ICHIMOKU (Ichimoku Kinko Hyo)
The Ichimoku Kinko Hyo (Equilibrium at a Glance) is a comprehensive technical analysis system that shows support/resistance, momentum, and trend direction. It was developed by Japanese journalist Goichi Hosoda and combines multiple indicators to provide a complete trading strategy framework.
Formula
Tenkan-sen = (Highest High + Lowest Low) / 2 for 9 periods
Kijun-sen = (Highest High + Lowest Low) / 2 for 26 periods
Senkou Span A = (Tenkan-sen + Kijun-sen) / 2 plotted 26 periods ahead
Senkou Span B = (Highest High + Lowest Low) / 2 for 52 periods plotted 26 periods ahead
Chikou Span = Current closing price plotted 26 periods behind
How ICHIMOKU Works
The Ichimoku system uses five different lines to create a "cloud" (Kumo) that helps identify trend direction, support and resistance levels, and potential trading signals. The cloud itself acts as a dynamic support/resistance zone, while crossovers between the various lines generate trading signals. The system also includes time elements to help predict future price movements.
Trading Strategies Using ICHIMOKU
Strategy Examples
- Trade Tenkan/Kijun crossovers for entry signals
- Use cloud breakouts for trend confirmation
- Look for price/cloud relationship changes
- Monitor Chikou Span for trend validation
- Use multiple timeframe analysis for better accuracy
Support and Resistance Strategy
- Use cloud boundaries as dynamic support/resistance
- Look for price bounces off Kijun-sen line
- Monitor cloud thickness for level strength
- Use flat Kijun-sen as strong support/resistance
- Watch for price reactions at cloud edges
Trend Identification
- Bullish: Price above cloud, green cloud
- Bearish: Price below cloud, red cloud
- Consolidation: Price inside cloud
- Trend strength: Cloud thickness
- Future trend: Cloud direction and color
Advantages and Limitations
Advantages
- Provides complete trading system
- Shows multiple timeframe perspectives
- Excellent for trend identification
- Dynamic support/resistance levels
Limitations
- Can appear complex for beginners
- Lag due to longer calculation periods
- Less effective in ranging markets
- Multiple signals can cause confusion
Best Practices When Using Ichimoku Cloud
- Use multiple timeframes to confirm signals across different periods
- Wait for clear cloud breakouts before taking positions
- Confirm signals with Chikou Span position relative to price
- Monitor cloud color changes for potential trend shifts
- Use Kijun-sen crosses for entry/exit timing
- Consider overall market conditions when interpreting signals
- Look for strong setups where multiple components align
- Pay attention to cloud thickness for trend strength confirmation
- Combine with volume analysis for stronger validation
- Document which Ichimoku patterns work best in your trading