The Ichimoku Kinko Hyo is a trend indicator developed by Japanese journals named Goichi Hosada with assistance from other students that fine-tuned the formula of the indicator. The meaning of Ichimoku in Japanese is ‘One look’, and the meaning of Kinko is ‘balance’ or ‘equilibrium’.
The Ichimoku indicator allows you to see the big-picture of a Forex pair, and it shows both dynamic support and resistance levels, and can also generate buy\sell signals.
It consists of 5 indicator lines:
1. Tenkan sen
2. Kijun sen
3. Chikou span
4. Senkou Span A
5. Senkou Span B
The formulas of indicator lines:
1) Tenkan-Sen = (Highest High + Lowest Low) / 2
2) Kijun-Sen = (Highest High + Lowest Low) / 2
3) Chikou Span = Today's closing price plotted 26 periods behind
4) Senkou Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead
5) Senkou Span B = (Highest High + Lowest Low) / 2, plotted 26 periods ahead
The space between the Senkou Span A and B is called the cloud.
How to Trade the Ichimoku Indicator:
The simplest way to trade the Ichimoku Kinko Hyo is when price crosses the cloud. If price crosses the cloud downwards it is a short signal, and when price crosses the cloud upwards it is a long signal and a sign to buy.
It is a classical trend following trading method that works very well in pairs that trend strongly, such as the GBP\JPY or EUR\JPY. However, in ranging markets this system fails so it is not recommended.
Another trading system that is based on the Ichimoku is by crosses of the Kijun-Sen and Tenkan-Sen. When the Tenkan-Sen crosses the Kijun-Sen upwards it is a long signal, and when the cross is downwards it is a short signal.
This is a slightly better trading signal as its signals are generated much quicker, and the reaction is quicker and not as lagging as the cloud trading system.
You can also use the Tenkan-sen to gauge trend strength – if the Tenkan-sen is trending with a strong angle, it is a sign that price is in a trend. If the Tenkan-sen is flat (horizontal) it is a sign that price is in range and you should take only short-term reversal signals (such as the Bollinger Reversal system).
In conclusion, the Ichimoku is an interesting indicator but very hard to interpret and its signals are usually lagging. While it is a popular indicator it is not recommended to trade with.
You can download the Ichimoku Kinko Hyo indicator for MetaTrader 4 here:
Ichimoku Kinko Hyo for MT4
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