Interpreting Ichimoku Kinko Hyo Signals
As you well know by now, the indicator Ichimoku Kinko Hyo uses 5 lines which are similarly to the use of moving averages where crossovers indicate either a buying or selling signals.
Here are some observations on what the crossovers of Ichimoku lines mean:
- The Kijun-sen or the standard line serves as the indicator of any directional change in the price. Basically, every time the price passes atop the Kijun-sen, it indicates a possible trend reversal since Kijun-sen, the longer term moving average represents the trend line in Ichimoku.
- The price would normally be hugging close to the Kijun-sen but if the price wanders too far from the Kijun-sen, it may indicate that the prices maybe in oversold or overbought territory and consolidation or correction may be expected anytime soon. This would mean you should keep a tight trailing stop to protect your profit.
- Any directional change in the offing may be signaled in advance when Chikou Span passes over the price. The point where Chikou span and the price meets represent either a resistance or a support level. It gains significance if it is a key price level which means the Chikou span passing over the price at this key level is an indication of a directional change in the price.
Bullish and Bearish Signals
Bullish and bearish signals are indicated by crossovers of Tenkan-sen and Kijun-sen. When the Tenkan-sen passes over the Kijun-sen from below, it indicates a bullish market sentiment. Conversely, if the Tenkan-sen passes the Kijun sen from above, it indicates a bearish market sentiment.
Moreover, if a bullish crossover occurs at a point where the price is trading above the Kumo or the Ichimoku cloud (the space linking Senkou spans A and B) it indicates a strong buy signal. Likewise, if the price is trading beneath the Kumo and a bearish crossover occurs, it indicates a strong sell signal. Normally, regular buy or sell signals are generated more often when the price is trading within the cloud. Further, a buy signal is considered weak if the bullish cross over occurs while the price is trading below the cloud. Similarly, a sell signal is considered weak if the bearish cross over occurs while the price is trading above the cloud.
The kumo or the Ichimoku cloud plays a vital role in determining support and resistance levels as well as determining the current market trend. If the price is trading above the cloud indicates a bullish market. Likewise, if the price is trading below the cloud, it indicates a bearish market. The boundaries or the perimeters of the Kumo serve as supports or resistances. If the price is trading above the cloud, the upper perimeter of the cloud serves as the first line of support. If the price is trading below the cloud, the lower perimeter acts as the first line of resistance. Knowing all these allows you to get a grasp on which direction the market wants to go. You therefore have an edge since you will have specific price action points on which you can base your trading strategy.
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