What is Ichimoku Indicator and how to Use it

Almost all experienced traders use a variety of tools in the Forex world to interpret market movements better. In some cases, these tools are like geometric shapes, such as Fibonacci. However, there are other tools such as pivot points or support and resistance levels that can interpret the market with just a few simple mathematical formulas. But have you ever heard of Ichimoku? What is the Ichimoku cloud? If you have never used this tool to analyze the Forex market, you can learn many things about it in this article and use it as a tool in future analysis.

What is Ichimoku?

Ichimoku Kinko Hyo, briefly known as Ichimoku, is a technical indicator used to measure market movements as well as areas of support and resistance that may form in the future. The literal meaning of the expression is balance at a glance. This indicator was first developed by a Japanese journalist named Goichi Hosoda, and then 20 years later, in 1960, he published his method in a book entitled The Business System.

Western countries have become interested in this method in the 1990s. Ichimoku is compatible with any trading method (such as scalping, day trading, or swing trading). It also enables price analysis in different asset charts (such as Forex, stocks, futures, cryptocurrencies). Traders can find an entry or exit signal by analyzing the Ichimoku chart at various timeframes.

Ichimoku cloud

Ichimoku Cloud is an important feature in technical analysis in transactions. Traders mainly use it to identify buy and sell signals. This method is based on the candlestick chart and was developed to increase the validity and precision of price movements. The Ichimoku indicator, which is one the of continuous indicators, includes more data compared to the candlestick chart because it also considers other elements such as time and price. Using the Ichimoku cloud may seem very complicated to beginners at first. But understanding the meaning of each line and its role fades this complexity. Several elements help the formation of the Ichimoku cloud. In general, Ichimoku has 5 fundamental elements, which are:

1) Tenkan-sen

Tenkan-sen, also known as the conversion line, indicates short-term trends. Tenkan is also an average and is usually calculated in 9 different time periods. We can calculate it by adding the highest ceiling price to the highest floor price during the last 9 periods, and then divide the result by 2. The result shows a support and resistance key level as well as a return signal. You should know that Tenkan-sen is different from the exponential and simple moving averages because they experience less fluctuation.

Tenkan-sen = (highest ceiling price of last 9 period + highest floor price of last 9 period) / 2

2) Kijun-sen

Kijun-Sen is also known as the baseline. This line is similar to a slow moving average line because it shows long-term trends. This average is calculated over a phase of 26 periods. Therefore, we calculate the average of the highest ceiling price and the lowest floor price in the last 26 periods, and then the result is divided by two. The obtained line represents the support and resistance key lines and confirms a trend change. Kijun-Sen reacts to the highest and lowest prices and describes the balance between buyers and sellers.

Kijun-sen = (the lowest floor price of 26 periods + the highest ceiling price of 26 periods) /2

3) Senkou Span A

“Senkou Span A” predicts the future support level, and it is famous for being very accurate until the trend changes. It corresponds with the average Kijun and tenkan. The Senkou Span A is calculated by adding Tenkan-Sen to Kijun-Sen, dividing by 2, then the result will be drawn in the next 26 periods. The obtained line forms the edge of the cloud, which will identify future support and resistance areas.

Senkou A = (tankan + Kijun) / 2

4) Senkou Span B

Here again, we can see that Senkou Span B predicts the future support level, and it is famous for being very accurate until the trend changes. The Senkou B corresponds to an average of 52 past time periods and 26 future time periods. To calculate the Senkou Span B, we should add the highest price ceiling to the lowest price floor in the last 52 periods, and then divide the result by 2. The obtained line forms the other edge of the Kumo cloud, which will identify future support and resistance areas.

Senkou B = (the lowest floor price of last 52 periods + the highest ceiling price of next 52 periods) / 2

5) Chikou Span

Chikou Span is the closing price of the current period, which shows the period of the last 26 days in the chart. This line can indicate the possible support and resistance areas.

Conclusion

As you see, the developer of Ichimoku was a Japanese person, just like the developer of the candlesticks. The Ichimoku cloud contains a lot of information. For example, when the price is above the cloud, it indicates an uptrend, and on the contrary, when the price is beneath the cloud, it indicates a downtrend. Traders use Ichimoku cloud data to determine future support and resistance areas.

Due to containing more detailed information such as time and price, this indicator can be very precise. However, you should always remember that although this indicator has more detailed and accurate data, it is better to use it in combination with other indicators to achieve the best results.