Forex Walkthrough

AAA

Charts - Ichimoku Cloud

The Ichimoku Kinko Hyo or equilibrium chart is a technical indicator that isolates higher probability trades in the forex market. More known for its applications in the futures and equities markets, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. This technique combines three indicators into one chart, allowing the trader to make the most informed decision. In this section, we'll learn how the Ichimoku works and how to apply the indicator in your trading.

Constructing an Ichimoku Chart
Let's take a look at an example of an Ichimoku chart so we have a visual point of reference. The Ichimoku chart consists of three lines (the red, maroon and pink shown below) and a "cloud":



Figure 1: EUR/USD Ichimoku Chart
Source: ForexWatcher.com

The components of the Ichimoku chart are calculated as follows:

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 most important component of this indicator is 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 "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 the trader's preference as long as it is consistent throughout all calculations.

Also, the "cloud" is comparatively thicker than your run-of-the-mill support and resistance lines. Instead of giving the trader a visually thin price level for support and resistance, the thicker cloud will tend to take the volatility of the currency markets into account. A break through the cloud and a subsequent move above or below it will suggest a better and more probable trade.

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 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 several things. The following 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); if the price stays above the Kumo, then there is an upward trend (bullish).

Charts
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.

The Round Up
Intimidating at first, once the Ichimoku chart is broken down, every trader from novice to advanced will find the application helpful. Not only does it mesh three indicators into one, but it also offers a more filtered approach to the price action for the currency trader. Additionally, this approach will not only increase the probability of the trade in the FX markets, but will assist in isolating only the true momentum plays. This is opposed to riskier trades where the position has a chance of trading back former profits.

Heikin Ashi


Related Articles
  1. Forex Education

    A Glance At An Equilibrium Chart

    The easy-to-use Ichimoku chart can tell you quite a bit in just one glance.
  2. Forex Education

    An Introduction To Ichimoku Charts In Forex Trading

    Discover how this high-flying application can be used in forex trading.
  3. Technical Indicators

    The Four Most Commonly-Used Indicators In Trend Trading

    Here are the top indicators and tools trend traders use to establish when trends exist and to find entry/exit points.
  4. Trading Strategies

    Beginner's Guide To Stockcharts.com: Changing The Chart Type

    This is one of the strengths of stockcharts.com as there are all sorts of chart types available to users. Every option is available to all users, so even free members have the ability to express ...
  5. Stock Analysis

    The First Cloud Computing ETF Is Here

    Learn about the components that make up the first cloud computing exchange-traded fund.
  6. Forex Education

    Make Sharp Trades Using Andrew's Pitchfork

    This technical indicator is underused in the currency markets, but it can help you isolate profitable opportunities.
  7. Active Trading

    Moving Averages: Factors To Consider

    By Casey Murphy, Senior Analyst ChartAdvisor.com Data Used in Calculation Most moving averages take the closing prices of a given asset and factor them into the calculation. We thought it would ...
  8. Trading Strategies

    Technical Analysis: Indicators And Oscillators

    By Cory Janssen, Chad Langager and Casey MurphyIndicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. ...
  9. Stock Analysis

    New Cloud Computing ETF Launches

    Cloud computing has the potential to revolutionize information and data technology, and with the world’s first cloud computing ETF now available, investors have a new way to play this fast-growi ...
  10. Technical Indicators

    Top 7 Technical Analysis Tools

    Technical indicators determine the direction of an asset’s momentum and whether that direction will continue. Here are seven used most.
RELATED TERMS
  1. Tenkan-Sen

    The mid-point between the highest high and lowest low of a particular ...
  2. Senkou Span A

    A component of the Ichimoku Kinko Hyo indicator that is used ...
  3. Chikou Span

    A component of the Ichimoku Kinko Hyo indicator that is created ...
  4. Trading Channel

    When charting the price of an asset, this is the space on the ...
  5. Forex Signal System

    A set of analyses that a forex trader uses to determine whether ...
  6. Lagging Indicator

    1. A measurable economic factor that changes after the economy ...
RELATED FAQS
  1. What signals do traders watch for that signal a change in a bull market?

    Discover the various signals of bull market tops and what traders and analysts look for as signs of an impending bearish ... Read Answer >>
  2. How is a simple moving average calculated?

    Learn about the simple moving average, how the indicators are used, and how to calculate a stock's simple moving average ... Read Answer >>
  3. Why is the Dark Cloud Cover pattern important for traders?

    Learn the significance for traders of the dark cloud cover candlestick pattern, a bearish indicator closely related to the ... Read Answer >>
  4. What does it mean to use technical divergence in trading?

    In technical analysis, most indicators can give three different types of trading signals: crossing over a major signal line, ... Read Answer >>
  5. How are moving averages used in trading?

    Moving averages are very popular tools used by technical traders to measure momentum. The main purpose of these averages ... Read Answer >>
  6. How do I create a trading strategy after spotting a Dark Cloud Cover pattern?

    Devise a trading strategy to take advantage of the dark cloud cover candlestick pattern, a bearish indicator that may signal ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center