Ichimoku Kinko Hyo indicator in Protrader
Ichimoku Kinko Hyo is a technical method of chart analysis that basically speaking is focused on following trends. Method is complex and very attractive visually therefore gained great popularity among traders both professional and amateur.
Ichimoku is totally a trend following strategy, so the very first thing you do with it is determining whether certain asset is in any trend, and what trend would that be. 'Ichimoku' means in Japanese 'just one look', and you can literally tell if certain instrument is in trend after only short while. If answer is positive, then you can go further with your analysis. But let's start from the beginning. The strategy contains four basic elements which are subsidiary and make your analysis full.
1) Senkou Span A and B - these two lines are 'dancing' with each other. Senkou Span A is moving average slightly faster than Senkou Span B and crosses it when tendency of price movement is changing. Therefore whenever Senkou Span A is above Senkou Span B, trend is considered upward. Conversely, whenever Senkou Span A is below Senkou Span B, trend is deemed downward. Space between two Senkou lines is filled with color creating so called 'cloud'. Thanks to it we are able to judge Senkou Span A and B positioning immediately.
2) Tenkan-Sen is the fast moving average which shows median of the highest high and the lowest low for last 9 periods (default value). It may be used as a dynamic S/R or signal for entry.
3) Kijun-Sen is a slower moving average used to measure medium term momentum, and also as dynamic S/R. Same as Tenkan-Sen, it shows median from highest high and lowest low but in last 26 periods by default. It can be used also as a signal to entry.
4) Chikou Span is simply following price, but it's shifted 26 periods back. It works mainly as a filter for trades but also may indicate S/R levels.
Sounds complicated? It might at the first moment. But after a while you will probably discover, how intuitive is this.
So when do we trade?
First of all, we need to understand, when we do NOT trade.
Essentially, we don't trade when chart shows little or no momentum at all. When price hasn't got any obvious direction. If you enter a trade in such environment, your trades would be compromised and TP would most probably be out of market's range. So:
- when Chikou Span is below or it is crossing the price while you have buy signal,
- when Chikou Span is above or it's crossing the price while you have sell signal,
- when price is in the cloud - between Senkou Span A and B,
If any of above occurs, we do not trade.
- we trade only long positions above the cloud,
- we trade only short positions when price is trading below cloud.
Now we have several signals that according to Ichimoku allow us to open new trade but only if none of above conditions is positive.
1. Basic signal, that is used both for opening and closing position occurs when Kijun line crosses Tenkan.
2. Candle breaks/tests the Kijun line and closes below as a sell signal.
3. Candle breaks/tests the Kijun line and closes above as buy signal
4 . Candle breaks out from cloud territory or tests it and closes outside of it.
Assuming that conditions mentioned in previous section allow you to open trade, every signal may result in entering the trade.
I.e. Buy trade would take place when:
- Price is above the cloud
- Chikou span is above the price
- Recent candle breakes above Kijun-Sen and cloud and closes there.
In the above example it would be wise to wait for some retracement before opening long position as price range seems pretty much extended.
Another example of a buy trade:
- Price is above the cloud.
- Chikou Span is making its way higher.
- Recent candle has tested Kijun Sen and the cloud with its wick. If it manage to close above, it will be nice buy signal.
And here is some short trade example:
- Price is trading under the cloud and Chikou Span is below the price - that's our sell environment.
- For our entry to be valid, we need price to test Kijun Sen and close below it.
Where to enter the trade?
We answered the question "when to trade" and "when not to trade" and now it's time to tell - where to trade. There are few approaches to placing trades. One says that may enter as soon as signal candle (the one that tells us to enter the trade) closes and another one opens. The other way of doing that is to place stop order right below/above the signal candle. Another method is to enter limit trade at 50% of signal candle. Or some people use Price Action and/or lower timeframe and local S/R level to make it more precise. All you need to do is just picking the one that fits you best.
Determining Target and Loss levels
Remember, always use Stop Loss! Always. But where to put it? You may use signal candle for that - just place your Stop Loss right above/below the signal candle. You might use some S/R level or Kijun line. It depends on your time horizon and risk that you are willing to take.
Placing target for trades might go one of two ways. Most conservative method is that you wait for exit signal which is opposite to entry signal - like Kijun and Tenkan crossing or candle breaking Kijun Sen and closing beyond it. Also, when price is entering cloud's territory it means you need to close your trades. On the other hand you might want to place your target while entering trade and leave it like that. What you need to do is to find your target S/R level or determine range of wave you plan to profit on.
Important note: Ichimoku was first developed and tested on daily charts. Actual settings of Ichimoku lines are 9, 26, 52 and comes from 6-day trading week from Japan. Tenkan Sen with period of 9 stands for 1,5 trading week. Kijun Sen with period 26 represents trading month and 52 for Senkou Span B has 2 month period. Because of that specialists don't recommend trading using Ichimoku on timeframes lower than 4-hour. Some of them use modified parameters fitted to modern, 5-day, trading week or lower (4-hour) timeframes.
This article has been written with great help of Marcin Wenus who is one of the top Ichimoku and Forex experts in Poland.