In the forex market, let’s consider a scenario where the price of a currency pair is trading below the cloud, indicating a bearish trend. Traders who enter a short position at the beginning of this trend and exit when the price breaks above the cloud would have made a profitable trade. When the price is above the cloud, it indicates a bullish trend, while a price below the cloud suggests a bearish trend. Additionally, the relationship between the Tenkan-sen and Kijun-sen can provide further confirmation of the trend direction.

The Chikou Span (the current price, projected 26 periods into the past) is another tool that generates trend-following signals. When this line crosses above price, it is generally considered a confirmation of the bullish trend, and a cross below prices is interpreted as a bearish signal. Ichimoku Kinkō Hyō is more commonly known as the Ichimoku Cloud, or just Ichimoku. The tool is a combination of technical indicators, which reveal the overall strength and direction of a market – while also identifying support and resistance, overbought and oversold levels, as well as trend shifts.

Why should I include Ichimoku Kinko Hyo in my trading strategy?

If the price were to enter the cloud, traders would watch for a potential reversal of the trend. The entry for the Ichimoku Kinko Hyo Cloud breakout trading strategy is simple – when the price closes above/below the Kumo, the trader places a trade in the direction of the breakout. Nevertheless, care does need to be taken to ensure the breakout is not a “head-fake” which can be especially prevalent when the breakout takes place from a flat top/bottom Kumo. To ensure the flat top/bottom is not going to attract price back to the Kumo, it is always advisable to look for another Ichimoku structure to “anchor” your entry to just above/below the Kumo breakout. This anchor can be anything from a key level provided by the Chikou Span, a Kumo shadow, or any other appropriate structure that could act as additional support/resistance to solidify the direction and momentum of the trade. When the Senkou span A and B switch places, this indicates an overall trend change from this longer-term perspective.

  • For example, combining the Ichimoku Cloud with Moving Averages, RSI, or MACD can provide a more comprehensive analysis.
  • In this way, the Kijun Sen itself acts as a “trailing stop-loss” of sorts and enables the trader to keep a tight hold on risk management.
  • Hosoda believed that using the average of price extremes over a given period of time was a better measure of equilibrium than merely using an average of the closing price.
  • Ichimoku Kinko Hyo is an all-in-one technical indicator that was initially developed for the Japanese markets in the late 1960s.

Flat Top/Bottom Kumos

The Ichimoku Kinko Hyo indicator was created by a Japanese newspaper writer to combine different technical strategies into one easy-to-use tool. In Japanese, “ichimoku” translates to “one look,” meaning traders only have to take one look at the chart to determine momentum, support, and resistance. The chart combines three indicators and offers a filtered approach to the price action for the currency trader. It not only can increase the probability of a potential trade in the FX markets but can help isolate true momentum plays. For instance, day traders are better off using it for shorter time periods of up to six hours while those with a long-term trading perspective could use it for daily or weekly trades. The thicker cloud tends to take the volatility of the currency markets into account instead of giving the trader a visually thin price level for support and resistance.

Also, the Cloud is better at filtering out noise than moving averages but requires practice to interpret. Traders who enter a long position when the price breaks above the cloud and exit when the price reaches the top of the cloud would have made a profitable trade. Hakan Samuelsson and Oddmund Groette are ichimoku kinko hyo independent full-time traders and investors who together with their team manage this website.

How does Ichimoku Kinko Hyo work in trading?

Between these two lines lies the Kumo “cloud” itself, which is essentially a space of “no trend” where price equilibrium can make price action unpredictable and volatile. Moreover, when the Leading Span A is above the Leading Span B, the conditions are bullish while the reverse indicates bearish sentiment. By combining these signals, traders can ascertain a better perspective on trend direction and improve timing across various market conditions.

Ichimoku Kinko Hyo and Trend Trading

  • Yes, Ichimoku has been successfully applied to various markets, including currencies, commodities, futures, and stocks.
  • While many may compare the Tenkan Sen to a 9-period simple moving average (SMA), it is quite different in the sense that it measures the average of price’s highest high and lowest low for the last 9 periods.
  • In the forex market, let’s consider a scenario where the price of a currency pair is trading below the cloud, indicating a bearish trend.
  • The width of the cloud also provides insights into the market volatility, with a wider cloud suggesting higher volatility.
  • Leading Span B is the slower moving boundary of the Ichimoku Cloud, derived from the midpoint of the highest high and lowest low over the past 52 periods, and plotted 26 periods ahead.

Likewise, point C represents a bearish Senkou span cross that generated a strong sell signal due to the price’s location at point D below the Kumo. The Senkou span cross at Point E generated a neutral buy signal since the price (point F) was trading within the Kumo at that point. While traditional take-profit targets can be used with the Kumo breakout trading strategy, it is more in line with the long-term trend trading approach to simply move the stop-loss up/down with the Kumo as it matures.

Likewise, if the price is trading below the Kumo that indicates that bearish sentiment is stronger. If the price is trading within the Kumo that indicates a loss of trend since the space between the Ichimoku Kinko Hyo Cloud boundaries is the ultimate expression of equilibrium or stasis. The informed Ichimoku practitioner will normally first consult the price’s relationship to the Ichimoku Kinko Hyo Cloud in order to get their initial view of a chart’s sentiment.

How do I interpret the Ichimoku Cloud (Kumo)?

Moreover, the cloud is often viewed as dynamic support and resistance, meaning that in an uptrend, traders will look to buy retests of the Senkou Span A, and will sell retests of that same line during a bearish trend. The thing to keep in mind with the Senkou span cross strategy is that the “cross” signal will take place 26 periods ahead of the price action as the Kumo is time-shifted 26 periods into the future. This relationship is obvious when one looks at the current price on a live chart, but less so when looking at historical price action.

As mentioned above, these two indicators act as a moving average crossover, with the Tenkan representing a short-term moving average and the Kijun acting as the baseline. Comparatively thicker than typical support and resistance lines, the cloud offers the trader a thorough filter. Developed in the 30 years leading up to 1969, the Ichimoku Cloud is one of the most well-developed and researched indicators.

A significant aspect of trend trading success lies in the trader’s mindset (trading psychology). However, if they cannot turn off this inner dialogue or at least ignore it and keep their focus on the long-term, then they are in for a very short, very bumpy ride as a trader. The example given above illustrates how the Ichimoku multi-dimensional view of support and resistance gives the Ichimoku practitioner an “inside view” of support and resistance that traditional chartists do not have. This enables the Ichimoku practitioner to select only the most legitimate, high reward trade opportunities and reject those of dubious quality and reward. The traditional chartist is left to “hope” that their latest breakout trade doesn’t turn into a head fake – a shaky strategy, at best.

The Senkou Span A is a leading indicator, plotted 26 periods ahead of the current price, providing insight into future support and resistance levels. When the Senkou Span A is above the Senkou Span B, it creates a bullish Kumo (cloud), suggesting a bullish market sentiment. Conversely, when Senkou Span A is below Senkou Span B, it forms a bearish Kumo, indicating a bearish market sentiment. The thickness of the Kumo can also give traders an idea of the market’s volatility and potential areas of price congestion. The Senkou span A is another one of the time-shifted lines that are unique to Ichimoku. Since it represents the average of the Tenkan Sen and Kijun Sen, the Senkou span A is itself a measure of equilibrium.

The chart in the Figure below shows some classifications of the Senkou span cross. The dashed vertical lines represent the 26-period relationship between price and the Senkou span cross. Thus, point A represents a bullish Senkou span cross that can be categorized as a “strong” buy signal due to the fact that price (point B), at the point of the cross, was trading above the Kumo.

Rather than providing a single level for support and resistance, the Ichimoku Kinko Hyo Cloud expands and contracts with historical price action to give a multi-dimensional view of support and resistance. A stock trader utilizing the Ichimoku Cloud and Relative Strength Index (RSI) to capitalize on short term trends identifies a bullish breakout, as price moves above the Cloud while the RSI breaks out, confirming upward momentum. Seizing the opportunity, the trader enters a long position, placing a stop just below the Cloud. When the price is above the Cloud, it acts as support, with the Leading Span B forming a strong base. In contrast, when the price is below the Cloud, it serves as resistance, making rallies into the Cloud potential selling opportunities.

Ichimoku Kinko Hyo: Understanding Its 5 Key Components

The entry for the Chikou Span cross is relatively straightforward – the trader initiates a position in the direction of the Chikou Span cross after taking into consideration the cross’s strength and other chart signals. For the highest probability of success, the trader will also look for the Chikou Span itself to be free of the Kumo as the Chikou Span can often interact with the Kumo much like the price curve. Being a “big picture” trend trading strategy, the stop-loss for the Kumo breakout strategy is placed at the point that the trend has been invalidated. Thus, the stop-loss for a Kumo breakout trade must be placed on the opposite side of the Kumo that the trade is transpiring on, a few pips/points away from the Kumo boundary. If price does manage to reach the point of the stop-loss, the trader can be relatively assured that a major trend change has taken place.

Over those years, Ichimoku was built to serve as an all-in-one technical indicator. The name suggests as much, as Ichimoku Kinkō Hyō translates to “equilibrium chart at a glance”. These settings were determined by Hosoda after extensive research, reflecting the Japanese business calendar at the time. Most professional traders still use these settings today, as they are considered optimal for many markets. Before you start trading using Ichimoku Cloud, you should consider using the educational resources we offer like NAGA Academy or a demo trading account.