Markets

What is Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo is a technical indicator that gauges momentum while taking into consideration areas of resistance and support. It is a tool that has been proven to work and is also referred to as Ichimoku. Published by Goichi Hosoda, a Japanese newspaper reporter, in 1969, the analysis method is made up of different lines including the tankan-sen, kijun-sen, senkou span A, senkou span B, and the chikou span. Although the parts may portray Ichimoku as a difficult or complex strategy difficult to compute, once each of the parts is understood, traders begin to feel comfortable with the terminology and idea behind the approach. This is especially true given that once traders take a look at a chart, the method allows for an easy determination of the momentum, support, and resistance of an equity, playing true to the translated meaning of “one look” or “one glance.”

The parts of Ichimoku

Tenkan-Sen: This is the Conversion Line calculated by adding the 26-period high with the 26-period low over the past nine periods and dividing by two. It represents a main support and resistance level and can be an important figure signaling a reverse.

Kijun-Sen: This line represents the baseline. Investors calculate it by adding the highest high and the lowest low over the last 26 periods and then dividing by two. This line will indicate a confirmation of a trend. Given that the result is a primary support or resistance, a trader can use the line to signal a trailing stop-loss point.

Senkou Span A: It is the leading span whose result is the addition of the Tenkan-Sen and Kijun-Sen, divided by two. The result is plotted 26 periods ahead. This line will create the first edge of the cloud that helps identify where possible future areas of resistance of support will fall.

Senkou Span B: This is the second span (leading span B) that creates the second edge of the cloud calculated in the previous variable (Span A). The result is the addition of the highest high and lowest low throughout the last 52 periods and then dividing that number by two. Afterward, the number is plotted 26 periods ahead.

Chiou Span: This is the lagging span and is a representation of the cloud boundaries. The result is the middle point of the conversion and baseline calculated by adding these two (conversion line and baseline) and dividing the result by two. Unlike the other lines, it is plotted 26 periods back and shows areas of support and resistance.

Interpretations of the lines

Some of the basic interpretations of the technical indicator are bullish trends when the price is above the cloud area or bearish trend when below the cloud. Additionally, results in the middle of the cloud may depict consolidation or ranging. In other words, an above the cloud indicator signals a buy while a below the line signals a short trade. While in the cloud, traders should be cautious and should monitor the candlesticks.

Investors should also review how trends are behaving. If the price of the stock or equity is consistently on one side, then the indicator is useful. Otherwise, if the trend is ranging, Ichimoku may not be a good source of information for executing the current trade as it is best used with clear trends. Another important piece of information that the technical analysis tool provides is the cloud or baseline for placing stops. Because traders can use the system for the entirety of the analysis, the multiple time frame allow investors to create stops for their trades based on previous levels of support or resistance.