The name Ichimoku Kinko Hyo, which translates to "Equilibrium chart at a glance" aptly, describes the system.
Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since Hosoda published his book and has been used successfully to trade currencies, commodities, futures, and stocks. Even with such wild popularity in Asia, Ichimoku did not make its appearance in the West until the 1990s and then, due to the utter lack of information in English on how to use it, it was mostly relegated to the category of another "exotic" indicator by the general trading public. Only now, in the early 21st century, are western traders really beginning to understand the power of this charting system. How it is to be used, as described below:
- While Ichimoku utilizes five separate lines or components, they are not to be used individually, in isolation, when making trading decisions, but rather used together to form an integrated "whole" picture of price action that can be gleaned "at a glance". Thus, a simple look at an Ichimoku chart should provide the Ichimoku practitioner with a nearly immediate understanding of sentiment, momentum and strength of trend.
- Price action is constantly measured or gauged from the perspective of whether it is in relative equilibrium or disequilibrium. Hosoda strongly believed that the market was a direct reflection of human group dynamics or behavior. He felt that human behavior could be described in terms of a constant cyclical movement both away from and back towards equilibrium in their lives and interactions. Each of the five components that make up Ichimoku provides its own reflection of this equilibrium or balance.
TENKAN SEN ("turning line")
(HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods
KIJUN SEN ("standard line")
(HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods
CHIKOU SPAN ("lagging line")
CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods
SENKOU SPAN A ("1st leading line")
(TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future) 26 periods
SENKOU SPAN B ("2nd leading line")
(HIGHEST HIGH + LOWEST LOW)/2 for the past 52 periods time-shifted forwards (into the
future) 26 periods
The senkou span A and B deserve special mention here as they, together, form the Ichimoku
"KUMO" or cloud.
Let's check how it works in automated backtests.
Basic Tenkan-Kijun Cross Strategy
There a few strategies based on Ichimoku. Kumo breakout, swing etc. For our test purposes we will use "the classic" Tenkan-Kijun Cross. The signal for the entry is given when the Tenkan Sen crosses over the Kijun Sen. If the Tenkan Sen crosses above the Kijun Sen, then it is a bullish signal. Likewise, if the Tenkan Sen crosses below the Kijun Sen, then that is a bearish signal. In general, the Tenkan Sen/Kijun Sen strategy can be classified into three major classifications: strong, neutral and weak.
STRONG TENKAN SEN/KIJUN SEN CROSS SIGNAL
A strong Tenkan Sen/Kijun Sen cross Buy Signal takes place when a bullish cross happens above the Kumo.
A strong Tenkan Sen/Kijun Sen cross Sell Signal takes place when a bearish cross happens below the Kumo.
NEUTRAL TENKAN SEN/KIJUN SEN CROSS SIGNAL
A neutral Tenkan Sen/Kijun Sen Buy signal takes place when a bullish cross happens within the Kumo.
A neutral Tenkan Sen/Kijun Sen cross Sell signal takes place when a bearish cross happens within the Kumo.
WEAK TENKAN SEN/KIJUN SEN CROSS SIGNAL
A weak Tenkan Sen/Kijun Sen cross Buy signal takes place when a bullish cross happens below the Kumo.
A weak Tenkan Sen/Kijun Sen cross Sell signal takes place when a bearish cross happens above the Kumo.
For backtests purposes EURUSD- the most liquid pair on 1Hour period chart is used.
The entry for the Tenkan Sen/Kijun Sen cross is very straightforward - an order is placed in the direction of the cross once the cross has been solidified by a close (of previous candle). The lot/position amount is calculated on max risked capital and depends on strenght of the signal:
- Strong Signal – max risked capital is 2% of account balance,
- Neutral 1%
- Weak 0,5%
The strategy stop-loss is determined and managed by the Kijun Sen itself. When entering a trade upon a Kijun Sen cross, the strategy checks the current value of the Kijun Sen and places stop-loss 5 to 10 pips on the opposite side of the Kijun Sen that entry is placed on (this manually input variable might be optimized in Strategy Tester for each instrument for the best results). When looking to enter Short, the strategy will look to place their stop-loss just above the current Kijun Sen and when looking to enter Long, the robot will place stop-loss just below the current Kijun Sen. Once the trade is underway, the strategy moves stop-loss up/down with the movement of the Kijun Sen, always maintaining the 5 to 10 pip "buffer" (input variable). This way, the Kijun Sen itself acts as a "trailing stop-loss" and enables the strategy to keep a tight hold on risk management while maximizing profits.
Exit signal is a Tenkan Sen/Kijun Sen cross in the opposite direction of open position.
As trend following strategy it needs trend to be profitable. While choppy and sideways market it can constantly lose money. But together with range and breakout systems it can superbly diversify your portfolio.
Ichimoku Strategy results for the last year EURUSD H1. Profit: 25063.03USD Equity on start: 50000.00USD.
[img class=img_center src=http://fxprosperhub.com/JForex/Chart_EUR_USD_Daily_snapshot_Profit_small.png orientation=0 realwidth=700]
Ichimoku in trending market stretch legs and gain profits
[img class=img_center src=http://fxprosperhub.com/JForex/Chart_EUR_USD_Hourly_snapshot_trend_small.png orientation=0 realwidth=700]
In sideways market... constantly loosing capital.
[img class=img_center src=http://fxprosperhub.com/JForex/Chart_EUR_USD_Hourly_snapshot_sideways_small.png orientation=0 realwidth=700]
Classic trend following strategy still can be profitable in trending market conditions. The profitability depends on instruments and some say that Ichimoku works better on indices and equities markets. If you wish to calculate PF, sharpe ratio, drawdowns my Ichimoku strategy is now free for demo and live trading. There are some additional features that let's you maximize profits, sharpe ratio etc.
Download Ichimoku Strategy