Ichimoku is a fancy Japanese name for a complex technical indicator. Its main components are still moving averages. Ichimoku looks intimidating but ones we understand its components and the significance of the meaning of their interaction every trader can find it very useful. Let us look at Ichimoku components. Out of respect for its creator Goichi Hosoda, a journalist, we keep naming Ichimoku components by their Japanese names: * Tenkan-sen shows the average price value during the shorter time interval defined as the sum of maximum and minimum within this time, divided by two (usually from 6 - 10);
* Kijun-sen shows the average price value during the longer time interval defined as the sum of maximum and minimum within this time, divided by two (usually from 18 - 25);
* Senkou Span A shows the middle of the distance between two previous lines shifted forwards by the value of the second time interval;
* Senkou Span B shows the average price value during the longest time interval shifted forwards by the value of the longer (Kijun-sen) time interval (somewhere between 45 and 60 periods).
* Chinkou Span shows the closing price of the current candle shifted backwards by the value of the longer (Kijun-sen) time interval.
1) First part of Ichimoku is a change in trend. Tenkan-sen and Kijun-sen serve as simple moving average crossover. When Tenkan-sen crosses Kijun-sen top-down we get sell indication and we get buy indication when Tenkan-sen crosses Kijun-sen bottom-up.
2) Second part of Ichimoku is support and resistance indication combined with volatility measure. Senkou Span A and Senkou Span B form a “Cloud” or Kumo. Besides shoving the support and resistance levels only, comparing to pivot points, the Kumo is also an indicator of volatility.
3) The third part of Ichimoku shows market sentiment. Chinkou Span is a measure of market sentiment. When sellers dominate the market, the Chinkou span will run below the price trend. When a pair remains bid in the market or is bought up, the span will rise above the price action.
Ichimoku Kinko Hyo Sample Setup
The picture above shows Ichimoku (7, 22, 52), with Tenkan-sen in red, Kijun-sen in blue, and Chinkou Span in pearl white. Senkou Span A (Up Kumo) is brown and Senkou Span B (Down Kumo) silver.
How to trade using Ichimoku:
Look at the Kijun-sen / Tenkan-sen Cross - The potential crossover in both lines will act similar to moving average crossover. When short term trend crosses longer term trend it is a significant point in price action and always indicates a change.
Confirm the down or uptrend with Chinkou Span – If the market sentiment is in line with the crossover the probability of the trade going in the right direction will increase.
Price action needs to run out of the Kumo (Cloud) - Anticipated down or uptrend needs to make a clear breakthrough of the cloud of resistance or support because when price hovers inside the Kumo it is caught in a channel. Then the cloud margins form the support and resistance levels.
If the price is above the cloud, its upper margin forms the first support level, and the bottom margin forms the second support level.
If the price is below cloud, the lower margin forms the first resistance level, and the upper one forms the second resistance level.
If the Chinkou Span line traverses the price chart in the bottom-up direction it is signal to buy. If the Chinkou Span line traverses the price chart in the top-down direction it is signal to sell.
If the price is higher than Kijun-sen, the prices will probably continue to increase.
Tenkan-sen is also used as an indicator of the market trend. If this line increases or decreases, the trend exists. When it goes horizontally, it means that the market has come into the channel.
This intel first appeared on: http://rurzag.wordpress.com/
