Trading using Ichimoku

Ichimoku is a technique developed by the Japanese journalist Goichi Hosoda, in 1930, between the first and second world war.

The method, which only appeared in the West in the 1990s, has been studied and perfected for over 20 years.

This technique, using only 5 different "lines", provides indications on future movements in the prices of financial instruments.

The most important factor to take into consideration is the price, which is what generates the lines. The prices, in fact, are the only element (together with the representation of Japanese candles) that contains all the useful information to the Trader for its operation and Ichimoku is a valuable tool in order to interpret the price.

Let's start by understanding the composition of our 5 Averages

Hosoda takes into consideration the sessions of the Japanese stock exchange of his time, which was then also open on Saturdays, and to set the periods of his averages he chooses 9 (one and a half week), 26 (1 month) 52 (2 months). Although all the stock exchanges are operational only 5 days a week, the settings remain valid and profitable the way they have been initially created.

Fundamental element: Ichimoku averages have the significant advantage of not being common moving averages, in fact they are "broken", in this way the inclination incorporates the momentum of the prices (the more the inclination is steep, the higher the speed and the price momentum), and when they become temporarily flat they signal the price area in which the values have stopped to consolidate with a lateral movement, and therefore that price level attracts corrections.

If we take into account the Tenkan line (red line), which is the one closest to the price, it will be much easier than it is crossed at  the time when momentum decreases giving us the information that the price is pausing to the line Kijun (blue).

The Kijun line instead is calculated over 26 periods and offers us important supports and resistances especially if it is flat as we can see in the image above.

The Ichimoku indicator is different from the other indicators, in fact we can consider it a real complete trading system.

Here are two interesting features which make this indicator different from all the others.

1. the Chikou line (black line): this line replicates the (closing) price but has moved back in time to 26 periods thus providing information in a historic sense. It is very important in order to understand how the current price is behaving by comparing it with the past price (in this case 26 periods). This line serves us as confirmation at the time of entry.

2. The Kumo (the cloud) is a forward-looking indicator which shows 26 periods in advance. The extremes of this cloud are composed of two averages that take the name of Senkou Span A (SSA) and Senkou Span B (SSB) giving us information in the "future" context.

REMEMBER, the cloud does not foresee the future of prices, but it indicates us supports and resistance that will be useful in the future. As a result, it may give us signs of upward or downward trends and, moreover, may indicate a possible change in trend when a cross between SSA and SSB occurs.

The formulas of the Ichimoku lines are as follows:
• Tenkan line : (HH + LL) of the last 9 periods / 2
• Kijun Line: (HH + LL) of the last 26 periods / 2
• SSA: (Current Tenkan value + Current Kijun value) / 2
• SSB: (HH + LL) of the last 52 periods / 2

The Chikou line does not have a formula because it is simply the price line (in closing) moved back by 26 periods.