Many traders dream of a perfect trading system, which would bring only profit. But ideal trading systems do not exist of course. To develop a system by own forces is very difficult, especially for a newcomer. That’s why traders copy someone else’s trading strategies, learn from mistakes or rely just on intuition. But many losses and errors can be avoided. To do this, you need to get acquainted with the Ichimoku indicator.
The Ichimoku indicator features
The Ichimoku Kinko Hyo indicator was developed in the 30s of the 20th century. Its author is a financial analyst from Japan Goichi Hosoda, also known under the pseudonym Ichimoku Sanjin. Goichi Hosoda created an indicator to predict the movement of Nikkei index on the stock market of Japan.
Nikkei Index or Nikkei 225 is the main index of prices on the stock market of Japan. It is calculated as the arithmetic average of the prices of 225 most traded companies shares. It reflects the general state of the Japanese market.
Ichimoku is one of the most popular indicators for the analysis of the Forex market. It can be used as a complete trading system, since it combines several approaches to forecasting of any changes on the Forex market. The Ichimoku indicator determines a trend, support and resistance levels, sends signals to open positions.
The Ichimoku indicator is already integrated into the MetaTrader 4 trading platform, so you have not to look for it by yourself. Traders use it, as a rule, on the candlestick chart on the higher time frames – H4-W1, since the indicator is considered to be less effective on the lower time frames. This technical indicator consists of 5 lines which we will consider further.
1st line – Tenkan-Sen – is the average price level in a short period of time. The line indicates a trend on the market, and also shows its direction. The steeper this line, the more pronounced is the trend. If Tenkan is directed from bottom to top, it shows the short-term uptrend. If it is directed from top to bottom – it is the downtrend. If the line is horizontal, that means a flat on the market. In the screenshot we can see the downward trend on the market.
2nd line – Kijun-Sen – is an analogue of the Tenkan line, but its values span a longer period of time. About periods we’ll talk later.
3d line – Chikou Span – this line is based on the closing prices and it is shifted backwards. It works on the same principle as the Momentum indicator. Chikou line compares the current price with the price several bars ago. If this line is above the price chart, it means that buyings are prevailed on the market. If below – sales.
4th line – Senkou Span A – is the average value of the Tenkan and Kijun lines. This line is shifted forwards the time period specified for the Kijun line, i.e. it is ahead of the price chart.
5th line – Senkou Span B – is the average price in the longest period of time. That is, three lines of Tenkan-sen, Kijun-Sen and Senkou Span B indicate the average value of the price, but in different time intervals. Also Senkou Span B line is shifted forwards in the time period specified for the Kijun line.
Senkou Span A and B form an Ichimoku cloud or Kumo. The cloud is hatched in the graph with color of the line which is higher. That is, if Senkou Span A is above Senkou Span B, the cloud will be drawn in its color, and vice versa.
If the price is above the cloud, so bullish moods prevail on the market, i.e. there are more buyers than sellers on the market. If the price is below the cloud, this suggests bearish moods, that is there are more sellers on the market. If the price is in the cloud, there is a flat on the market.
Senkou Span A and B lines also serve as dynamic levels of support and resistance. If the price is between them, the lower line becomes the support level, and the upper line – the resistance level. If the price is above the cloud, its upper line is the first support level, and the lower one is the second support level. If the price is below cloud, the lower line is the first resistance level, and the upper one is the second resistance level. In the picture we see two support levels:
Levels of support and resistance are the conditional lines between which the price moves a certain period of time. Then it can go up sharply, thereby overcome the resistance level, or go down and overcome the support level.
How to set Ichimoku in MT4 and what you need to know about periods
To apply Ichimoku indicator in the MetaTrader 4 trading platform, go to Insert – Indicators – Trend – Ichimoku Kinko Hyo. You will see the following values:
These are time periods that we have mentioned above. The period of 9 is set for the Tenkan line, 26 – for Kijun, 52 – for Senkou Span B. Each number indicates the number of weeks, if we use the weekly chart, or a number of days, if the daily one is used. That is, the value of the Tenkan line is constructed within the last 9 weeks (the average price of 9 weeks), the value of the Kijun line – within six months, i.e. 26 weeks, the value of Senkou Span B – within the year – 52 weeks.
These parameters 9-26-52 were used by Goichi Hosoda. He argued that these are best to forecast the movement of the Nikkei index. Someone trades with the same periods on the Forex market. You can adjust the periods to your needs and observe, with what parameters Ichimoku indicator will be the most effective.
The Ichimoku indicator signals
Ichimoku indicator lines intercross and interact with each other, giving some signals. We suggest to consider the most popular ones:
- “Death Cross” – Tenkan crosses Kijun from top to bottom. This suggests that the currency pair should be sold.
- “Golden Cross” – Tenkan Kijun crosses Kijun from bottom to top, that is a signal to buy the currency pair.
- If Chikou crosses the price chart from top to bottom, it is a sell signal, one should open sell orders. If Chikou crosses the price chart from bottom to top it is better to open buy orders.
- If Senkou Span A and Senkou Span B line intercross with each other, this indicates a possible trend reversal. When Senkou Span A crosses Senkou Span B from top to bottom, you need to sell. When Senkou Span A crosses Senkou Span B from bottom to top, then you need to buy.
Ichimoku indicator may seem to be complicated. But just try to use Ichimoku indicator and you’ll see how useful it is. This will not only tip for a trader, but also to the whole trading system.
We wish you successful trading with Ichimoku indicator!