Ichimoku Kinko Hyo
Funny name, great indicator! For the non-Japanese among you, “Ichimoku Kinko Hyo” translates to “one glance equilibrium chart”. Indeed, once we add this indicator to our chart, all we need is one glance to spot price movement bias, price trend, support and resistance. The Ichimoku Kinko Hyo indicator, short “Ichimoku Cloud”, consists of three lines (red, blue and green) and a cloud, also named “Kumo” after the Japanese word for “cloud”. While each line represents a series of averages, I will not get into how they are calculated, but rather how these lines can help us with our Forex trading.
The red line, also called “Tenkan Sen”, indicates the current trend. If this line fluctuates up and down, the market is trending, but if this line is mainly horizontal, then the market is ranging.
The blue line, or “Kijun Sen” predicts the future direction of the price. If the current price is above the blue line, the market has the potential to go even higher, and if the price is below the blue line, the market may slide further.
The green line, “Chikou Span”, or “lagging line” is a copy of the current closing price projected 26 chart periods behind. The crossovers between the green line and the price provide great sell or buy signals. When the green line crosses over the price from top to bottom, this is usually a signal to sell. On the other hand, when the price crosses the price from bottom towards the top, the market may reverse and this is a signal to buy.
It is very likely that you will encounter expressions such as “the price broke through cloud support”, or “the price pierced cloud resistance”. The “cloud” referred to in such a technical analysis is indeed the Ichimoku cloud. Even without all other lines, the cloud itself is a great way to determine additional future support and resistance levels. When the price is below the cloud, the bottom of the cloud is the first resistance and the top of the cloud is the second resistance. If the price is above the cloud, such as in the image below, the top of the cloud (marked with an orange line) is the first line of support, while the bottom of the cloud provides the second support.
The Ichimoku cloud indicator is most efficiently employed in trending markets and its use in ranging markets is not recommended due to the possibility of providing us with wrong signals. Before relying on this indicator for making trading decisions, we need to first identify whether the market is currently trending or ranging. There are a variety of other indicators better suited for ranging markets, such as the Bollinger Bands®.
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