What is a Tenkan-Sen (Conversion Line)?
Tenkan-Sen, or Conversion Line, is the mid-point of the highest and lowest prices of an asset over the last nine periods. The Tenkan-Sen is part of a larger indicator, called the Ichimoku Kinko Hyo, which shows potential support and resistance areas based on different timeframes. Ichimoku Kinko Hyo roughly means "one look equilibrium chart", and is commonly called the Ichimoku Cloud indicator.
The Ichimoku Cloud indicator was 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 price movement and volatility. One of those lines is the Tenkan-Sen.
- The Tenkan-Sen is the fastest moving line in the Ichimoku Cloud indicator.
- The line follows price closely, therefore it helps highlight short-term price direction via its slope.
- Tenkan-Sen is its own line/indicator, but its value is also used in the Senkou Span A (Leading Span A) formula. Senkou Span A is one of the two lines that form the "cloud" or "kumo" for the Ichimoku Cloud indicator.
The Formula for the Tenkan-Sen (Conversion Line) is
How to Calculate the Tenkan-Sen (Conversion Line)
- Find the highest price in the last nine periods.
- Find the lowest price in the last nine periods.
- Add these values together and then divide by two.
- Repeat the process as each period ends.
What Does the Tenkan-Sen (Conversion Line) Tell You?
The Tenkan-Sen shows an asset's short-term price momentum. On its own, it shows the mid-point price over the last nine periods. Due to the very short-term nature of the indicator, it is not typically used on its own but rather used in conjunction with the other elements of the Ichimoku Cloud indicator.
For example, if the Tenkan-Sen moves above the Kijun-Sen (Base Line), which is the 26-period price midpoint, some traders view that as a buy signal. Conversely, if the Tenkan-Sen drops below the Kijun-Sen, it may be viewed as a sell signal.
These signals are also filtered via the "cloud". The cloud is a colored part of the indicator which is used to help identify the trend. When the price is above the cloud the trend is up, when the price is below the cloud the trend is down. If the price is moving within the cloud that often indicates choppy trading, or that the trend is in the process of reversing.
Therefore, when the price is above the cloud, traders may prefer to buy when the Tenkan-Sen crosses above the Kijun-Sen. They may also sell that long position when it crosses back below.
In a downtrend, when the price is below the cloud, traders may short-sell when the Tenkan-Sen crosses below the Kijun-Sen. They may cover the short position when the Tenkan-Sen crosses back above the Kijun-Sen.
The Tenkan-Sen also plays a role in generating Senkou Span A, one of two lines creating the "cloud" on the Ichimoku indicator. The edges of the cloud indicate support and resistance points, and the thickness of the cloud indicates price volatility. As indicated above, the cloud also helps identify the trend.
The Difference Between the Tenkan-Sen (Conversion Line) and a Simple Moving Average (SMA)
The Tenkan-Sen is sometimes confused with a simple moving average. It is not. The Tenkan-Sen is a mid-point, calculated by adding the 9-period high and low and dividing by two. This is a different calculation than a simple moving average, which would add up the closing prices from the nine periods and then divide the total by nine.
Limitations of Using the Tenkan-Sen
The Tenkan-Sen moves closely with the price, therefore it doesn't provide a lot of information on its own, except for possibly to very short-term traders. Because of this, the Tenkan-Sen is typically used in conjunction with other lines in the Ichimoku indicator. Crossover trade signals are sometimes used between the Tenkan-Sen and the Kijun-Sen. While these crossover trade signals may produce high-profit trades, the strategy is also prone to whipsaws. This is when crossovers occur but the price fails to move as anticipated, resulting in more crossovers and losing trades.
The Tenkan-Sen is the mid-point price of the last nine periods. There is nothing inherently predictive in its calculation. Therefore, while it may provide some insight and trade signals, traders are well advised to also incorporate other forms of analysis, such as price action and other indicators, into their strategy, as opposed to relying exclusively on the Ichimoku indicator and its elements.