Ichimoku Kinko Hyo (hereinafter referred to as Ichimoku), invented by Goichi Hosoda, is a trading method that combines many trend-following indicators, and the shape of these indicators is also "very different" compared to other Traditional indicator developed by the West.

Introduce

To trade with Ichimoku you need to understand a few concepts related to this system including:

  • Tenkan Sen (Signal line) - Highest / lowest price average of the last 9 periods.
  • Kijun Sen (Standard line) - Average of the highest / lowest prices of the last 26 periods.
  • Chikou Span (Slow Line) - The price closed back 26 periods.
  • Senkou Span A (Leading Path) - The average of Tenkan and Kijun sen is pushed up to 26 periods.
  • Senkou Span B (Leading Path) - Average high and low prices of the previous 52 periods, pushed up to 26 periods.
  • Kumo (Clouds) - The middle zone of Senkou Span A and B

Trading rules

Buy order rules:
  • The price is above the Kumo cloud
  • Tenkan Sen line is above Kijun Sen line
  • The Chikou Span line is above the price of the 26th candle from now
  • Senkou A is above Senkou B
  • The price is not too far from Kijun Sen and Tenkan Sen lines
  • Tenkan Sen, Kijun Sen, and Chikou Span lie outside the Kumo cloud.
Win order example:


This is an M30 chart, you see it looks a bit confusing right? Now let's analyze each entry condition:
  • The red Tenkan Sen line is above the purple Kijun Sen line. This signal is similar to a bullish crossover of the fast and slow-moving averages. The price and both of these lines are above the Kumo (a zone of support).
  • Before considering entering an order, you must look to the left side of the chart at the blue Chikou Span line, and make sure it is above the price. It lay on top of the rack before it detached and moved upwards. Combining these factors together, and with the bullish signal from the candle bar marked, we enter a buy order at the green arrow.
With this trade, the thin cloud in front is a pretty good price target (marked by two dotted lines).

Loss order example:


This is the chart USDJPY on the M20 frame, the setup failed in sideways market conditions.

Looking at the Kumo clouds, you can easily spot the setup. Tenkan line cuts above the Kijun line and is above the Kumo cloud.

Chikou Span was above the price 26 periods ago.

The strong bullish signal from the bars should be green, but after creating a double peak pattern, the price collapsed.

Rules for sell orders:
  • The price is below the Kumo cloud
  • Tenkan Sen line is below the Kijun Sen line
  • The Chikou Span line is below the price of the 26th candle from now back
  • Senkou A is below Senkou B
  • The price is not too far from Kijun Sen and Tenkan Sen lines
  • Tenkan Sen, Kijun Sen, and Chikou Span lie outside the Kumo cloud.
Strategy evaluation

At first glance, you can see that the Ichimoku is an overly complicated indicator that messes up the chart. It is true, however, as you get to know Ichimoku more closely, you will find that it is very effective in identifying trends. Furthermore, you can remove, or use another "cleaner" chart after analyzing Ichimoku to focus on pure price action.

Here are 3 worthwhile trend measurement tools for Ichimoku:
  • Tenkan Sen and Kijun Sen (similar to two moving averages but more effective, see more here)
  • Chikou Span (compare current prices with past prices)
  • Kumo (resistance zones - potential support)
If you follow the rules mentioned, you will likely encounter very few opportunities, but when the opportunity comes, your chances of catching a long trend are very high. Remember to pay attention to rule number 5, as this is how you can eliminate entry when the trend is exhausted.

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