Ichimoku Kinko Hyo

The Ichimoku Kinko Hyo trading method was developed by Japanese journalist Goichi Hosoda in the 1930s and published in 1968. This method aims to predict market trends and is applicable to all types of markets.

Graphically, it consists of five lines:

• Kijun-Sen: trend line (in red in the chart below)
• Tenkan-Sen: signal line (in dark blue in the chart below)
• Chikou Span: lagging price line (in dotted green in the chart below)
• Senkou Span A: main extension A (in thick light blue in the chart below)
• Senkou Span B: main extension B (in thin light blue in the chart below)

The gap between the Senkou Span A line and the Senkou Span B line is called the cloud, or kumo in Japanese, (the light blue zone in the chart below).

Calculation Method

The method uses two parameters, P1 and P2, defining two periods.

Kijun-Sen = (High + Low)/2 over the last P1 periods
Tenkan-Sen = (High + Low)/2 over the last P2 periods
Chikou Span = Lagged closing price of P1 periods
Senkou Span A = (Kijun-Sen + Tenkan-Sen)/2 projected P1 periods ahead
Senkou Span B = (High + Low)/2 over the last 2*P1 periods, projected P1 periods ahead

Indicator Parameters

P1: medium-term period, generally set to 26
P2: short-term period, generally set to 9

Note: users have the option to choose a different pair of periods.

Example

Interpretation

The Ichimoku Chart trading method provides three types of interpretation:

• Buy and sell signals:
  Such a signal is generated by the crossover of the signal line (Tenkan-Sen) and the trend line (Kijun-Sen).
  Buy signal when the signal line (Tenkan-Sen) crosses above the trend line (Kijun-Sen).
  Sell signal when the signal line (Tenkan-Sen) crosses below the trend line (Kijun-Sen).

  A buy signal is reinforced when the Chikou Span curve is above the closing price.
  Conversely, a sell signal is reinforced when the Chikou Span curve is below the closing price.

• Trend indicator:
  The Kijun-Sen line shows the direction of the trend.
  A breakout of prices above the Kijun-Sen line indicates a high probability of starting a bullish trend. In contrast, a breakout below indicates the beginning of a bearish trend.
• Support and resistance levels:
  The gap between the Senkou Span A and B lines forms the cloud (or kumo in Japanese). When prices are above the cloud, it acts as support. When prices are below the cloud, it acts as resistance. A breakout from the cloud can be considered a break of support or resistance, and therefore may serve as a buy or sell signal.