Ichimoku Kinko Hyo: the ‘scariest’ trend indicator in trading

How Ichimoku Kinko Hyo is Calculated and How to Use it

The Ichimoku Kinko Hyo is one of the most controversial technical indicators. Why? Its look makes many traders avoid it!

In reality, it is one of the most useful indicators.

Most professionals use it to identify key support and resistance levels, identify trend direction and its strength, gauge its momentum, and provide actionable signals. The indicator was suggested by a Japanese journalist, Goichi Hosoda.

What is the Ichimoku Kinko Hyo Indicator

The Ichimoku Kinko Hyo is an indicator that has five main parts. These are:

• Tenkan-Sen – This line is also known as the conversion line. It is calculated by adding the period high and period low and dividing it by two. In most platforms, the default period is 9. The Tenkan-Sen is usually red.

• Kijun-sen – This line is also known as the standard line. It is calculated by adding the highest high with the lowest low in the past 26 days divided by two. As with the conversion line, the period can be tweaked.
  The Kijun Sen is usually blue (like in MT4).

• Senkou span A – This is also known as leading span A. This is calculated by adding the Tenkan-Sen and the Kijun-sen. You then divide by two.

• Senkou span B – This is also known as the leading span B. It is calculated by adding the highest high and highest low in the past 52 days divided by 2.

• Chikou span – This is also known as the lagging span. This is the current period’s closing price plotted 26 days back.

The chart below shows the Ichimoku Kinko Hyo applied on the four-hour XAU/USD pair. The white and orange levels are known as the Ichimoku cloud.

Analyze Trends with the Ichimoku Cloud

Traders use the Ichimoku Kinko Hyo in a number of ways. First, they use it to confirm a trend. If the price is above or below the cloud as shown above, it is usually a sign that the trend will continue.

A reversal of the trend is usually signalled when the price enters the orange cloud.

The second way they use the indicator is to confirm the trend strength and weakness. In an uptrend, when the Chikou Span (shown in green in the chart above) is on the left side, it is usually a signal that the upward trend is strong.

In a downtrend, if the line is on the left of the price, it is usually a signal of a strong downward trend.

There are other ways of interpreting the indicator. For example, when the Kijun-Sen and Tenkan-Sen makes a crossover, with the price moving upwards, it is usually a signal that the upward trend will continue.

When the two lines make a crossover, with the price declining, it is usually a signal that the price will continue moving lower.

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Key Take-Away

As a trader, there are several things you need to know about Ichimoku Kinko Hyo.

First, you don’t need to know how to calculate the indicator. This is true with other indicators too. Second, you need to test the various periods to see the one that works for you. Finally, it is recommended that you combine the indicator with other indicators.

External Useful Resources

• History of Ichimoku – Slideshare
• Ichimoku Clouds on Stockcharts.com