Ichimoku Kinko Hyo is an equilibrium chart which gives traders a visual representation of where market prices are heading.
Strangely enough this particular technical analysis tool wasn’t invented by mathematician but by a newspaper journalist. This particular chart is named ‘equilibrium chart’ has been gaining in popularity in the last few years. It shows where prices are likely to go in the future and looks at first glance extremely complicated with its myriad of colored lines.
Ichimoku Kinko Hyo:
The translation of the word Ichimoku is ‘one look’ and the translation for Kinko is ‘equilibrium’ hence this chart being named equilibrium chart. It in fact gives a visual view of where prices are going and therefore whether a long or short position should be in place.
As you can see the chart consists of five lines. These lines are comparable to moving average techniques and use the midpoints of the highs and lows of previous periods. In doing so the finished chart is able to show a clear picture of potential price action.
The chart has the following components.
The Tenkan Sen and the Kijun-Sen act like moving averages but with different time frames. The Tenkan Sen shown as an orange line uses 9 time periods. The Kijun-Sen shown as a purple line uses 26 time periods. The Chikou Span shown as a blue line is plotted using the closing price over 26 time periods. The Senkou Span A shown as a dark green line is plotted 26 time periods ahead and forms one side of the cloud shown as green dots. The Senkou Span B shown as a light green line is plotted using a 52 time period back and 26 time periods ahead and forms the other border of the cloud. Finally, Kumo is the cloud itself which is the area between Senkou A and Senkou B.
As with moving averages sell and buy signals are given when the lines cross over. When the orange line (Tenkan-Sen) crosses the purple line (Kijun-Sen) from below a bullish signal is given. Conversely when the orange line crosses the purple line from above a bearish signal is given.
How to interpret an Ichimoku chart and apply the data for a possible trade?
Unlike moving averages Ichimoku charts show various degrees of strength for sell and buy forex signals. For example where the price is trading above the cloud (Kumo) and the chart shows a bullish crossover signal as indicated by A; it is considered an extremely powerful buy signal. The same would be true for prices trading below the cloud and a bearish cross over signal occurred as indicated at B; this is considered a powerful sell signal. If however the price was trading inside the cloud any buy or sell signals would be considered of normal strength as in D. Finally, if a buy signal was given while the price was trading below the cloud, it would be considered extremely weak and conversely if a sell signal was given and the price was trading above the cloud that would be considered very weak too as indicated at C.
In conclusion the Ichimoku chart is an indicator which gives traders an idea of where prices are going and also provides buy and sell signals of various strengths.
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