Ichimoku Kinko Hyo – What it is and How it is used?

Jul 24 • Forex Indicators, Forex Trading Articles • 1553 Views • Comments Off on Ichimoku Kinko Hyo – What it is and How it is used?

Ichimoku Kinko Hyo is a technical indicator developed by (of all people) a Japanese newspaper writer and builds on the Japanese Candlestick Charting Technique. It is said that its writer Goichi Hosoda developed this indicator in 1930 but spent the next 30 years perfecting it with the help of university students before finally releasing it to the public in 1960.

Ichimoku is Japanese word for ‘one look’ or ‘one glance’ and what it basically wants to do is to give an indication of what the market wants do, albeit the price trend and direction with just one look. Like the Japanese Candlestick Charts, it intends to capture the market’s underlying sentiment and portray them on a highly visual manner in a way that traders will be able to identify trading opportunities with just one look. Like the candlesticks, it intends to portray a clear picture of what the market wants to do.

Itchimoku is actually an improvement on the Japanese candlestick charts and fine tunes the market sentiment the candlestick wish to portray using of 5 different indicators meticulously studied by Hosoda and his students over the years. The result is a candlestick chart with 5 indicator lines which may actually look complicated at the onset. However, those who are familiar with MACD and Momentum studies should find similarities in their concepts. They may use different formulas or model different periods but they essentially work in the same way to project the underlying market sentiment.
 

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The Ichimoku is composed of five lines each of which is an indicator by itself. They are the tenkan-sen, the kijun-sen, the senkou spans A and B, and chickou span.

  • Tenkan-sen is more like a short term simple moving average but instead of using the previous session’s closing price it is calculated using the average price value for a given time interval  which is usually 9 periods.  The formula used to determine the Tenkan-sen line is (HIGHEST HIGH & LOWEST LOW) divided by 2 for the preceding 9 periods.
  • Kijun-sen is the longer term moving average is usually over 26 periods and is calculated as follows: (HIGHEST HIGH & LOWEST LOW) divided by 2 for the preceding 26 periods. It serves as the standard line and used as a reference point to indicate a major trend reversal.
  • Chinkou Span is a line representing the closing price of the current candle that is plotted 26 periods.
  • Senkou Span A represents the midpoint between Tenkan-sen and Kijun-sen that is plotted ahead by 26 periods.
  • Senkou Span B shows the midpoint between Highest High and the Lowest Low over 52 periods and plotted ahead by 26 periods.

As with all other technical indicators, the use of Ichimoku Kinko Hyo may require some learning curve and may seem complicated at the onset. But with a little bit of patience, you’d be able to get a working knowledge of how this indicator works and how it vastly improves on the visual presentation of the underlying market sentiment that only a Candlestick charts. Getting a right reading of where the majority of the traders would like to bring the price in a fast moving market like forex is definitely a trading advantage that Ichimoku has to offer.

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