Ichimoku Kinko Hyo (commonly just shortened to Ichimoku) is a Japanese charting system created in the 1930’s by Goichi Hosoda. It is commonly used to assist in entry and exit points in trending markets, is popular in Japan, and recent years has gained popularity in the west. You may have heard of this charting system, given it a quick try, or maybe you’re a seasoned pro at using it! In any case, this article will briefly introduce the system for using Ichimoku in a FOREX setting and demonstrate a quick and easy strategy to follow. Pertinent features of Ichimoku will be discussed and throughout the month, I will use this strategy to demonstrate prospectively how this strategy can be used and I intend to write a follow-up article to critique this trading system using this simple setup.
Components of the system
These are as follows
- Tekan sen – (highest hi + lowest low)/2 for the past 9 periods.
- Kijun sen – (highest hi + lowest low)/2 for the past 26 periods.
- Chikou span – current price moved back 26 periods.
- Senko span A – (Tekan Sen + Kijun Sen)/2 moved forward 26 periods.
- Senko span B – (Tekan Sen + Kijun Sen)/2 for the past 52 periods moved forward 26 periods.
- Kumo (“cloud&rdquo – the area between the two senko spans. The kumo cloud is bullish when Senko A is above Senko B, and bearish when Senko Span B is above Senko A
The key to using the Ichimoku setup is taking into account of all the components before a trading decision is made. These conditions, along with further explanations of these terms will now follow.
Trading signals explained
The tekan sen and kijun sen is a representation of the extremes of prices over the last 9 and 26 periods. Many readers will be familiar with the classic simple moving average (SMA) crossover setup where a moving average of SMA over a shorter time period crosses that of a SMA of a longer time period. The tekan sen and kijun sen cross can also be used in a similar fashion. Thus if the tekan sen crosses above the kijun sen, this is seen as a bullish signal, and this represents our first signal. Conversely, if the kijun sen crosses below the tekan sen, this is a bearish signal.
It is also important to evaluate where this cross actually happens. The kumo (“cloud&rdquo is a representation of historical prices, and provides support and resistance. Thus if the tekan/kijun cross happens above a positive kumo (i.e. a kumo that is created by Senko A above B), this reinforces the bullish nature of the cross. If the tekan/kijun cross below the kumo, this can be interpreted as a weak bullish signal. On the other hand , a kijun/tekan cross below the kumo can be viewed as a strong bearish cross, and a kijun/tekan cross above the kumo can be viewed as a weak bearish signal. It should be noted that it is not advisable to trade within the kumo, as this is an indication that the price may be ranging, and as this is a trending system, most trades should be conducted above or below the kumo.
Finally, the position of the chikou is also important, as this represents how the current price is compared to 26 periods before. If this line is above the historic price, the current price is in bullish territory – if the chikou is below the historic price, it is in bearish territory.
The above discussion can be summarised into a simple strategy.
Go long if:
- Tekan sen crosses over the kijun sen
- The cross happens above a positive kumo cloud
- The chikou is above the historic price
Go short if:
- Kijun sen crosses over the tekan sen
- The cross happens above a negative kumo cloud
- The chikou is below the historic price
It is good practice to check a higher time frame to see if these conditions also hold to maximise the chances of a positive trade. Remember, all three conditions must be met before a trade is entered!
So that’s it! Good luck in the markets, and I hope to give an update once I get some trades in the book!