Ichimoku Kinko Hyo: How to use the panoramic view of the market to improve your trading

But here’s something really interesting.

The most significant facet of the cloud charts is how price interacts with the cloud. Frequently one can observe the market turning right on the edge of the cloud. The market effectively creates its own driver that propels it into the future with the cloud mechanism.

It is affected by the cloud running ahead of itself into the future continuously offering us a singular roadmap. Cloud contacts are not always exact, but market frequently touches and rebounds or runs along the edges of the cloud.

The cloud is projected forward into the future and it is very valuable for traders, giving them a thinking time advantage and allowing them to be more prepared and ready to act when the market starts to change.

What it all boils down to is this.

It is very similar to learning how to drive a car, where we are taught that the distance traveled, from the moment we see the need to break, to the moment we actually put our foot on a break, is more than simply between breaking and stopping.

Cloud charts give us the feeling about the market moving forward and this element seems to be very appealing.

The Ichimoku indicator from inside out

The Ichimoku Kinko Hyo system consists of 5 elements:

• Tenkan Sen
• Kijun Sen
• Chikou Span
• Senkou A
• Senkou B

These five elements together tell the entire story behind the chart, and the key for the trader is to understand each component individually and how they work together.

Tenkan Sen

The first indicator is the Tenkan Sen, representing the short-term price movement.

Its formula is:

(Highest High plus Lowest Low)/2 for 9 periods.

While using the average of the Highest High and the Lowest Low in lieu of the closes, this indicator takes into account the intra-day volatility.

If the price crossed the Tenkan Sen in the direction opposite to the trend, one of the three possible outcomes will follow:

A. Minor short-term retrace - where price crosses over the Tenkan Sen, but doesn’t cross over the Kijun Sen. After it crosses the Tenkan Sen, the price then will continue to move in the direction of the dominant trend.

This usually occurs when short-term oriented traders take profit, while the long-term traders continue to hold their positions.

B. Major short-term retrace - will have price crossing both the Tenkan Sen and Kijun Sen in the direction opposite to the trend. After doing that, price ultimately will continue moving in the direction of the original trend.

In this case, long-term oriented position traders are taking partial profits by closing some of their positions.

But the predominant belief held among them is that the market will continue the trend after the major retrace has finished and therefore they are not closing out their entire position.

C. Countertrend: The third scenario is very much alike to the second scenario with market crossing over both the Tenkan Sen and the Kijun Sen.

The crossover occurs in the direction opposite to the trend, with market entering a consolidation phase (sideways) or a new trend develops.

In this sequence of events, the long-term oriented traders are closing their positions entirely, either over a certain time period or all at once in some instances.

Kijun Sen

The second indicator is the Kijun Sen. It represents the medium-term price movement.

The formula for the Kijun Sen is:

(Highest High plus Lowest Low)/2 for 26 periods

The Kijun Sen is analogous to the 30-period simple moving average used by most traders.

Just like the Tenkan Sen, the Kijun Sen is using the Highest High and the Lowest Low. In place of the 9-period for the Tenkan Sen, the Kijun Sen is using the 26 periods.

The Kijun Sen is one of the major parts of the Ichimoku system. Many Ichimoku strategies are built around this one indicator.

Price crossing the Kijun Sen signals that a trend may change direction. The task is to determine if a major retrace or reversal of the trend is about to occur. Neither can happen until Kijun Sen is crossed over by price.

When price crosses over the KijunSen, one of three possible cases can happen:

A. Minor retrace:

The market would bounce off the Kijun Sen and carry on the original trend path.

Think about it this way.

Some traders may have taken the profits but most of the major market participants are still holding their positions and possibly adding to them now with the minor retrace. The majority of traders at this point believe that the trend will continue.

B. Major retrace:

The market crossing over the Kijun Sen will eventually cross back to resume the dominant trend in place.

After experiencing some gains, the long-term oriented traders still have some open positions because the predominant belief is that the market will continue moving in the direction of the dominant trend.

C. Trend reversal:

The market crosses the Kijun Sen once and then never returns to cross back over the Kijun Sen to resume the dominant trend. Instead, the market enters a consolidation phase or begins a trend reversal. Most of the of the long-term oriented traders are closing their positions here.

Chikou Span

The third indicator is the Chikou Span.

It is described as the momentum of price, and it tells us if a trend can occur. We should keep in mind, a trend is where price continues moving in the same direction for a prolonged period of time.

The formula for the Chikou Span is:

Current Price moved back 26 bars.

Simple as it sounds, it is the indicator that produces the most confusion.

Basically, it is today's price shifted back 26 periods. We end up comparing today's price movements to price from 26 bars ago.

Kumo Cloud components

The 2 components of Kumo Cloud are the Senkou Span A and Senkou Span B.

Together, they provide a lot of market information that comes in the form of the open space between them. The gap or space, between the Senkou Span A and Senkou Span B, is known as the "Kumo Cloud."

lf the Senkou A is greater than Senkou B then the cloud is considered to be bullish and if Senkou A is less than Senkou B then it is bearish.

• Senkou A

This indicator represents first part of the Kumo Cloud. The formula for the Senkou A is:

(TenkanSen +KijunSen)/2 shifted forward in time 26 bars

• Senkou B

This indicator represents the second half of the Kuma Cloud. The formula for the Senkou B is:

(Highest High + Lowest Low)/2for 52 bars and then shifted forward by 26 bars

Five Ichimoku strategies every trader should try

1. Ideal Ichimoku Strategy.
2. TenkanSen / KijunSen Cross Strategy.
3. KijunSen Cross Strategy.
4. Kumo Cloud Breakout Strategy.
5. Future Senkou Crossover Strategy.

Ideal Ichimoku Strategy

This is a “high probability” safe and conservative approach that aims to get 30-40% of the trend.

The basic bullish rules for this strategy are:

• The market is trading above the Kumo Cloud.
• Tenkan Sen is greater than the Kijun Sen.
• Chikou Span is greater than the price from 26 bars ago.
• Future Senkou A is greater than the Future Senkou B.
• Price is near the Kijun Sen and Tenkan Sen.
• Tenkan Sen, Kijun Sen, and Chikou Span are not in a thick Kumo Cloud.

The basic bearish rules for this strategy are reversed.

Tenkan Sen/Kijun Sen Cross Strategy

This approach is similar to an old-fashioned moving average crossover in conjunction with longer-term SMA that controls the direction of the trade.

The basic bullish rules for this strategy are:

• Price is above the Kuma Cloud.
• Tenkan Sen is crossing above the Kijun Sen.
• Chikou San is in open space, meaning that there is nothing supporting/resisting price.
• Price, Tenkan Sen, Kijun Sen, and Chikou Span should not be in the Kumo Cloud.

The basic bearish rules for this strategy are reversed.

Kijun Sen Cross Strategy

This approach has the lowest risk factor compared to all the others.

The basic bullish rules for this strategy are:

• The price crosses over the Kijun Sen.
• If Tenkan Sen is less than Kijun Sen then Tenkan Sen direction should be facing upward while the Kijun Sen is flat.

Another option would be:

• Tenkan Sen value is greater than the Kijun Sen.
• Chikou Span is in open space, meaning that there is nothing supporting/resisting price.
• Future Senkou B is flat or facing upward.
• Future Senkou A value is less than Future Senkou B then Future Senkou A is facing upward.
• Price, Tenkan Sen, Kijun Sen, and Chikou Span should not be in the Kumo Cloud. If they are, it should be thick cloud.
• The market is trading close to Tenkan Sen and Kijun Sen.

The basic bearish rules for this strategy are reversed.

Kumo Cloud Breakout Strategy

The trade is entered in as soon as price breaks out of the Kumo Cloud. The basic rules of this strategy are the same as for the Kijun Sen Cross Strategy, except, instead of the crossing over the Kijun Sen, it has to close above the Kumo Cloud.

The rest of the requirements are identical to Kijun Sen Cross Strategy.

Future Senkou Crossover Strategy

This is more of a time-based approach.

The place where the Senkou A crosses Senkou B signifies a possible turning point in the trend. The basic rules of this strategy are the same as for Kumo Cloud Breakout Strategy, with an additional requirement that current Senkou A must be greater than current Senkou B.

The rest of the requirements are identical to Kumo Cloud Breakout Strategy.

Using clouds as your trading roadmap

The most important aspect of cloud charts is that the offer rigorous definition of the trend direction that one can get at a glance.

We can know immediately whether we are in uptrend or downtrend and adjust our decision-making accordingly.

Even if one doesn’t use the trading signals and rely on other techniques, the cloud still tells us whether we should be long in an uptrend or short in a downtrend.

The way clouds are constructed that shifts the cloud forward and the lagging line back offers a better view of the crossover point after a high or a low.

So what’s the point?

Try It Yourself

After all the sides of the indicator were revealed, it is right the time for you to try either it will become your tool #1 for trading.

In order to try the indicator performance alone or in the combination with other ones, you can use Forex Tester with the historical data that comes along with the program.

Simply download Forex Tester for free. In addition, you will receive 23 years of free historical data (easily downloadable straight from the software).

Did you happen to trade using Ichimoku Cloud strategies? Was is successful? Share your experience, it is important for us to know your opinion.