first and second levels of support. Likewise, when the price is below the Cloud, the Senkou Span A and Senkou Span B act as first and second levels of resistance.

What is the Tenkan-sen line in Ichimoku Kinko Hyo?

The Tenkan-sen line in Ichimoku Kinko Hyo is also known as the conversion or turning line. It is the median of the most recent 9-period range. The line is calculated by adding the highest high and lowest low over the last 9 periods and dividing the sum by 2. This is done for every new period to get the continuous line plot. If, in the last 9 periods, there is no change in the highest and lowest levels compared to the last one, the Tenkan-sen line will stay flat.

How do I use the Kijun-sen line effectively?

To effectively use the Kijun-sen line, you should understand its function in the Ichimoku Kinko Hyo indicator. Also known as the Base Line, it is the median of a 26-period range. The line is slower than the Tenkan-sen line and, in combination, both can be used to identify the direction of the trend.

When the Tenkan-sen line is above the Kijun-sen line, the trend is likely bullish, so you look for buy setups. Conversely, when the Tenkan-sen line is below the Kijun-sen line, the trend is likely bearish, so you look to short the market.

What does the Chikou Span indicate in Ichimoku?

In Ichimoku, the Chikou Span indicates where the price is relative to past price action.

Also known as the Lagging Span, this line is the current closing price plotted 26 periods behind. The line is usually described as the market memory because, by placing the current closing price with the price action of 26 periods ago, it not only makes it easier to see where the price is relative to past price action but also helps you know if the price is at a key level or a previously stubborn level which it has to cross again.

How does the Senkou Span A and B work?

The Senkou Span A and B work as the borders of the Ichimoku Cloud. With Senkou Span A moving faster than Senkou Span B, the borders switch as the market changes trend. When the Senkou Span A crosses above the Senkou Span B, an uptrend is likely emerging and the Cloud changes to a bullish color. When the Senkou Span A crosses below the Senkou Span B, the Cloud changes to a bearish color, as a downtrend is likely emerging.

Also, the Senkou Span A and B work as the first and second layers of the Cloud’s support and resistance zone. When the price is above the Cloud, the Senkou Span A and Senkou Span B act as first and second levels of support. Likewise, when the price is below the Cloud, the Senkou Span A and Senkou Span B act as first and second levels of resistance.

What is the best time frame for Ichimoku Kinko Hyo?

The best time frame for Ichimoku Kinko Hyo will depend on the trader’s strategy and trading style. A swing trader would trade on the 4-hourly or daily timeframe, while a day trader would want to trade on intraday timeframes, such as the hourly, 30-minute, and 15-minute timeframes.

A scalper would even go to a lower timeframe. What matters is having a trading strategy and backtesting it to be sure that it works on the timeframe you’re trading. You can backtest various timeframes to find the one that works best.

How do I trade with the Ichimoku Cloud breakout?

To trade with the Ichimoku Cloud breakout, you have to study the indicator and how it interacts with the price action. While the price breaking out of the Ichimoku Cloud indicates a change in trend direction, where the price crosses the cloud may determine how fast the trend change happens and how much the potential stop loss would be — the breakout happens faster and the stop loss small if the price cross a thin and twisted Cloud than the full thickness of a large cloud.

What does a bullish cloud signal mean?

A bullish cloud signal means that the cloud is ascending with the price trading above it. In this situation, the cloud shows a bullish color (green), indicating that the faster-moving Senkou Span A is above the slower-moving Senkou Span B.

Both the Tenkan-sen line and the Kijun-sen line are above the cloud, with the former likely above the latter. When all these are present, it means that the trend is up, and buyers are dominating the market. Time to look for buying opportunities.

What does a bearish cloud signal mean?

A bearish cloud signal means that the cloud is descending with the price trading below it. In this situation, the cloud shows a bearish color (red), indicating that the faster-moving Senkou Span A is below the slower-moving Senkou Span B. Both the Tenkan-sen line and the Kijun-sen line are below the cloud, with the former likely below the latter.

When all these are present, it means that there is a downtrend, and sellers are dominating the market. The right time to look for selling opportunities.

How can I identify trends using Ichimoku Kinko Hyo?

To identify trends using Ichimoku Kinko Hyo, you have to check the position of the price relative to the components of the indicator, as well as the position of the components relative to themselves. In a strongly trending uptrend, the price would be above all the indicator components, while both the Tenkan-sen line and the Kijun-sen line are above the cloud, with the former above the latter and the cloud sloping upwards.

In a strongly trending downtrend, the price would be below all the indicator components, while both the Tenkan-sen line and the Kijun-sen line are below the cloud, with the former below the latter and the cloud sloping downwards. The slopes of the Tenkan-sen line and the Kijun-sen line identify short-term trends, and their crossovers indicate changes in short-term trends.

What are the common Ichimoku trading strategies?

The common Ichimoku trading strategies include:

• The Tenkan-sen and Kijun-sen crossovers: This occurs when the Tenkan-sen line crosses above the Kijun-sen line to give a bullish signal, or when it crosses below to give a bearish signal.
• Chikou Span price crossover: This is when the Chikou Span crosses above the price, giving a bullish signal, or when it crosses below the price, giving a bearish signal.
• Senkou Span A and B crossovers: When the Senkou Span A crosses above the Senkou Span B, it is a bullish signal for a potential long-term trade. The opposite is true for a bearish signal.

How do I combine Ichimoku Kinko Hyo with other indicators?

To combine Ichimoku Kinko Hyo with other indicators, you have to study how the indicator works to know other indicators that can complement it. Some of the best indicators to combine with Ichimoku Kinko Hyo are volume indicators. This is especially true for markets where real volume data are available. Breakouts and crossovers supported by rising volume imply stronger signals.

What are the strengths of using Ichimoku Kinko Hyo?

The strengths of using Ichimoku Kinko Hyo include:

• It shows the direction of various trends — relatively short-term and long-term trends
• It can show the price momentum
• It can show potential support and resistance levels
• It can give trading signals
• The Chikou Span can provide context relative to the past price action

What are the weaknesses of Ichimoku Kinko Hyo?

The weaknesses of Ichimoku Kinko Hyo include:

• It is a lagging indicator, so its signals often appear late
• It does not have predictive power in most cases, as it is based on past price data
• It has too many components, which can be confusing to a newbie
• It can make the chart look ugly, especially to price action traders

How do I avoid false signals with Ichimoku Kinko Hyo?

To avoid false signals with Ichimoku Kinko Hyo, trade on a higher timeframe. False signals are more likely to occur on lower timeframes than on higher timeframes.

Another thing is to combine the indicator with a volume indicator. Rising volume can help confirm a breakout or crossover signal.

What is the difference between Ichimoku and other indicators?

The difference between Ichimoku and other indicators is that Ichimoku is an all-in-one indicator with many different components that provide information about different aspects of the market, such as the direction of the trend, the momentum, support and resistance levels, and crossover signals.

Other indicators simply focus on and measure one aspect of the market.

How do I customize Ichimoku Kinko Hyo settings?

To customize Ichimoku Kinko Hyo settings, you have to experiment with different settings to find one that works well for you. The best way to do this is to do proper backtesting to know the settings that work in the market you intend to trade.

Also, while trading, periodically evaluate your results to know when to tweak the settings further.

What is the history of Ichimoku Kinko Hyo?

The history of Ichimoku Kinko Hyo traces back to 1969 when a Japanese journalist Goichi Hosoda, a financial market reporter for the Capital Newspaper, published a book about the indicator. The indicator gained a little popularity in Japan when the author was alive, but after his death in 1982, it fell out of use.

It wasn’t until 1996 that a book titled, “Ichimoku Kinko Studies”, written by Hidenobu Sasaki, a trader from Nikko Citigroup Securities, spread the use of the indicator beyond the shores of Japan.

How do beginners start with Ichimoku Kinko Hyo?

Beginners can start with Ichimoku Kinko Hyo by learning what the various parts represent and their functions. Next, they can start learning how they can use it to create reliable trading strategies.

The best way is to start with the simple parts, such as the Tenkan-sen and Kijun-sen lines. They can create crossover strategies and move from there.

What are common mistakes when using Ichimoku Kinko Hyo?

Some of the common mistakes when using Ichimoku Kinko Hyo include:

• Trying to use all the different signals from the indicator in one trade
• Not formulating a coherent strategy with the indicator first
• Not backtesting their strategy to be sure it has an edge in the market
• Not having a risk management plan

How do I set up Ichimoku Kinko Hyo on trading platforms?

To set up Ichimoku Kinko Hyo on trading platforms, go to the indicator section of the platform and look for Ichimoku Kinko Hyo — the indicator is one of the built-in indicators in most trading platforms. If your platform doesn’t have it, get a custom-made Ichimoku for the platform and install it.

Then, go to the indicator section and double-click on it to attach to your chart. Use the pop-up box to put your preferred settings.

Why should I include Ichimoku Kinko Hyo in my trading strategy?

Why you should include Ichimoku Kinko Hyo in your trading strategy is that it can help you easily identify the different trends in the market at any point in time. you can also use it to gauge the market momentum, as well as anticipate potential levels of support or resistance. Y

ou can also create trading signals from it and even have the backward-projected Chikou Span to evaluate with previous price action and key levels.