How to trade using Ichimoku Kinko Hyo

Ichimoku Kinko Hyo is a technical chart indicator that defines future areas of support and resistance, identifies a true trend direction, gauges momentum and provides trading signals.

This indicator gives all you ever need as a trader to trade successfully.

Just one look on the market chart and you identify the trend and the potential signals with in that trend.

Ichimoku kinko hyo means a glance at a chart in equilibrium.

This great indicator was developed by a great journalist by the names of  Goichi Hosoda  in 1936 and   published it in his book in 1969.

The indicator is as summarized as it is shown on the chart below and is one of the easiest indicators you can come across with best results.

As seen above, Ichimoku Kinko Hyo is made up of five plot lines in different colors  each representing a different role on the chart.

Tenkan Sen (conversion line):  This is the blue line and is derived from the highest high and lowest low for the past 9 days. It is the fastest and most sensitive line that follows price the closest.

Kijun Sen (base line) :  This is the red line. It is calculated by taking average of the  highest high and lowest low for the past 26 periods. It follows price after the blue line.

Chikou Span (green line):  It is a lagging line. It is plotted 26 days in the past/ behind.

Senkou Span A (green line): This is the first Senkou Span line. It is calculated by averaging the  Tenkan sen (blue line) and Kijun sen(red line). It moves faster than the Senkou span B because it has a shorter moving average therefore more sensitive to price change and faster.

Senkou span B (orange line); This is calculated by averaging the highest high and lowest low for the past 52 days. It is therefore plotted 26 days ahead.

Cloud: This is the zone between  Senkou Spans A and B. The crossing between them determines the cloud colour (type of trend).

 How to trade using Ichimoku Kinko Hyo?

You need to first identify the trend before entering any trade. Senkou Span A and B and the cloud will help us to identify the trend direction.

For an uptrend, prices are above the cloud and the trend is strong when the leading span A green Senkou cloud line is rising above the leading Span B orange Senkou (cloud line). There fore in the uptrend, the cloud is green.

For a down trend, prices are below the cloud and the trend is strong when a green Senkou is falling or below the orange Senkou(cloud line), hence cloud orange.

The trend is known to be flat or in consolidation when the prices are in the clouds.

Now that we have identified the trend directions, we can determine the strength of momentum and possible signals to trade.

For bullish signals

The buy signal must fulfill all these conditions;

  • Price moves above the cloud
  • The cloud colour turns from orange to green
  • The Tenkan Sen crosses above the Kinjun Sen
  • Chikou span above the price on the upper side

From our chart above, the buy signal B qualified to the above conditions. Note that we didn’t enter the buy trade after immediate cross over at A of Tenkan Sen and Kinjun Sen simply because the cloud had not turned from orange to green.  

For bearish signals

The sell signal must fulfill this conditions

  • Price move below the cloud
  • The cloud colour changes from green to orange
  • The Tenkan Sen crosses below the Kinjun Sen
  • Chikou span below the price on the down side

You can see from our chart above, the Sell signal at D, qualified. Note that we didn’t enter the sell at C ,the immediate crossover of Kinjun Sen and Tenkan Sen,  because price was still in the cloud.

Take profit/Exit levels

For a buy

  • The Tenkan Sen crosses below the Kinjun Sen
  • Chikou span below the price on the down side

The target/exit for our buy trade on the chart above at T qualifies.

For a sell

  • The Tenkan Sen crosses above the Kinjun Sen
  • Chikou span above the price on the upper side

Target for the sell trade on our chart is not shown because, the trade is still running since the target/exit conditions haven’t been met just yet.

You must be wondering why the cloud isn’t in the exit criteria. This is because the Tenkan Sen, Chikou Span and kinjun Sen react to changes in the trend quite fast before the cloud color changes. Waiting for the cloud to exit will lead you to give away some profits back to the market.

 

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