What is Tenkan-Sen
Tenkan-sen, or conversion line, crates a moving average of the highest and lowest prices of a security over the past nine periods. The tenkan-sen appears in the Ichimoku cloud equilibrium chart, which is used to present both support and resistance information in a single view for technical analysts.
The following formula generates the tenkan-sen:
Breaking Down Tenkan-Sen
The tenkan-sen shows a security’s short-term price momentum and, when read against a longer-term momentum indicator, yields a prediction of future price movement. For example, if the tenkan-sen moves above the kijun-sen, a 26-period average of the highest high and lowest low, many investors take it as a buy signal. Conversely, the tenkan-sen’s moving below the kijun-sen yields a sell signal.
Because the tenkan-sen covers a shorter time period, it tracks price equilibrium with greater sensitivity than the kijun-sen. On the Ichimoku cloud chart, it may show movement where the kijun-sen does not.
The tenkan-sen values also have a part in generating senkou span A, one bound of the kumo, or cloud, the primary element of the Ichimoku cloud chart. The edges of the kumo indicate support and resistance points, and the thickness of the kumo indicates price volatility. The thicker the kumo, the stronger the support and resistance. The general movement of the kumo comports with bearish or bullish price movement.
The Ichimoku Cloud Chart
The Ichimoku cloud chart, or Ichimoku Kinko Hyo chart, is a more detailed version of a candlestick chart developed by Japanese journalist Goichi Hosoda and promoted to the public in 1969. The Ichimoku combines a typical candlestick chart with five additional lines that measure movement and volatility, creating a holistic technical view.
Though it’s more complex than the standard candlestick chart, the Ichimoku’s intention is to yield information more quickly. Ichimoku Kinko Hyo translates roughly as “at-a-glance equilibrium chart,” suggesting that the Ichimoku offers investors everything they need to find an ideal entry point for a security in one easy-to-interpret graphic. The Ichimoku favors running measures of a security’s equilibrium, the average of recent price extremes, over moving averages for predicting short-term price movement. The product of three decades of development the Ichimoku is easier to read and interpret than it is to fully understand.
The tenkan-sen, like all equilibrium-measuring lines on the Ichimoku, will flatten out when the price of a security is consolidating. The nine-period moving average, on the other hand, will almost always continue to move. That means that an investor who looks only at the nine-period moving average will miss signals of equilibrium and volatility that reveal more useful information about short-term price momentum, or so the Ichimoku argument goes.