What is Ichimoku Kinko Hyo?

The full name should be Ichimoku Kinko Hyu. In short, I call it Ichimoku.

It is essentially a trend trading system developed by a Japanese newspaper man called Goichi Hosada with the help of many other students to fine tuned the formula.

With Ichimoku, I found that I am able to quickly developed a big picture understanding of the underlying security. Rather than looking at indicators and moving averages separately, Ichimoku encourage one to have a ‘macro’ view of what’s going on. From there, we can decide if we want to short, long, or even sidestep security.

What makes up Ichimoku ?

Ichimoku is make up of 5 indicators.

  1. Tenkan sen
  2. Kijun sen
  3. Chikou span
  4. Senkou Span A
  5. Senkou Span B

Tenkan sen (a.k.a ‘turning line’) or the short ‘moving average’

Unlike typical simple moving average, where the day’s closing price is taken and calculated, Tenkan sen is calculated as  (HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods

The angle of the Tenkan sen can be used to suggest the strength of the momentum. If it is a steep line, we can say that the underlying has a change in momentum and is very strong. Look at Palm’s chart below. See how Tenkan sen change when Palm Pre is announced.

Kijun sen (a.k.a standard line’) or the higher timeframe ‘moving average’

Kijun sen is calculated using (HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods.

This is the longer timeframe line and is less sensitive to current price changes. However, it is a key indicator for major change in trends.

Chikou Span (the “lagging line”)

This is shown on the chart as a lagging line behind the price. In the chart below, it is the green line and it is calculated as CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods.

Chikou Span is one of the unique feature of Ichimoku. And this is the line that I used to determine the  support and resistant  levels.

Why is Chikou Span shifted 26 periods back? The answer becomes clear once you understand that a change in trend is a relative state. For example, if the trend is up and it continues to goes up, then there is not change in trend. By shifting it bacwards 26 period, we can compare the current price level to how it looks like 26 periods ago.

With a glance of the position of the current price level and Chikou Span, we can quickly identify if the trend is changing and is it going to break through any possible support or resistant levels.

Some rules:

  • If current close price is lower than that of Chikou Span at 26 periods ago, then we can safely say that the likelihood of more bearish price action to go and vice versa.
  • If Chikou Span cuts through the price line with no kumo resistant in sight, we can assume that the trend is bullish.
  • If Chikou Span cuts through the price line with kumo resistant ahead, we can expect resistant levels.
  • <<work in progress>>