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We have been discussing trend technical indicators. So far, we have talked about Moving Average Convergence Divergence (MACD), Moving Averages, and Bollinger Bands. You have learned the basics of those, and by now, you can easily deploy them in your trading. With them, you can detect when the market is either oversold or overbought. Based on your discovery, you can predict when it is likely headed next.
As far as trend technical indicators are concerned, we are not yet done. We believe the more options you have, the better. Having more options will enable you to experiment and eventually find out the particular one that works for you. An integral component of the recipe for trading success, after all, is discovering those tools that are suitable for you and learning to use them as best as you can. So, here, we will be discussing the Ichimoku Kinko Hyo.
Ichimoku Kinko Hyo is another trend technical indicator. It is of Japanese origin and a standalone indicator that can gauge prevailing trends and reversals in the market and the levels of resistance and support in them. It is generously illustrated, making it extremely popular, especially with visual traders. This can also make it look complicated, though. However, since you are not in this business to prove you have beautiful and clear charts, you should not have a problem with that.
Ichimoku Kinko Hyo
If you have been looking for a technical indicator that can give all the information you need on one chart, then the Ichimoku Kinko Hyo could be what you are looking for. Developed by the Japanese journalist, Goichi Hosoda, the indicator’s name is a Japanese phrase that loosely translates as “one-look equilibrium chart.” Being a trend indicator, it is most effective in trending markets where it helps traders pick high-probability opportunities.
Ichimoku Kinko Hyo. ©Babypips.com
It also helps traders to determine the exact momentum of price. For clarity, in trading, momentum is the strength of price in the particular direction in which it is advancing. Is it bullish or bearish? If so, for how long and how far? Being able to gauge the momentum of the price at any point in time enables you to be better informed about the right action to take, and this is precisely what Ichimoku Kinko Hyo helps you to do.
The Ichimoku Kinko Hyo consists of five lines known as the Tenkan Sen, Kijun Sen, Senkou Span A, Senkou Span B, and Chikou Span. Each of these lines has a specific way by which it is computed. The Tenkan Sen, also known as the conversion line, is calculated by adding the 9-period high and the 9-period low and dividing the result by 2. As a result, it translates to a moving average of the midpoint of the last 9 periods. It is usually red.
The Kijun Sen, also known as the baseline, is computed by dividing the product of the addition of the 26-period high and the 26-period low by 2. Often blue, this line is, therefore, plotted as a moving average of the midpoints of the last 26 days. Then there is the Senkou Span A, which is gotten by adding the Tenkan Sen and the Kijun Sen and dividing the result by 2. The Senkou Span A is, therefore, the midpoint of the Tenkan Sen and the Kijun Sen and aims to project the price 26 periods into the future.
The last two lines are the Senkou Span B and the Chikou Span. Add the 52-period high and the 52-period low, divide the product by 2, and you would have the Senkou Span B. It serves as a moving average of the midpoint of the previous 52 periods, while also seeking to project the price 26 periods into the future. The Chikou Span, green, is the current closing price plotted 26 periods back in time. Both Senkou Span A and B lines are orange.
To understand Ichimoku Kinko Hyo well, you have to know those components well but the Senkou Span the most. Why? It is the lines of the Senkou Span that form the ‘cloud’ known as the Ichimoku cloud. This cloud is green when the Senkou Span A is above the Senkou Span B. When it is in reverse, it is red.
How to Use Ichimoku Kinko Hyo
Many traders tend to be a bit confused when using the Ichimoku Kinko Hyo. This does not have to be so. So long you pay attention to the following guidelines, you can effectively deploy the indicator in your trading:
When the price is above the Senkou Span, the top line and the bottom line respectively serve as the first and the second levels of support. When the price is below it, the bottom line and the top line form the first level and the second level of resistance, respectively.
How to Use Ichimoku Kinko Hyo. ©Babypips.com
The Kijun Sen aims to predict price movements. As a result, the price will most likely continue to go up when the price is above it. Conversely, when it is below it, it will most likely continue to drop.
The Tenkan Sen helps to indicate the market trend. So, when it is moving up, it signifies that the market is trending. When it is not, the market is moving sideways, with no clear trend.
You have a buy signal when the Chikou Span crosses the price from below. On the other hand, a sell signal is generated when it crosses it from above.
Conclusion
This is the fourth installment in our series of posts on indicators, a set of invaluable tools for the technical analysis of currency pairs. With technical indicators, you can discern the market’s potential moves, which you can leverage for your gains. With them, also, you can get better and more successful at trading. However, you need to choose one that will be suitable for you for that to be achieved.
Beyond Moving Average Convergence Divergence (MACD), Moving Averages, and Bollinger Bands that we have discussed, Ichimoku Kinko Hyo is arguably the most effective and accurate technical indicator. However, if you are not keen on using any of these indicators yourself, you can use our Forex signals.
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