Many novice traders consider the Ichimoku indicator too complicated and do not use it in trading. This impression is created due to the fact that the tool consists of five lines at once, forming different levels and zones. But is this indicator so complicated as to refuse signals, or is the instrument still worth spending time on learning it?
Table of contents:
- What is the Ichimoku indicator
- How to install Ichimoku Kinko Hyo on a chart
- How to trade indicator signals
- Trading strategy with Ichimoku Kinko Hyo
- Pros and cons of the Ichimoku indicator
Description and features of the Ichimoku Kinko Hyo indicator
The Ichimoku indicator was developed much earlier than most technical analysis tools : it was created by the Japanese trader and analyst Goichi Hosoda back in the 30s of the last century. Of course, in those years, all constructions were made by hand, and this influenced the appearance of the instrument. After calculating the indicator values using special formulas, the points on the chart were connected by straight lines, therefore, unlike the classic moving averages, the Ichimoku lines have a somewhat “broken” appearance.
The Ichimoku Kinko Hyo indicator consists of 5 lines, each of which is built according to a specific formula:
- Kijun (blue line). To calculate it, at each point, the arithmetic average of the minimum and maximum of the candle is taken, and then the average value of this parameter is calculated for the last 26 candles. In simple words, this is an analogue of the 26-period moving average.
- Tenkan (red line). It is built on the same principle as Kijun, only with a period of 9.
- Chinkou (green line). The line drawn at closing prices, shifted 26 periods back.
- Senkou A (Up Kumo, orange line). Average of Tenkan and Kijun shifted 26 periods ahead.
- Senkou B (Down Kumo, gray line). The arithmetic average of the high and low of each candle for 52 periods, shifted 26 periods forward. Forms a common area in conjunction with Senkou A.
Formula for calculating the Ichimoku indicator
Max(High,N) – the highest of the highs for a period equal to N – intervals (for example, N days)
Min(Low,N) – the smallest low for a period equal to N – intervals
N – length of the period
M – period length
Chinkou Span – Current Close moved back by M
Senkou Span A = (Tenkan-sen + Kijun-sen) , shifted forward by M intervals
Senkou Span B = (Max(High,Z)+Min(Low,Z))/2 , shifted forward by M spans
Z is the length of the spans
The Tenkan and Kijun lines, individually and together, work as moving averages, their mutual intersections, as well as intersections with the price chart, give signals to buy and sell. Two Senkou lines form a support or resistance zone, being the first and second levels, depending on the trend.
Installing and configuring the indicator
The Ichimoku indicator is included in the standard MetaTrader 4 trading platform tools package , so its installation is quite simple. It does not need to be searched on the Internet and downloaded from third-party resources, just open the “List of indicators” tab on the terminal toolbar and select Ichimoku Kinko Hyo in the “Trend” category.
Three parameters can be changed in the settings window: the periods of the Tenkan, Kijun and Senkou B lines. Senkou A is calculated from the Tenkan and Kijun values, so it does not have its own parameter in the settings. Chikou is completely dependent on the closing price. The offset of each line is set by default and cannot be changed.
After the tool is installed on the chart and configured, you can proceed to trading in the Forex market .
Trade by Ichimoku Kinko Hyo
Ichimoku is a complex indicator that gives the trader many different signals. Some of them are quite simple, such as the “Golden Cross” that occurs when the Tenkan crosses the Kijun from the bottom up and gives a buy signal. A dead cross, on the other hand, is a sell signal and is formed when the Tenkan line crosses the Kijun from top to bottom.
You can also trade inside the “cloud” formed by the Senkou A and Senkou B lines (it is shaded on the chart). When the market is in a flat (this is signaled by Tenkan, located horizontally), you can open quick scalping trades when the price bounces from one Senkou line and rushes to another.
However, in order to make trading more efficient, it is recommended to open deals on several signals at once, formed from the interaction of the indicator lines with the price chart and with each other.
A simple, but already quite optimized trading strategy for Ichimoku Kinko Hyo looks like this (using the example of opening a buy deal):
- Tenkan line crosses Kijun from bottom to top.
- The price chart crosses both lines in the same direction.
- The price pushes up from the “cloud” formed by the Senkou lines.
The price bounced off Senkou and broke through Tenkan and Kijun from the bottom up
In this case, the indicator gives three signals at once, which increases the likelihood of making a profitable trade. At the same time, no additional indicators need to be installed on the chart, all technical analysis is carried out using one tool.
Despite the complexity of Ichimoku, some professional traders combine it with other indicators. This approach requires more experience and speed of decision-making, however, after some practice, it will not seem too difficult even for a novice trader.
Strategy Ishimoku + Stochastic
Ichimoku is a trend indicator, so it is most logical to supplement its signals with an oscillator filter. Ichimoku works best in conjunction with the Stochastic, since RSI, although a fairly popular indicator, very rarely gives signals, which means that matching readings of two indicators will be even more rare.
In this strategy, the stochastic oscillator will warn the trader against making deals at those moments when the trend has already dried up, and the Ichimoku signal is clearly late.
Sell trades using the Ichimoku + Stochastic strategy are opened under the following conditions:
- The lines on the chart line up in the order Kijun-Tenkan-price.
- The price is repelled from the “cloud”.
- Stochastic is not oversold, the oscillator lines are directed down.
The strategy is quite versatile and suitable for trading on almost any timeframe, except, perhaps, M1 and M5. As a trading asset, you can use Forex major pairs, as well as CFDs on gold and silver.
Advantages and disadvantages of Ichimoku Kinko Hyo
Ichimoku is a fairly versatile and effective tool, moreover, it is more time-tested than any other technical analysis indicator. Ichimoku Kinko Hyo can be used to find signals in both Forex and the stock market , as well as when trading cryptocurrencies .
The main drawback of Ichimoku is common to almost all trend indicators – its signals are very often late. Lines built on averaged values show the previous price values in a modified form, but they cannot accurately and timely predict the moment of a new trend development. That is why Ichimoku must be combined with an oscillator, even if it seems that this Japanese instrument has enough signals of its own.
Trading in financial markets involves a high level of capital risk. In order to reduce risks, it is recommended to strictly follow the rules of money management and always set Stop Loss. All decisions that a trader makes while working on Forex are his personal responsibility.