DEFINITION of 'Ichimoku Kinko Hyo'

Ichimoku Kinko Hyo, or Ichimoku for short, is a technical indicator that is used to gauge momentum along with future areas of support and resistance. The all-in-one technical indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span.

BREAKING DOWN 'Ichimoku Kinko Hyo'

The Ichimoku Kinko Hyo indicator was originally developed by a Japanese newspaper writer to combine various technical strategies into a single indicator that could be easily implemented and interpreted. In Japanese, "ichimoku" translates to "one look", meaning traders only have to take one look at the chart to determine momentum, support, and resistance.

Ichimoku may look very complicated to novice traders that haven't seen it before, but the complexity quickly disappears with an understanding of what the various lines mean and why they are used.

The Ichimoku indicator is best used in conjunction with other forms of technical analysis despite its goal of being an all-in-one indicator.

Ichimoku Kinko Hyo Interpretation

There are five key components to the Ichimoku indicator:

  1. Tenkan-sen - The tenkan-sen is calculated by adding the highest high and the highest low over the past nine periods and then dividing the result by two. The resulting line represents a key support and resistance level, as well as a signal line for reversals.
  2. Kijun-sen - The kijun-sen is calculated by adding the highest high and the lowest low over the past 26 periods and dividing the result by two. The resulting line represents a key support and resistance level, a confirmation of a trend change, and can be used as a trailing stop loss point.
  3. Senkou Span A - The senkou span A is calculated by adding the tenkan-sen and the kijun-sen, dividing the result by two, and then plotting the result 26 periods ahead. The resulting line forms one edge of the kumo - or cloud - that's used to identify future areas of support and resistance.
  4. Senkou Span B - The senkou span B is calculated by adding the highest high and the lowest low over the past 52 periods, dividing it by two, and then plotting the result 26 periods ahead. The resulting line forms the other edge of the kumo that's used to identify future areas of support and resistance.
  5. Chickou Span - The chickou span is the current period's closing price plotted 26 days back on the chart. This line is used to show possible areas of support and resistance.

Example of a Ichimoku Kinko Hyo Chart

The following is an example of an Ichimoku indicator plotted on a chart:

Example of Ichimoku Chart

In this example, the Ichimoku kuma - or cloud- is the area that's shaded green, which represents a key area of support and resistance. The chart shows that the SPDR S&P 500 ETF remains in a bullish uptrend since the current price is trading above the cloud. If the price were to enter the cloud, traders would watch for a potential reversal of the trend.

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