How to use the Ichimoku Kinko Hyo technical indicator

The Ichimoku Kinko Hyo technical indicator was created by Goichi Hosoda in 1968. This indicator can be a good trading system in itself. It allows you to: assess future price dynamics, find trading signals and determine support & resistance levels.

The expression ichimoku kinko hyo translates as "a look at a chart in equilibrium". Also, keep in mind that this indicator is mainly used with JPY pairs.

Ichimoku consists of 5 indicators and a cloud called the Kumo:

Kijun Sen (blue line): the standard line, it represents the point of equilibrium. (average of the low and high points over the last 26 periods)

Tenkan Sen (red line): the turning line, it represents the trend. (average of the low and high points over the last 9 periods)

Chikou Span (green line): the lagging line, it moves in time with the current price, but is projected 26 periods in the past. (current price close, shifted 26 periods into the past)

Senkou Span A (orange line): it shows upcoming support and resistance levels. (average between Kijun and Tenkan, projected 26 periods into the future)

Senkou Span B (purple line): it confirms a change in the trend. (average between Kijun and Tenkan, projected 52 periods into the future)

Senkou

If the price is higher than the cloud formed by the Senkou A and B lines, the top line serves as the first support level, while the bottom line serves as the second support level.

If the price is lower than the cloud, the bottom line forms the first resistance level while the top line is the second resistance level.

Kijun Sen

The Kijun Sen line is an indicator of the future price evolution.

If the price is higher than the blue line, the uptrend may continue.

If the price is below the blue line, the downtrend may continue.

Tenkan Sen

The Tenkan Sen is a market trend indicator.

If the red line moves up or down, it indicates that the market is in a trend.

If it moves horizontally, it indicates that the market is in a trend-less range.

Chikou Span

The Chikou line represents the market's memory, as it displays prices shifted 26 periods back. It's a confirmation of market sentiment.

If the green line crosses the price in an upward direction, this is a buy signal.

If the green line crosses the price in a downward direction, this is a sell signal.

How to trade using the Ichimoku Kinko Hyo indicator

Trading support & resistance levels and cloud breaks

The cloud (Kumo) is shifted in the future by 26 periods, so it can anticipate support and resistance zones that are stronger when the cloud is large and easier to break when it is small.

The cloud also allows you to identify a trend change when the Senkou Span lines intersect and the price breaks through the cloud. The buy signal is even stronger if the green line that is also shifted by 26 periods breaks through the cloud.

Crossing of the Tenkan Sen and Kijun Sen lines

The crossing of the red line with the blue line typically indicates a good entry point.

• Bullish crossing over the cloud: buy.
• Bearish crossing below the cloud: sell.

Crossing of the price and the Kijun Sen line

The crossing of the price and the blue line also offers a trading signal, once again by taking into account the position of the price with respect to the cloud.

• Bullish crossing over the cloud: buy.
• Bearish crossing below the cloud: sell.

Crossing of the price with the Chikou line

• Bullish crossing of the green line with the price: buy signal.
• Bearish crossing of the green line with the price: sell signal.

The optimal entry point according to the Ichimoku indicator

The numerous signal indications and confluences by the Ichimoku indicator make it possible to find reliable entry points.

A sell signal materialises when the price breaks through the cloud and positions itself below the Kijun Sen (blue) and Tenkan Sen (red) lines. The signal must be confirmed by the green Chikou Span line which also breaks through the cloud. The stop loss should be placed just above the blue Kijun line or the resistance level formed by the cloud. The exit from the trade can be done when the price breaks through the blue or red line.

You can obviously use the opposite process to find a good buy signal.