The Ichimoku Kinko Hyo indicator started to become extremely popular among traders after the Japanese approach to technical analysis came to complete the Western approach.
There is virtually no trading platform that is not offering the Ichimoku indicator and a rough translation of its whole name would be “equilibrium at a glance”. The reason for this is for the fact that the indicator is actually projecting support and resistance levels on the right side of the chart and this means those support and resistance levels are known in advance.
Another huge advantage of this indicator is coming from the fact that it is extremely visible, and this means that it leaves no room for interpretation.
Some trading platforms are putting the Ichimoku under the trend indicators category, others under the oscillators, but in reality it is none of the above as simply it is a very special one.
Ichimoku has five elements (lines) to be interpreted: Senkou A and B, Kinjun, Tenkan, and Chinou. The Senkou A and B represent the edges of the cloud and when A crosses above B, the cloud becomes green, or bullish, while a cross below B means a red cloud, or a bearish one. Needless to say, in the first instance one should look for longs, while shorts should be favored when the cloud is red.
To fully understand the power of the cloud indicator is to look at current prices and the below image represents the actual EURUSD hourly chart at the closing “Friday”.
Look where current price is and where the actual cloud is: cloud is projected 26 periods forward in time. Depending on the time frame you’re applying the indicator, this represents strong support and resistance as well as an indication of the main trend.
In the example above, the cloud turns green or bullish way earlier than the actual break price did, and this was a sing to go long or at least not to be short anymore.
Going long when the cloud turned bullish (green) and placing a stop loss at the previous swing lower would have resulted in more than two hundred pips profit by Friday’s closing and this is only technical analysis. Considering the NFP (Non-Farm Payrolls) was released on Friday, one of the most important economic releases, one can say that the EURUSD pair was already bullish when the release came.
Another way to trade with the Ichimoku indicator is to look for support and resistances in a given trend. For example, if the cloud is green, it means the trend is bullish and we should look to buy dips.
All good, but where to enter? Any dips into the Tenkan and Kinjun lines are appropriate entries, while a deeper move into the cloud would open the gates for a reversal.
But trading with the Ichimoku not only gives the entry, but also the exit out of a trade as well as a potential reversal of the general trend.
Both of the above are being given by the Tenkan/Kinjun cross. These two lines are in essence similar with the classical moving averages, and a strong bullish trend is valid as long as Tenkan is above Kinjun, while a strong bearish trend goes on and on as long as Tenkan is below the Kinjun line.
In other words, if you’re looking to fade the trend or to trade a reversal, the first thing to come time mind is to look for a cross in the Tenkan/Kinjun relationship. That should be the exit out of the previous trend and the entry on the next one, basically looking for a trend reversal.
As a rule of thumb, the bigger the time frame the indicator is applied, the stronger the implications, so a Tenkan/Kinjun cross on the monthly chart is clearly more powerful than one on the daily or lower time frames, so this is crucial when interpreting where price is going to go next.
Moreover, the actual cloud represents support and resistance and the fact that we know in advance of the 26th period before the actual price coming to it is a major competitive advantage in front of markets. Imagine the monthly chart: it means we know future resistance or support levels 26 months before the actual price to go there!
All in all, the Ichimoku Kino Hyo represents a great contribution from the Japanese technical analysis approach that, together with the now famous candlestick techniques, revolutionized the Western technical analysis and made many in the West embrace them.
More details about candlestick techniques to be found on our next article here on ForexGator.com.