Above the clouds

7 years ago - Published in Commodities, Finance

The Ichimoku Kinko Hyo
The Ichimoku Kinko Hyo is for many traders the Holy Grail, which they have been looking for all the time. Translated, he means "everything at a glance". Let's take a closer look at the so-called cloud indicator and show how you can make a meaningful contribution to your trading decisions.

 

The Ichimoku method

The Ichimoku method is used by traders and institutional investors – practically used across all asset classes. It proves itself not only in equities, but also in commodity exchanges and foreign exchange markets. With this method, you immediately recognize the market phase you are currently in the right buying- and selling-times. The position of the price in the chart is decisive: Is it above, below or in the cloud? You will therefore often hear the term "cloud indicator". The cloud (or Kumo) is the heart of the Ichimoku. The name came about because the different lines in the chart look like a cloud.

The five trend lines of the indicator

In the indicator, there are a total of five trend lines indicating the support and resistance areas as well as trade signals. For a better understanding, these trend lines are shown in Figure 1: Chikou Span (dark green line): This line represents the current price of the past 26 periods (mostly trading days). It is, so to speak, the "follow-up indicator". In concrete terms, the Chikou Span evaluates the signals and their meaningfulness. Tenkan Sen (blue line): This line represents the mean value from the highest high and the lowest low of the last nine periods divided by two. The Tenkan Sen is also called the "rotating line". Kijun Sen (violet line): This line is well suited as a trailing stop for profit protection. The Kijun Sen is the average of the highest high and the lowest low of the last 26 periods divided by two. The Kijun-Sen line confirms current trends, but can also serve as a support or resistance line.

 

The next two lines are crucial for "cloud formation". They build on the three previous lines: Senkou Span A (light green line): This is the pre-existing line, which projects the price of 26 days into the future. It is created by adding Tenkan Sen and Kijun Sen and then dividing by two. The Senkou Span A forms a border of the cloud. Senkou Span B (red line): The Senkou Span B is the second leading line that forms the other cloud-border. This is a further average of the highest high and the lowest low of the last 52 periods divided by two. The Senkou Span B is also projected 26 days into the future. It serves primarily as a signal line and as a support or resistance line. The gap between Senkou Span A and Senkou Span B forms the cloud. It is the central point and the heart of the trend following indicator. The cloud borders show current and possible future support and resistance points.

Significant signals

Depending on how the price is related to the Ichimoku indicator, trading signals can be derived from this. A buy-signal is generated, for example, whenever the price crosses the top border of a cloud. If the Chikou Span also leaves the cloud up, it is a strong buy-signal (Figure 2). A sell signal, on the other hand, is triggered when the price breaks through the lower border of a cloud. If the Chikou leaves the Kumo down, it is again a strong sell-signal (Figure 3).

 

 

The trends with the Ichimoku

After getting to know the Ichimoku and its structure, we come to the trends. We basically distinguish between three possible phases: the upward, the downward and the sideways-trend. An uptrend is characterized by higher highs and higher lows – reverse of the downtrend. If the prices stay at a certain level, without having a clear direction, then it is a sideways phase. In reality, there are rarely trends drawn with a ruler, the development of the price often look more complex. The Ichimoku can show here the trend strength and the trend direction. This allows the signals to be traded in the direction of the current trend. This allows you to see whether you are dealing with a strong or weak buy or sell signal.

  • Uptrend: In the case of an intact uptrend, the price should be quoted above the cloud. The Tenkan Sen is ideally located over Kijun, the Chikou Span over the price of 26 periods ago. The cloud serves as confirmation: the thicker the cloud, the stronger the trend can be classified.
  • Downtrend: As long as the price is is below the cloud or the Chikou Span under the price of 26 periods and the Kijun Sen over the Tenkan Sen, we speak of an intact downward movement.
  • Sideways phase: The cloud often changes the color (depending on the setting). Tenkan Sen and Kijun Sen signal a possible sideways span by frequent crossing. A strong buying or selling signal results when a high or a low point is permanently overcome.

Conclusion

The Ichimoku is quite close to a perfect indicator. In one of the next editions we will analyze with his help DAX and Co. Combined with a sophisticated risk management, it is a wonderful tool to survive in the markets. Never forget: "The most important thing about money management is the management of risks, not the management of returns." (Benjamin Graham)

 

Author

 

 

Martin Chmaj has been active on the stock exchange for nine years. Meanwhile, he is an independent trader and investor. He writes analyzes and publishes articles on the DAX and Co. in his blog. In addition, visitors to the site can experience his strategies at first hand. www.ziel20.wordpress.com

 

 

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