Ichimoku: the final guide 2019

All About Ichimoku

So here we are and we are going to get into the Ichimoku System. We’re going to start breaking this down and then we’ll start getting into the trading system, the trading styles and we’ll go from there. Now, let’s get started!

Ichimoku Kinko Hyo: This system was developed by the Japanese journalist Goichi Hosada. The history of Ichimoku is that it is a technical analysis method that builds on Candlestick charting to improve the accuracy of forecast price moves. It was developed in the late 1930s by Goichi Hosada and he was also known as Ichimoku Sanjin which can be translated to “what a man in the mountain sees”. He spent 30 years perfecting this technique before releasing his findings to the general public in the late 1960s. So basically, this guy spent 30 years perfecting this and studying it, which means there’s a lot of validity to this system based off of him doing all that back testing and preparing it for 30 years.

Ichimoku translates to “one glance equilibrium chart” or “instant look at the balance chart” and it’s sometimes referred to as “one glance cloud chart” based on the unique clouds that are featured in the Ichimoku charting system. Ichimoku is a moving average based trend identification system and because it contains more data points than the standard Candlestick charts, it provides a clearer picture of the potential price action. The main difference between how moving averages are plotted in Ichimoku as opposed to other methods is, that Ichimoku lines are constructed using the mid price of the highs and lows for a certain period as opposed to the candles closing price of a certain period. Ichimoku is the most often used indicator in the Japanese trading rooms.

As said before, it’s a trend based technical analysis method that measures the momentum of the market. Its purpose is to show the bias of the market with one glance based on the price of an asset as opposed to the “Kumo Cloud”. It uses multiple units of observation to give you a deeper more comprehensive view of price action. Together, the units of observation and levels of analysis help to give you a deeper view of price action and whether or not prices are in equilibrium or disequilibrium and those are very important to know. Ichimoku also shows past, present and future support and resistance levels making it the only indicator that is both leading and lagging. It does not show future price levels but it shows future support and resistance levels which are very important and which can give us a lot of leads on what the market might do or could be doing. It’s also used to generate buy and sell singles and a variety of ways and also shows the strength of a signal. So, in a nutshell, the Ichimoku system combines market bias, momentum, volatility, support and resistance levels and trading signals.

 

So why use Ichimoku?

 

“Discipline” is one thing that traders need. Discipline is one reason why we see 95 percent of traders failing in the Forex market, many traders lack of discipline. Discipline is something that every trader needs to learn. Ichimoku is going to make sure that you’re disciplined.

Another reason why traders fail is “patience” – or rather the lack of. As a Forex trader, you have to wait on the right opportunity based off the Ichimoku rules and signals. This means that you have to be patient and wait for those trades. A lot of traders are not patient and they jump in trade after trade and just want to be quick and get into a trade, get it done and jump into the next trade.

Well, that’s not how trading works. You have to set this up like a business and act like it’s a business. Trading is rules-based and if you set your trading up by a pre-determined set of rules it will keep the emotional side of trading disengaged. You will not be using your emotions to trade Ichimoku. If you’re using your emotions, it’s usually just because you’re excited and overcome with joy when you see prices going one hundred pips in your favor. That’s the only emotion you’ll have here.

Ichimoku catches the best of a trend. The Elliott third wave is normally the largest and most profitable wave and Elliott Wave traders will tell you that the third wave is the wave they like to catch. Ichimoku is going to catch that wave every time. It is just knowing how to get in the move and you’ll learn exactly that: being able to catch these third waves.

We’re going to eliminate the “Doubting Thomas Syndrome”. This system is going to give you clear cut rules, no guessing about market bias and you will know exactly when trading conditions are right. You’re going to see the signals and you’re going to know that the trading conditions are right to enter the trade. It’s going to eliminate any Doubting Thomas Syndrome that you may have. Ichimoku will help you to develop order in your trading, but you’re going to have to follow specific trading rules and you’re going to have to look at specific things before you can get into a trade. Everything’s going to be in order and certain things will have to happen for you to get into a trade. It won’t allow you to be scattered and getting in trades here and there and just jumping around.

You’re going to have order in your trading and you will have to develop some fundamental analysis skills like support and resistance, knowing market bias and so forth.

In regards to market bias: you are going to always know who’s in control of the market short term, medium term and long term. You will know if the bulls are in control or if the bears are and that will help you to make a decision if you want to get into the market or not. This is a standalone system and you do not need to use anything else with this Ichimoku system. It has Stop-Loss, entry and exit levels. Everything is included and no other indicator is needed.

It also works in all markets. It’s going to work in Forex, stocks, options, indices, etc. You’re going to be able to trade Ichimoku on absolutely everything. It also works on all time frames. But the higher timeframes are going to be more reliable, so you’re going to be getting stronger signals off of the higher timeframes. The smaller signals can give you more signals but they are also less reliable. The higher timeframes are much stronger.

This system is as easy as the ABC. It may look confusing at first, but with some effort to learn it becomes easy. We said this in many of our other classes but we repeat it here again: you have to put effort in anything. If you don’t put a lot of effort into this you will not learn it and you will miss out on being a successfull trader in this system.

Ichimoku Kinko Hyo translates to “one glance equilibrium chart”. Ichimoku is all based off of equilibrium and we’re going to show you why.

Ichimoku equilibrium is very important in trading and you will understand once we get into it and break it down why you should really know about equilibrium and know when the market is in equilibrium or disequilibrium. You probably already know it when you see your indicators like a stochastic, for example, and you say “we’re oversold” or “overbought”. That’s market equilibrium or disequilibrium.

Ichimoku works on the concept of market equilibrium. Demand creates market equilibrium and market disequilibrium. The point at which supply and demand are equal is known as “market equilibrium”. This point represents the price at which the quantity demanded by consumers is equal to the quantity supplied by producers. This is the ideal outcome in the market because the most efficient producers are sellers and those who are most willing to pay are the buyers. So, market equilibrium maximizes both consumer and producer surplus and extracts all the potential gains from the market because both sellers and buyers are contributing to the market at near equal amount, keeping the market stable or within a range.

At this point, if either buyers or sellers out-whey one another, the market begins to move away from equilibrium and into disequilibrium. Understanding the concepts of market equilibrium and disequilibrium will contribute deeply to understanding the Ichimoku system.

What is market equilibrium? It’s a situation in which the supply of an asset is exactly equal to its demand. Since there is neither surplus nor shortage in the market, price tends to remain stable in this situation thus creating equilibrium. So basically, you have supply and you have demand. And then in between supply and demand you have equilibrium.

What is market disequilibrium? Prices are either too high and prices will fall. Quantity supply decreases and the quantity of demand increases. Or, in another scenario of market disequilibrium the price is too low and there is shortage. Prices will rise, the quantity supplied increases and the quantity in demand decreases.

 

The components of the Ichimoku system

 

The typical cloud trading system is made up of six components which are all based off of the equilibrium of price. The six components are:

Tenkan Sen: also known as the convert version line.

Kijun Sen: also known as the reference line.

Chikou Span: also known as the lagging line.

Senkou Span A: also known as leading or proceeding line 1.

Senkou Span B: also known as leading or proceeding line 2.

Kumo: also known as the cloud. It is the shaded area between Senkou Span A & B. It stands out more than anything else in the chart.

 

Tenkan Sen

Let’s start off with the Tenkan Sen. This calculation is the highest high and the lowest low of the past nine periods divided by two. It’s the midpoint of the past 9 period. This means, that if prices are above that midpoint you know that it’s a short term bullish signal. If it’s below, then you know it’s a short term bearish. It’s the fastest calculation of all the indicators and it works off of nine periods. It shows you short term bias, short term supply and resistance, short term momentum and the primarily used for this is the Tenkan Sen crossover that we get with the Kijun Sen and TK Cross Signal.

The picture below shows a green line which is going to be our Tenkan Sen.

 

 Kijun

Now let’s look at Kijun Sen. It’s the highest high and the lowest low of the past 26 periods divided by two. Notice, it’s the same calculation as the Tenkan Sen, but it’s for a longer period of time. It’s a stronger signal because it’s for a longer period of time. It’s the midpoint of the past 26 periods. There mid is equilibrium. It is medium term bias which is like a medium moving average. It’s not the long base moving average. It’s the medium base moving average therefore it’s going to be medium term bias. It’s also going to be medium term support and resistance and medium term momentum.

It’s further a built-in trend line, because when price crosses it usually signals a possible change of the trend direction and it’s also a trailing Stop-Loss and adjusts with the market volatility. The biggest aspect though is that it is a “magnet to price”. The market is in equilibrium when it’s Kijun Sen and it’s in disequilibrium when price moves farther away from Kijun Sen. It is used with the Tenkan Sen to create the TK Crossover signal that we’ll be getting into soon. It is also used alone to create a Kijun Bounce signal. The blue line here below is your Kijun Sen:

The Kijun Sen level is equal to the equilibrium, which means that when prices near the Kijun Sen the markets are in equilibrium. When the market is too far away from Kijun Sen the market is in disequilibrium because there is excess in demand.

The market is in equilibrium when it’s at the Kijun Sen level. Below is an example where the market stays in equilibrium all the time and neither buyers nor sellers want to make a decision here:

We decide to get into a trade when we see the market starting to move away from equilibrium because now we know the market is going to move:

The trend might continue for a long time but eventually it will come back to equilibrium again. All of this tells us that in between excess supply and demand lies the market equilibrium. Excess supply equals market disequilibrium because price is too far away from the Kijun Sen. When other traders use their other indicators like the stochastics and RSI they would see a overbought or oversold situation – excess supply so the market is in disequilibrium. However, we don’t need an RSI or stochastic to tell us that, because we can see that by simply looking at the Kijun Sen.

The Kijun Sen is a multi talented player. It’s acting as support and resistance as you can see in the picture below. The market is not going any lower than the marked level and it’s not going any lower with the other example before the price takes off. This is how we can find a good trading opportunity by trading off of that support level

Below you can see a typical Kijun Sen resistance. We can find good trades at these resistance levels where the price is staying near resistance and then going down:

Here we have Kijun Sen acting as a trend line and it decides that price is going to change even before we get to that “real” trend line:

 

Chikou Span

Now let’s move on to the Chikou Span. Remember that the Chikou Span is going to be very important to your trading! All it really is in the end, is the current price shifted back 26 periods. When we look at our price today and draw a straight line 26 candles back, that’s where our Chikou Span is. It is perhaps the most important aspect of the Ichimoku system when entering a trade.

 

> It indicates if price is trending or ranging.

> It’s the final filter for entering a trade.

> Helps to keep us out of bad trades.

> It will be your decision maker when entering a trade.

> Chikou Span above the price of 26 periods ago means that the current price is bullish.

> Chikou Span below the price of 26 periods ago indicates that the current price is bearish.

> It indicates past levels of support and resistance such as the Kumo and price ranges.

> It is a more reliable form of plotting support and resistance much like a line chart. We can draw support and resistance like a line chart using the Chikou Span.

Here below we can see a typical Chikou Span. This dashed pink line is the Chikou Span and it’s back 26 periods from the current price – 26 candles if you count each candle.

So where is the Chikou Span based on the 26th candle back? It’s above that candle. Going back 26 periods / candles we check if the Chikou Span is above or below that period. In this example here it’s above, which indicates a bullish trend and we would enter a Long position.

This also works the other way: Going back 26 candles and here we have the Chikou Span below the price which indicates a bearish trend, giving us the signal to enter a Short position.

The next picture shows that our Chikou Span is right inside this price range. And what is price doing here? Correct, it’s ranging all throughout. We haven’t really moved and price staid pretty much at the same level.

 

 

That’s how the Chikou Span can tell you if it’s smart to get into a trade or not. You know, because this is clearly ranging and there’s no need to get in a trade.

Let’s have a look on how you draw support and resistance levels with this. Where we see the peaks we draw support and resistance levels.

 

Senkou Span A

Let’s move on to Senkou Span A.

> It’s the Tenkan Line + Kijun Line divided by 2 plotted 26 time periods ahead. This means we’re going from the past into the future or from “lagging” to “leading”.

> Together with the Senkou Span B it forms the shaded area known as the Kumo.

> Together with Senkou Span B it forms the Kumo Twist and the future Kumo sentiment.

> The trend is bullish when Span A is on top and bearish when Span A is at the bottom.

> It represents a level of equilibrium.

> It measures a longer term trend.

> It also represents long term support and resistance.

> It measures market volatility will always. 

> It will always be between Tenkan Sen and Kijun Sen current level but 26 periods ahead.

> Senkou Span A is normally never flat while Span B has more periods where it’s flat.

You don’t necessarily need to remember all of this but it’s certainly good to know.

In the below graphic you can see that Senkou Span A is between these two levels: Tenkan Level and Kijun Level. It will always be between both of them, no matter where the chart goes. If they go tighter it’ll be between both of them and if they go farther it will also be between both of them just like it is exactly between both of them here in this graphic.

 

 Senkou Span B

Now we’ll get into Senkou Span B.

> It is the highest high and the lowest low divided by 2 calculated over the past 52 time periods shifted 26 periods ahead.

> This is the slowest of all the components because it’s calculated using 52 periods.

> Together with Senkou Span A it forms the Kumo Twist and future Kumo sentiment. It helps us know if we have a bright or dark future which helps us to get into a trade knowing this sentiment of the market.

> The trend is bullish when Span B is on bottom and bearish when Span B is on top.

> It forms flat Kumo tops and bottoms if price hasn’t made a newer high over the past 52 periods.

Here we can see Senkou Span B flat on top (brown cloud left) and flat bottom (blue cloud in the middle). Now it’s on top flat right here. You don’t have to remember Senkou Span A on top or bottom. Just remember if your cloud is bearish it’s going to be brown (in our example) and if it’s bullish it’s going to be blue (again, just in our example). Now your colours may be different but the colours simply help us to know the twist. We know that if Span A or B is on top or bottom just by the colour of the clouds.

 

What we can clearly see in this example is the flatness of Senkou Span B and that’s going to be strong major support and resistance levels. We can also see how Span A is normally never flat. Even when they cross or even when Span B is flat for a long time it’s still never really flat. We can see that there are some parts that are almost flat and they simply tell us that the market was really ranging during those periods.

Kumo

Let’s move on to the Kumo, which is the last thing we really have to remember.

> The Kumo is the shaded space between Senkou Span A & B.

> It determines market bias: if prices are above the Kumo you got bullish bias and if price is below the Kumo it’s bearish bias.

> It identifies the current and future support and resistance levels rather than lines.

> Thicker Kumo represents higher volatility and stronger levels of support and resistance.

> A thinner Kumo represents lower volatility and weaker levels of support and resistance.

> Kumo future is the Kumo shifted 26 periods ahead to form future support and resistance levels and future market sentiment.

> The Kumo shadows are flat clouds directly behind price from past consolidation or range levels. These form support and resistance levels causing price to consolidate.

> Every trend begins with a Kumo Breakout.

Here below is the Kumo cloud. This is why you don’t have to remember Senkou Span A and B. You simply remember this cloud since all is one.

Again, price above the Kumo cloud means bullish sentiment. Just like an airplane flying above the cloud. We want the price to be above that cloud if we want to take a Long position. Prices above the cloud means we’re bullish:

Price inside the cloud correlates to turbulence. We don’t want to be inside that cloud. The price inside the cloud means turbulence as it doesn’t do anything. It’s all over the place. We don’t trade while we’re inside the cloud. We don’t want to be inside the cloud and trade because “we can’t see”. We need to get outside of the cloud to make a decision. Then we can enter a trade. Remember: never trade when prices are turbulent like in the example below:

Prices “flying” below the Kumo cloud means we’re bearish.

We can simply look at the chart and can clearly see its’s bearish. We know the market bias and we know if we want to be Short or Long. In the above example the overall trend is down which means, once again, that’s bearish. We know that we may have some slight pullbacks here and there but we want to be going with the overall trend.

Now, the thickness of the Kumo represents support and resistance levels. Weaker levels are represented by a thinner cloud. Have a look below and notice how thin this cloud is. Prices blew right through it, then it paused and then took off. To repeat, a thinner cloud equals weaker support and resistance level and a thicker cloud represents stronger support and resistance level.

Here an example where we can see that price had a hard time trying to get through the cloud and it took a really long time before it took off and went to the top side. The thicker the cloud, the stronger the support and resistance will be.

Now, the Kumo Twist is the crossing of Span A and B. Just look at the twists and you can say if it is a bullish or bearish twist. In fact, we can know this just looking at the different colours. It went from brown to blue.

26 periods (candles) ahead and the Kumo future is right here. We already had the twist so we know our future is bullish in this case. These 26 pairs ahead represents future support and resistance levels. It does not represent where the market will be 26 periods from now, because if it did we would get very rich very easily. It just tells us where supporting resistance is:

Minimum requirements to enter a trade

These are the minimum requirements to enter a trade and you will need to ask yourself these minimum requirements before you can enter any trade.

 

  1. Price versus the Kumo: ask yourself that: is it above or below? If price is above it’s bullish sentiment. If price is below it’s bearish. If price is inside the Kumo cloud it’s neutral. So, if price is above the Kumo the overall trend is bullish and the market bias is also bullish. If it is below the Kumo the overall trend is bearish and the market bias is also bearish. When price is inside the Kumo we are in turbulence. As discussed, the top and bottom of the Kumo are very strong support and resistance levels. If you have the prices above the Kumo, the Kumo top acts as the first level of support and the bottom acts as the second level of support. On the other hand, if price is below the Kumo, the Kumo bottom is the first level of resistance in the top as the second level of resistance.

 

Ask yourself where is price as opposed to the Kumo before getting into a trade.

 

  1. Then ask yourself: where is Tenkan Sen versus Kijun Sen? Is Tenkan Sen above Kinjun Sen then we know it’s bullish. If it is below it is bearish. Tenkan below Kijun supports a bearish move while Tenkan above Kinjun supports a bullish move. It is always recommended to check the position of the price versus Kijun Sen and Tenkan Sen as opposed to just looking at the Kumo cloud. If the price moves quickly and leaves behind Kijun Sen it usually turns flat and in order to dissolve the disequilibrium it will pull it right back like a magnet. That puts the market from disequilibrium into equilibrium and then they move together again in the direction that the market wants to go.

 

  1. Chikou Span vs Price and Kumo: If Chikou Span is above price it’s bullish and if it’s below it’s bearish. Above or below Kumo for additional confirmation. So, if the Chikou Span is above the price the trend is bullish and if it’s below the price the trend is bearish. If it is within the price then there is no trend at all and price is consolidating or ranging. Ok, so if Chikou Span is above the Kumo it supports the bullish move and if it’s below the Kumo cloud the bearish moves are supported. The Chikou Span is your final filter to support your trade. The Chikou Span should be your best friend and not the trend!

 

  1. Kumo future: ask yourself: is it a bearish or a bullish future. If Senkou Span A is below Senkou Span B it indicates a bearish future. If Span A is above Span B it’s the opposite and signals a bullish future. When Senkou Span A crosses Span B and the colour of the Kumo cloud changes it supports the crossing of the Kijun, indicating a possible change in the trend. Basically, once price crosses the Kijun Sen and then we get that Kumo Twist, it supports the crossing of the Kijun Sen to represent a trend change or direction change, which then gives us confirmation to enter a trade.

 

Alright, so that was a hell lot of information, we know, and you may be thinking “how am I ever going to remember all of this?”. We will break this all down on the charts which will help you see the economic strength of signals.

 

 

 

Ichimoku Strength of Signals

 

The Ichimoku System tries to put the probabilities into our favour, therefore not only do we have signals from this system but also the strength of the signal. The strength of the signal is determined by where the signal takes place and there are just 3 places where the signal can take place and they are as follows:.

  1. Above the Kumo cloud: = bullish signal.
  1. Inside the Kumo cloud: = neutral.
  1. Below the Kumo cloud: = bearish signal.

Now, if we are taking a Long trade, which is a bullish trade, then we would want the signal to take place in bullish territory. This woulsd make the strength of the signal a strong signal. The same holds true if we want to take Short trade, which is a bearish trade. Then, we want the signal to take place in bearish territory, which would make the strength of our signal a strong signal.  

Types of Trades with the Ichimoku System

> TK Cross = Tenkan Sen crossing Kijun Sen from above or below.

> Kumo Breakout = When price breaks out of the Kumo cloud from either above or below.

> Kumo Bounce = When price bounces off of the Kumo from above or below.  

> Kijun Break = When price crosses the Kijun from above or below.

> Kijun Bounce = When price bounces off of the Kijun from either above or below.

> Kumo Twist = When Senkou Span A & B cross each other.

> Chikou Span Cross = Chikou Span crossing price from above or below.

 

Other Types of Trades Combined with the Ichimoku System

> Fractal Breakout = First fractal outside of the Kumo cloud.

> Support and Resistance.

> Fibonacci Retracement.

 

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