How To Use Ichimoku Kinko Hyo
The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is the most non-standard indicator of the standard ones. You can use it to perform any type of analysis: evaluate the price momentum, find flat zones and determine the points of beginning of a trend, and build support and resistance levels.
It can serve as a basis for a complete trading strategy without the confirming indicators. Most importantly, it is available on practically all trading platforms as one of the basic indicators, including MT4/MT5. However, it is used rather rarely. The reason is that not only it consists of five lines, but it also forms price zones. For a person seeing this indicator for the first time, it seems confusing and the chart has too many lines. This review will introduce you to the specifics of the Ichimoku Cloud indicators, help you understand how it works and teach you to quickly and faultlessly find signals using it.
Ichimoku Kinko Hyo Review
The Ichimoku Cloud indicator was developed in Japan in the early 1900s for stock trading. However, it was published only in 1969 after full testing. Since then, it’s been featured as one of the basic indicators of many trading platforms.
How the components of the indicator are calculated:
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Kijun-sen (KS): the arithmetic mean between price extremes for the interval specified in the settings.
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Tenkan-sen (TS): the line calculation formula is similar, but the price is calculated for a shorter period. The timeframe for Tenkan-sen must be less than the Kijun-sen timeframe.
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Chikou Span (CS): Price Close of the current candle, shifted by the period selected in the settings. The value of the period is indicated in the Kijun-sen line settings.
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Senkou Span A (SSA): the arithmetic mean between Kijun-sen and Tenkan-sen, shifted by the period selected in the settings. The value of the period is indicated in the Kijun-sen line settings.
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Senkou Span B (SSB): the arithmetic mean between the maximum and minimum price over the period specified in the settings, shifted forward. The period for the calculation of the arithmetic mean is specified separately. The shift period coincides with the period specified in the Kijun-sen line settings.
Information for beginners. A period denotes the number of candles used in the calculation. For example, Kijun-sen uses a 26-period moving average by default, which means that the highest and the lowest prices of the latest 26 candles are used in the calculation. A shift means a shift of the indicator line to the left or right along the line axis.
On the chart, the indicator is displayed in the main window, superimposed on the price chart. Therefore, in order to avoid the price merging with the indicator lines, the Ichimoku Cloud is applied mainly to the candlestick chart or bars. A line price chart with an indicator is almost never used.
The elements of the Ichimoku Cloud:
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1
Tenkan-sen is the conversion line that shows the nature of the short-term trend. It is also used to determine the local support and resistance levels, which are intermediate on a long trend.
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2
Kijun-sen is the base line that shows the nature of a medium-term trend. Price breakouts of this line happen frequently; trend reversal is less frequent. The signals of this line are considered stronger ones. Crossing of Kijun-sen and Tenkan-sen with subsequent movement in the same direction is considered an amplifying signal.
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3
Senkou Span A and Senkou Span В are Leading Span A and Leading Span B (indicators). These lines are used to build the cloud (Kumo), a range that is colored on the chart. The settings provide two types of colors that determine the upward or downward movement in the long term. For example, if the price is above the cloud it indicates an upward movement, and this is a signal to open a long position.
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4
Chikou Span is a Lagging Span (indicator), an analogue of an oscillator, showing the degree of price deviation from previous values. The moment of the end of the trend and a possible reversal are shown on this line.
On the charge, the indicator looks like this:
The elements of the Ichimoku Cloud
TS – red line, KS – blue line, SSA и SSB – lines forming brown and pink zones, CS – green line.
Pros
👍 Pros of Ichimoku Cloud indicator:
• Universality. The indicator allows you to conduct a full chart analysis thanks to a combination of several instruments. It draws trend zones, shows the moments of the change in the direction of price movement, and indicates overbought/oversold zones. While being a trend indicator, it also partially performs the functions of an oscillator.
• Few settings. The indicator is easy to optimize and adjust to any asset.
The indicator combines the functions of moving averages, oscillator and chart analysis.
Cons
👎 Cons of Ichimoku Cloud indicator:
• Information overload of the indicator. The lines and zones distract traders from the actual analysis of price movement – from candles, pattern formation, etc. Finding signals quickly requires a lot of practice and patience.
• Ambiguity of signal interpretation. You can determine which signals are accurate and which are false only by testing the indicator on a specific trading asset.
• Working on long intervals. The indicator is most frequently used on intervals from H1.
This indicator is complex and therefore suitable for those with knowledge of technical analysis higher than average.
How does Ichimoku Kinko Hyo work?
What is the right way to use the Ichimoku Cloud indicator? The indicator is intended only for medium and long-term trading. Initially, the instrument was tested on daily and weekly timeframes, but later its signals were adjusted to smaller periods. In trading theory, you can find trading strategies with H1-H4 timeframes.
The indicator is used:
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To determine trend movement in the market. If the trend is determined, you can enter the market with a delay, provided you are trading on daily or weekly timeframes.
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To search and display strong support and resistance levels.
The indicator was developed for the Asian session, which is described by smoother and longer price movements without strong, sharp volatility jerks.
Indicator signals:
Kumo is the space between SSA and SSB, which by their principle of operation resemble moving averages. The cloud edges identify support and resistance levels. If the price is inside the Kumo zone, the market shows no visible trend.
If the price goes upward through the top of the Kumo or downward through the bottom of the Kumo is a signal of a trend. For example, the price under the bottom of Kumo indicates a downward trend in the market, Senkou Span A and Senkou Span В lines serving as support and resistance levels respectively.
Example 1:
Kumo
If you zoom out, you can clearly see the flat area. The pink cloud indicates a downward movement. For as long as the price is in this area, there is no trend; the price going down through the edge of the cloud indicates the beginning of a trend movement in the same direction.
Example 2:
Kumo
A flat is observed in the market, which is later confirmed by an indicator – the price enters an upward cloud. After a small breakout downwards, the price resumes its upward trend.
The signal is ignored if the price moves downward through the upward cloud or upward from the downward cloud.
Kijun-sen. The line is used as a signal confirming a long-term trend. If the price moves above the line, the upward movement is likely to continue.
If the price is above the Tenkan-sen line, it is seen as an amplifying signal. Tenkan-sen in this case is used to confirm the trend. If the line is growing, there is a trend, while horizontal movement indicates a flat. The signal for a short position is mirrored: the price moves below the Tenkan-sen line.
Kijun-sen and Tenkan-sen are also analogs of moving averages, which are calculated by averaging highs and lows. Since Tenkan-sen has a shorter period, it is responsible for the short-term trend, and Kijun-sen for the medium-term trend. Their combination gives practically the same signals as fast and slow EMA crossovers.
Chikou Span. This line determined the degree of deviation of the current price from the previous values. If the line is far away, it speaks for a strong deviation from its standard values. The further it is, the more likely the price will reverse.
Chikou Span has the properties of an oscillator, showing the overbought and oversold moments on the long-term movement.
Ichimoku Kinko Hyo Settings
The indicator does not have many settings, which still does not make its optimization during the testing period easier.
Tenkan-sen period must be shorter than the period of other lines – that is the advice, although technically you can set a longer period.
Kijun-sen period is used for periods in other lines and in shift calculations.
Senkou Span B period is the highest value. It is used exclusively to calculate this line.
The basic settings of the indicator cover a half of the weekly cycle, and therefore they can be used on the H1 timeframe. However, as the fundamental volatility grows, the signals lose their accuracy during intraday trading. Therefore, the recommendations for working with the indicator contain the following types of settings:
12, 24, 120. These settings are suitable for a trending market in long-term strategies. Inside the price channels, the indicator will give many false signals, but it can be used on the trend movement to find the pivot points.
120, 240, 480. This is another settings option for the one-hour timeframe that allows to filter out flat periods. The number of signals is lower, but their accuracy is better.
In the Colors tab, you can set the color of the lines and how they are displayed (solid line, dotted line, and their thickness). In the Visualization tab, you can set the timeframe, on which the indicator is shown – on all timeframes or specific ones.
Ichimoku Kinko Hyo Indicator Best Strategies
Ichimoku Cloud trading strategies are built to determine which signal is key and which one is weaker.
In a conservative long-term strategy, the theory recommends adhering to the following algorithm:
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Search for preliminary signal. The cloud provides this signal. The signal is when the price enters the cloud and stays in it for some time. Since the edges of the cloud are strong support/resistance levels, you can consider the option of short-term trading inside the flat area. However, for a long-term strategy, this is a preliminary signal.
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Search for the main signal. The main signal is when the price moves out of the cloud, and the direction of the price must coincide with the direction of the cloud. The second condition is the crossing of Tenkan-sen and Kijun-sen lines, and the price’s position relative to them. The price momentum can break through the edges of the cloud, but that does not mean that the price will not return to the cloud. KS and TS give the main signal.
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Search for confirming signal. CS plays its role. Close location of the line to the price on candlesticks near the crossing of KS and TS is the confirming signal.
You can use Chikou Span to search for the points of exit from the market. If the line moved far away and a reverse pattern appeared, this is a signal to close the position. For short-term trading inside the cloud, the Stop Loss order is set outside the cloud at a distance of 5-10 pips.
Example.
Chinkou Span
The price entered the falling cloud, drew a reversal pin bar just beyond its upper border and moved down. The red Tenkan-sen line crosses the blue Kijun-sen line. The two signals coincided, but the green Chikou Span line is above the price at a long distance. You can open a trade at the moment when the price moves out of the cloud downwards, but such signals are considered high-risk signals.
Should I Use an Ichimoku Kinko Hyo?
Ichimoku Cloud is an independent indicator you can use to build a full trading strategy. It provides all three types of signals: preliminary, main and confirming. The formulas of its lines include tools for averaging and comparison with previous periods (shift forward and backward).
However there are many nuances you need to consider:
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You need to follow all possible signals. They do not always coincide simultaneously. Therefore, you need to understand in which case, for example, the crossing of KS and TS lines will serve as the strongest signal, and in which – the location of the price relative to all indicator lines, etc. It is possible that waiting for all conditions to coincide will result in a late entry.
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Relative infrequency of signals, that is if you seek for when all conditions coincide.
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The issue of location of clouds in relation to price. The price often breaks through the clouds, breaking the theory that SSA and SSB are strong support and resistance levels.
The Ichimoku Cloud does not enjoy particular popularity due to the complexity of signal analysis and because it mainly works on daily timeframes. However, if you want to improve your professional level and support conservative long-term strategies, we recommend that you test using a demo account.
FAQs
H3 What kinds of signals does the Ichimoku Cloud give?
Main signals:
Price moving downward out of a bottom cloud – a signal to open a short position, upward from a top cloud – long position.
Crossing of Tenkan-sen line by Kijun-sen line: from bottom to top – long position, from top to bottom – short position.
“Three-line signal” – crossing of TS, KS, CS. Opening a position in the direction of divergence.
Change of the color of the cloud – a signal of a change of the trend.
Strong deviation of Chikou Span from the price – a signal for the trend reversal.
Additional signals include price placement relative to the indicator lines, price crossing TS, KS. The more conditions coincide, the stronger the signal.
How accurate are the signals provided by the Ichimoku Cloud?
You have to get used to this indicator. Several conditions must be met to get an accurate signal, and learning to instantly see when they coincide requires practice. The Ichimoku Cloud gives accurate signals, but you need to know how to find them. Use a demo or cent account to gain experience, add confirming instruments and search for patterns. The effectiveness of the indicator signals should be at least 70%.
What are the tips for using the indicator?
Tips:
Use the indicator only on H1 timeframes. Strategy option: search for a trend movement on the daily timeframe and open a position on H1. The developer advises using the indicator on daily intervals.
Try to find signals that are confirmed by all indicator lines, even if they are infrequent.
Discount some lines of the indicator: you can remove them from the chart so that they don’t distract you. You can do it by setting the line color to “None”.
Before launching a trading strategy on a real account, launch it in a test mode on MT4, on a timeframe of at least five years.
What other instruments can be combined with the Ichimoku Cloud indicator?
The Ichimoku Cloud is a full-fledged trend indicator with some lines built based on the principle of moving averages. In trading strategies, this indicator serves as the main one. Additionally, its signals can be filtered with standard oscillators, such as RSI, CCI, MACD. You can also track formation of patterns that indicate possible pivot points.
Team that worked on the article
Oleg Tkachenko is an economic analyst and risk manager having more than 14 years of experience in working with systemically important banks, investment companies, and analytical platforms. He has been a Traders Union analyst since 2018. His primary specialties are analysis and prediction of price tendencies in the Forex, stock, commodity, and cryptocurrency markets, as well as the development of trading strategies and individual risk management systems. He also analyzes nonstandard investing markets and studies trading psychology.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.
Olga’s motto: Do well and you’ll be well!