How to interpret ICHIMOKU

Ichimoku Kinko Hyo Technical Indicator is a very useful tool as it provides a good overview of the market in one glance.

Timeframes to use: all.

Main elements:

• There are 2 moving averages:
  1. Tenkan-sen (red line) or conversion line – it’s a short-term MA (usually 9 periods).
  2. Kijun-sen (blue line) or the base line – it’s a longer-term MA (usually 26 periods).
• There are 2 more moving averages which are shifted forwards and shown ahead of the prices:
  1. Senkou Span A (short-term MA).
  2. Senkou Span B (longer-term MA).
     The space between these lines is painted with color and is the Cloud (or Kumo).
• There’s Chinkou Span (green line) – closing price of the current candle shifted backwards.

How to interpret:

Things to watch:

• Where are the prices against the Cloud?
  • If the price is above the Cloud, its upper line forms the first support level, and the second line forms the second support level.
  • If the price is below the Cloud, the lower line forms the first resistance level, and the upper one forms the second level.
  • If the price is inside the Cloud, we have a sideways market. The upper border of the Cloud acts as resistance, and the lower one – as support.
• Where do Tenkan-sen and Kijun-sen go?
  • Tenkan-sen is used as an indicator of the market trend. If this line increases, there’s an uptrend; if it decreases, there’s a downtrend. When it goes horizontally, it means that the market has come into the channel.
  • Kijun-sen is used as an indicator of the market movement. If the prices are higher than this line, they will probably continue to increase. When the price traverses this line, the odds are that trend will change.
• What color is the Cloud?
  • If Senkou Span A is above Senkou Span B, the Cloud is bullish (usually painted lighter) – there are more bulls at the market.
  • If Senkou Span A is below Senkou Span B, the Cloud is bearish (usually painted darker) – there are more bears at the market.
  • If Cloud is thin and horizontal – market’s most probably trendless and sideways. The market’s characterized by uncertainty and indecision.

Signals to watch:

• Tenkan-sen and Kijun-sen
• ‘Golden cross’ – bullish signal that occurs when Tenkan-sen crosses Kijun-sen to the upside. The signal can be strong (buy!) when this cross is above the Cloud; neutral when it’s inside the Cloud and weak when it’s below the Cloud.
• ‘Dead cross’ – bearish signal that occurs when Tenkan-sen crosses Kijun-sen to the downside. The signal can be strong (sell!) when this cross is below the Cloud; neutral when it’s inside the Cloud and weak when it’s above the Cloud.
• Bullish signal when the price crosses Kijun-sen from below to above. The signal can be strong(buy!) when this cross is above the Cloud; neutral when it’s inside the Cloud and weak when it’s below the Cloud.
• Bearish signal the price crosses Kijun-sen from above to below. The signal can be strong (sell!)when this cross is below the Cloud; neutral when it’s inside the Cloud and weak when it’s above the Cloud.
• Ichimoku Cloud
  • If Cloud switches from bearish to bullish state – bullish signal. The signal can be strong is if the current price is above the Cloud; neutral if the current price is inside the Cloud; weak the current price is below the Cloud.
  • If Cloud switches from bullish to bearish state – bearish signal. The signal can be strong is if the current price is below the Cloud; neutral if the current price is inside the Cloud; weak the current price is above the Cloud.
• Chinkou Span
  • If Chinkou Span traverses the price chart in the bottom-up direction – buy. At the same time, watch the current price action and the Cloud: the bullish signal is strong if the current price is abovethe Cloud; neutral if it’s inside the Cloud; weak if it’s below the Cloud.
  • If the line traverses the price chart in the top-down direction – sell. The bearish signal is strong if the current price is belowthe Cloud; neutral if it’s inside the Cloud; weak if it’s aove the Cloud.
  • Note that Chinkou Span has to come through the body of the price candle for the signal to be good.

Some Forex theorists do not recommend using Ichimoku on short-term time frames. 

However, experience shows that this indicator can be very effective on the H4, H1 and even on the minute charts. Price relation to the Cloud gives a clear picture of what the market is thinking right now. Combination of the Ichimoku with a focus of price action gives a chance for a flexible real-time trade.