Lesson 31: How to use the Ichimoku indicator as a complete trading system

"Ichimoku" is a word that may seem barbaric, but is currently very fashionable.

It is an indicator coming from Japan, as the name suggests, and which has the peculiarity of being able to be used in the form of a complete trading system: The well-controlled Ichimoku indicator is enough for its followers to Practice their daily trading, from the decision-making of trading to the definition of objectives.

However, when one begins to take an interest in this indicator, one is often repelled by its apparent graphic complexity (many lines on the graph). But once things are tackled, there is really nothing complicated, and the use of the Ichimoku indicator remains within the reach of anyone who takes the time to study it.

The different elements that make up the Ichimoku indicator

The Ichimoku indicator, with its full name Ichimoku Kinko Hyo, was developed by the Japanese Goichi Hosoda. It is a simple and comprehensive system that contains several pieces of information.

The indicator consists of 5 lines and allows to detect three types of information: trend, supports and resistances, and trading signals.

The 5 lines composing the indicator can be divided into 3 groups:

The Tenkan-Sen and the Kijun-Sen

These are lines that correspond to the median level between the lowest and highest of a certain period, they may be related to moving averages but they are not. The calculation formula is as follows: (Highest + Lower) / 2. The division is done on 2 and not on the number of periods as for a moving average.

In addition to the mathematical difference, on the graph, they form horizontal horizontal lines if there are no new low or high points over the period, which, as will be seen later, represents levels Very useful supports and resistors.

The Tenkan is calculated on 9 periods and the Kijun on 26 periods.

The Senkou Span A and the Senkou Span B

The peculiarity of these two lines is that they are projected into the future and like the Tenkan and the Kijun, they also form tiers. They work together, but their methods of calculation are different.

The Senkou Span A, known as SSA, is an average of the Tenkan and Kijun lines projected 26 forward periods, as an extension. The calculation formula is as follows: (Tenkan + Kijun) / 2. The Senkou Span B, known as SSB, is the median of the highest and lowest of the last 52 periods, and projected 26 periods in the future, as an extension.

The calculation formula is as follows: (Highest + Lower) / 2.

It is calculated like the Tenkan and the Kijun but on 52 periods and it is projected 26 periods ahead.

The area between these two lines represents what is called the cloud, which is usually colored on the graph.

The Chikou Span

More commonly known as Lagging Span because it simply represents the delayed price line of 26 periods (the course graph with 26 periods of delay, a "photo" of the past).

Interpretation and application to the trading of Ichimoku

First, it is customary in the presentation of the indicator to indicate that the crossing of the Tenkan and the Kijun gives a trading signal as on moving averages, but these two lines are NOT moving averages and Such signals are often misleading, particularly on short time units. On Ichimoku, interest is elsewhere, it is the price line that will have to be monitored.

To analyze and follow the trend

The cloud between SSA and SSB indicates a level of price equilibrium. It is then difficult to anticipate a trend when prices evolve inside the cloud.

When prices move above the cloud, the trend is bullish. And when they move below the cloud, the trend is bearish.

The crossing of the cloud from one side to the other indicates then a change of trend in the unit of time studied.

The finer the cloud, the more likely the tendency is to reverse, and vice versa.

To locate the supports and resistors

Each of the 4 lines, apart from Lagging Span, represents a level of support or potential resistance. If the curve forms a horizontal line, the level will be stronger and harder to pass, and the longer the line, the more true it will be.

In addition to the levels directly below or above the current price, the previously formed bearings are also likely to represent levels of support or strength.

To get trading signals

The trading signals are given by the break of the different lines.

The break of the Tenkan is an early warning that the trend could reverse, the Kijun will confirm whether this is a real turnaround or only a rebound. Subsequently, the definitive confirmation is given by the crossing of the cloud.

The Lagging Span here comes into play to provide further confirmation or to call for caution if it is likely to encounter supports or resistances. First we look at where the prices are and then we confirm with Lagging Span.

For example, one can have a configuration in which the prices leave the cloud but block without apparent obstacle, and it will then be interesting to see where lies the Lagging Span which will probably be under resistance.

Objectives and stops can be set at different levels.

Practical advice

Among the 4 curves, the Kijun and the SSB are the most resistant and most likely to hold. Their breakage therefore gives the most reliable signals. For example, they can be made thicker on the graphs for easier identification in addition to the color codes.

The analysis on Ichimoku must be multi-temporal, the study of a single unit of time does not give enough information to optimize its trading. It would be useful to analyze 3 different time units according to the investment horizon. In swing, hold D1, H4 and H1, and in intraday take H1, M15 and M5, while keeping H4 - for the swing - and M15 - for the intraday - as guiding threads because it is on these two units of time That trading signals are the most reliable on Ichimoku.