The forex market has recently become abuzz with the latest addition the family of forex indicators with the introduction of Ichimoku Kinko Hyo or simply the Ichimoku cloud. It is actually built on the Japanese candlestick charts as an overlay technical indicator that measures momentum along with possible areas of resistance and support lines.
Used together with the candlestick, Ichimoku promises to be a potent trading tool that can capture the underlying market sentiment with greater accuracy. It was developed in 1930 as an improvement on the candlesticks by a Japanese journalist named Goichi Osoda. It is sweeping the forex industry like a storm. Itchimoku is Japanese for ‘one look’ denoting its value as a trading tool. With one look at the Ichimoku Cloud overlain on a candlestick chart, you’d be able to determine market momentum, resistance, and support lines with just one glance. The candlestick pattern forming on any of the Ichimoku lines actually becomes more significant. Ichimoku is a classic example of how to use a combination of forex indicators to come out with quality price action points.
It may look confusing at the beginning with all the shaded areas and the many lines forming the Ichimoku cloud plus the Japanese names used to identify the different lines. But, with a little bit of patience anyone should be able to use this forex indicator effectively.
The Ichimoku Kinko Hyo is made up of five lines – kijun-sen, tenkan-sen, senkou span A and B, and chickou span. Tenkan sen is a signal line and represents a minor resistance/support level. Kijun sen is another support/resistance line and used as a confirmation line and as a trailing stop for your trades. Chickou span is a lagging line and serves as another resistance/support line. Senkou span A forms one edge of the cloud. Senkou span B forms the other edge of the cloud. Kumo or the cloud itself is the space between Senkou spans A and B.
Trading the forex market with the use of the Ichimoku Kinyo Hyo as a forex indicator is actually simple.
If the price is over the Senkou span, then the 1st support level is top line and the bottom line is deemed as the 2nd support level.
If the price is under the Senkou span, the line below serves as the 1st level of resistance while the line on top is now the 2nd level of resistance.
The Kijun Sen indicates future price movements. If the price is above the blue line, the trend is likely to continue to climb further. Conversely, if the price is beneath the blue line, the trend could continue to drop.
The Tenkan Sen is used to indicate market direction. If the Tenkan sen (red line) is on the move, up or down, it is an indication of a trending market. If it moves sideways, it means the market is range-bound.
Finally, the Chikou Span (green line) provides the buy and sell signals. If the Chikou span crosses over the price from the bottom up, it means a buy signal. Conversely, if the Chikou Span crosses from the top to bottom, that is a sell signal.
The use of Ichimoku trading signals can be tempered by the presence of significant candlestick patterns. This is the best combination of forex indicators in the market today. It is no wonder that it has become a buzz word in the industry.