The names of mathematicians and statisticians dominate the list of technical analysis innovators; it's not often we see newspaper writers on this list, but Tokyo newspaper writer Goichi Hosoda is an exception to the rule. In the years before World War II, Hosoda--with the help of several assistants--developed the Ichimoku Kinko Hyo, or "equilibrium-chart-at-a-glance technique." Released in 1968, the technique was designed to illustrate where prices were likely to go and when to trade. In this article, we look at this extraordinary technique and how you can apply it to enhance your trading.

Constructing an Ichimoku Chart
First, let's take a look at an Ichimoku chart so we have a visual point of reference. The Ichimoku chart consists of three lines, which are color-coded on the chart below, and a "cloud":

Figure 1: EUR/USD Ichimoku Chart. Provided by

Let's see what these lines represent, and how they are plotted:

  1. Tenkan-Sen, or conversion line (red) - (Highest high + lowest low) / 2, calculated over the past seven to eight time periods.
  2. Kijun-Sen, or base line (maroon) - (Highest high + lowest low) / 2, calculated over the past 22 time periods.
  3. Chikou Span, or lagging span (pink)- The most current closing price plotted 22 time periods behind (optional).
  4. Senkou Span A (green)- (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 time periods ahead.
  5. Senkou Span B - (blue) (Highest high + lowest low) / 2, calculated over the past 44 time periods. Plot 22 periods ahead.

The "cloud," known as the Kumo, is the space between Senkou Span A and Senkou Span B. The time period is most often measured in days; however, this can be modified to be any time unit as long as it is consistent throughout all calculations. We should note that, due to the shortened trading week (which used to be six days long), the time period values shown here are revised versions of the ones that Hosoda used in 1968.

To calculate these figures manually, you can use a spreadsheet program like Excel (with formulas to speed up the process), and then plot the points on a time series chart. There are also several commercial charting programs that have this technique installed by default and can automatically show the Ichimoku chart in real time.

Interpreting the Chart
Now that we have a chaotic chart filled with colorful lines and strange clouds, we need to know how to interpret it. The Ichimoku chart can be used to determine a variety of things. Here is a list of signals and how you can spot them:

  • Strong Signals - A strong buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A strong sell signal occurs when the opposite occurs. The signals must be above the Kumo.
  • Normal Signals - A normal buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A normal sell signal occurs when the opposite occurs. The signals must be within the Kumo.
  • Weak Signals - A weak buy signal occurs when the Tenkan-Sen crosses above the Kijun-Sen from below. A weak sell signal occurs when the opposite occurs. The signals must be below the Kumo.
  • Overall Strength - Strength is shown to be with the sellers if the Chikou Span is below the current price. Strength is shown to be with the buyers when the opposite is true.
  • Support/Resistance Levels - Support and resistance levels are represented by the presence of the Kumo. If the price is entering the Kumo from below, then the price is at a resistance level. If the price is falling into the Kumo, then there is a support level.
  • Trends - Trends can be determined by simply looking at where the current price is in relation to the Kumo. If the price stays below the Kumo, then there is a downward trend (bearish). Alternatively, if the price stays above the Kumo, then there is an upward trend (bullish).

The Ichimoku charts give us a rare opportunity to predict market timing, support/resistance levels, and even false breakouts, all in one easy-to-use technique.

Why Isn't Everyone Making Money?
Although it was created back in 1968, this charting technique did not gain international attention until the 1990s. It has since been applied by traders worldwide. Despite its success, the Ichimoku chart still has some drawbacks.

  • Empirical Decision Making – As with most technical analysis, empirical decision making is required when determining the time period to use. Keep in mind that the time periods are the only thing making this technique different from a moving average analysis, so it is critical to fine-tune (optimize).
  • 24-Hour Markets – Markets which operate 24 hours a day, like the currency market, are without an actual set open and close price. To get around the problem, traders often make the calculations in real-time or use the open and close times that are closely associated with the currency pair being traded. For example, for the EUR/USD, it would be wise to use the New York open and close since that is when the majority of trading occurs.
  • Occasional Short Time Between Trades – There will be times when the buy and sell signals occur within close proximity. In a world without commissions or bid/ask spreads, this would not be a problem; however, quick trades like this can cause commissions to eat into your profits.

When Goichi Hosoda developed the Ichimoku Kinko Hyo charting technique, he was definitely onto something. The technique gives traders an easy way to determine buy and sell signals, support and resistance levels, trends, and signal strength. However, the charting method is not without its drawbacks, such as its need for empirical decision making and time period definitions, and its indications to make high frequency trades. Despite these flaws, the technique is employed often by the international trading community, and can prove to be an asset to any trader.

Related Articles
  1. Active Trading Fundamentals

    Support And Resistance Basics

    Understanding the concept of Support and Resistance in trading can drastically improve your short-term investing strategy.
  2. Forex Education

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  3. Forex Education

    The International Money Market

    Banks, corporations, traders and speculators all use the IMM to borrow, lend, trade, profit, finance, speculate and hedge risks.
  4. Active Trading

    Blending Technical And Fundamental Analysis

    Find out how you can combine the best of both strategies to better understand the markets.
  5. Forex Education

    Moving Average Bounce

    Find out how this simple trading strategy can be added into your trading arsenal.
  6. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  7. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  8. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  3. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center