Since Ichimoku has recently caught a lot of attention in the Trader's circle and I couldn’t find a reference on this site for this wonderful system I thought I'll take some time to explain everyone about Ichimoku.
Few important points:
Please note in advance that some of the concepts and interpretations you find here on this page will be quite unique and might contradict with the usual Ichimoku concepts you have learned on the other web sites or read in the books.
I've a couple of reasons to look at Ichimoku differently, first that no system in world is perfect and we should try improving it by keeping the innovation alive. Secondly, I've been privileged to have worked with some of the most advanced Ichimoku experts who happen to be Japanese themselves. All these factors have encouraged me to think out of the box.
So please bear with me if you find some of the concepts defined below as different and / or unique and try giving it a chance.
Bit of History:
The Ichimoku Cloud was originally called the 'Ichimoku Kinko Hyo.' Where Ichimoku means 'one glance, 'Kinko 'balance' and Hyo 'chart.' Thus the full translation could best be described as 'one glance balanced chart.' Originally developed by Goichi Hosada pre WWII, a newspaper journalist (published in 1969) who wanted to develop an Uber-indicator that could provide the trader with various levels of support/resistance, entry/exit points, direction of the trend, and strength of the signal.
Ichimoku Components:
Essentially made up of SIX major components, the Ichimoku offers a rich view of whats happening in the market. Following are the key components:
1. The Tenkan-sen: (“Conversion Line”): is a nine-period moving average
2. The Kijun Sen: (“Base Line”): is a twenty six-period moving average
Now let's take a look at the most important component, the Ichimoku "cloud”, which represents current and historical price action. It behaves in much the same way as simple support and resistance by creating formative barriers. The last two components of the Ichimoku application are:
3. Senkou Span A: The sum of the Tenkan Sen and the Kijun Sen divided by two. The calculation is then plotted 26 time periods ahead of the current price action.
4. Senkou Span B: The sum of the highest high and the lowest low divided by two. This calculation is taken over the past 44 time periods and is plotted 22 periods ahead.
Now the most important two components of Ichimoku:
5. Kumo cloud: The cloud is formed by using the Senkou Span A and Senkou Span B. Kumo offers a number of interesting features, such as:
5.1. Support/resistance levels: Firstly, if today’s candle is above the Cloud, the trend is for higher prices. The top of the Cloud is the first level of support and the bottom is the second level of support. From experience, I have seen that these really do often work, but one has to give them a little leeway. Normally, I would also wait until the end of the day to see whether the closing price is below the Cloud, before even beginning to consider whether the trend has reversed. The opposite is the case when candles are below the Cloud, with this becoming the area of resistance. Very often the market seems to move through the first support/resistance level and fails somewhere in the middle of the Cloud. When this happens we watch the shape of the daily candlesticks to see if they give a reversal signal.
5.2. Cloud thickness: The thickness of the Cloud is important. The thicker the Cloud, the less likely it is that prices will manage a sustained break through it. The thinner the Cloud, and a break through has a much better chance. So, Cloud is Cloud regardless of whether Span A or Span B is on top; the thickness is what matters.
5.3. Crossover points: Many experts believe that this has no significance, my experience tells me that its the other way around. The Kumo (borders) crossover shows the Major Shift in Trends.
5.4. Trend reversals: Thin sections in the Cloud give us an idea of when the market is likely to change trend. Look ahead and see when, and at what price, it gets very thin. Similarly, if the Cloud is getting fatter and fatter, the chance of a reversal in trend lessens looking out into the future. It gives dates (I’d say three or four days around the central
6. Chikou Span: If you visit Youtube and search for Ichimoku, you will find a Video explaining how this system works. Good explanation in my opinion, however one major problem there. The guy explains all the above components and tells you that he has not drawn Chikou Span on this chart since its of no value at all. Its actually quite contradictory as this particular happens to be one of the most important element as it (in combination with Kumo cloud) basically helps us to determine the strenght of signals. Here is what it does:
6.1. Chikou Span is used in combination with today’s candlestick:
• if Chikou Span is trading above the candlestick of 26 days ago, then today’s market is said to be in a bullish long term phase; conversely,
• if Chikou Span is trading below the candlestick of 26 days ago, then today’s market is in a long term bearish phase.
• Same idea for Chikou Span itself and the Clouds: above the Cloud of 26 days ago, then today is bullish - and vice versa.
Few rigid ideas:
If you do some homework and join some of the active forums on web, you will find few rigid ideas / concepts people have formed, I tend to disagree (based on personal experiences) with the following in particular:
1. Ichimoku can only work on Daily Charts: Lets put it this way, Ichimoku doesn’t know itself whether the Parameters you've provided are daily numbers or a shorter timeframe. Since the price moves in waves and follow certain patterns there is no reason why Ichimoku cant help you in shorter timeframes
2. 26/52 are the only settings that work with Ichimoku: Of course not
don’t take my word, but try starting with the Default settings first and then try different combinations based on the Timeframe of your choice. You'll find that one combination will work as the best in one timeframe while not so great in the other. So my personal advise is to try out as many settings and timeframes as possible3. Ichimoku does not work on Forex: In combination with the above points, people also claim that the Ichimoku does not work well in the Forex market as it was originally designed for Japanese market which works 26 days in a month unlike the forex market which works on a 24 hours model. I would say that it works as great on forex as it works on any other market, the reason is that it actually works on Price and not on the market itself. Any financial product which follows the price movement could be used with Ichimoku (just like any other indicator)
4. Ichimoku works well during the Trending market. Quite contradictory to the basic idea behind Ichimoku and especially its Kumo cloud, it actually helps you to detect the Trends and their strengths
5. Ichimoku should not be combined with other Indicators. OK, and why is that ?
Over the years, I've combined Ichimoku with several other indicators and have always found that it only adds a bit of extra help. So try it with other indicators and see what suits you most.What Next:
Guys, the idea behind starting this thread is to get each other's feedback on this great tool. Unlike other Ichimoku forums, I'll welcome all the new ideas and innovations and I'm sure we'll learn a lot from each other.
PS: I'll be posting live trading charts in the past explaining the current trades ... so just hang in around :
Look forward to hear more ...
Asher
