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Introduction to the Ichimoku Indicator and how to trade it

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Nadeem
1864
Nadeem  

I found this article while doing some research and I really think it will be an interesting read for wannabe traders and traders alike.

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This indicator is based on the 4 time intervals and because of that we may see the 5 different line:

- Tenkan-sen is the average value of the price for the first time interval calculated as sum of maximum and minimum for this period of time devided by 2;

- Kijun-sen is the average value of the price for the second time interval;

- Senkou Span A is the middle of interval between two above mentioned lines (Tenkan-sen and Kijun-sen) shifted onward on the value of the second time interval;

- Senkou Span B is the average value of the price for the third time interval shifted onward on the value of the second time interval;

- Chinkou Span is the closing price of the current candle shifted back on the value of the second time interval.

Ichimoku indicator

The space between Senkou lines is the cloud.

And we have 3 cases:

- if the price is inside the cloud (it means it is between Senkou lines) we have non trading market. In other words, we are not trading inside the cloud.

And Senkou lines are the support and resistance lines in this case.

- if the price is above the cloud the first Senkou line is the first support, and the second one is the second support respectively.

- if the price is below the cloud the first line (first from the price line) is the first resistance and the second one is the second resistance.

If Chinkou Span line is crossing the price curve from below to upward we have the signal to buy, and from above to below - signal to sell.

Kijun-sen is used as market trend indicator line (main line):

- if the price is above Kijun-sen line we have uptrend (most probably);

- if the price curve is crossing the Kijun-sen line the trend will be reversed (most probably as well).

Tenkan-sen line is crossing Kijun-sen line:

- from up to down - sell signal;

- from down to up - buy signal.

Tenkan-sen and Kijun-sen line are used to estimate the trendable and float market. If one of the line is going by the horizontal way we have float (non-trading zones).

Besides, Tenkan-sen is used as the reversed line to estimate the trend.

Thus, the Ishimoku indicator looks like trading system: all the lines are the middle of the price range for the some period of time and we may estimate the bullish and bearish trend and so on. And all the lines are re-acted instantly on the creating the new max or minimum within period of time - no delay.

In other words the Ishimoru indicator is of the complex trading system.

Well. But why we are not using this indicator right now?

Because some people say: "the settings of the indicator (9, 26, 52) are valid for the weekly charts only; and not for the forex; this indicator will not work on an other timeframes with the default settings; so it is necessary to have different settings for the different timeframes.

But anyway there are many people who are using this indicator with some good results. And they are using exactly default settings (9, 26, 52).

On the next few posts we will describe more about it but I want to say that if you are trading using Ishimoru indicator you will have 1 trade for 2 weeks on D1 or 1 trade per 2 days in intra-day trading. And most probably you will be in profit in 4 of 5 cases (it means 75%).

We said above that if Chinkou Span line is crossing the price curve from down to upward we have the signal to buy, and from up to down - signal to sell. But this Chinkou Span line should cross the line not in horizontal way. It should be at angle (45 or above is the ideal crossing).

Besides we mentioned about Tenkan-sen line is crossing Kijun-sen lines crossing: Tenkan-sen is crossing Kijun-sen from down to up - signal to buy (Gold Cross), sell signal is called as Dead Cross.

If the price curve crossed the Senkou Span B line (price candle should be closed before the line) we may open the order on the direction of the trend. But only in the case if Tenkan-sen line is not on horizontal level.

If Tenkan-sen line is on horizontal level - we have afloat market. We are not trading in this case.

And if we have Tenkan-sen, Kijun-sen and Senkou Span B lines are going in horizontal way above each other - it is reversed point. It means the price will change the direction soon.

If the price is inside the cloud together with horizontal Tenkan-sen - afloat market. Most of us will not trade in this case but some people are trying to trade inside the cloude understanding the cloud as the channel. It is possible only if the channel (cloud) is big enough.

So we have the signals to enter. But it is very important to exit in right way: T/P and S/L.

If we enter (open the order) on the direction to the cloud so most probably we will have 2 levels of T/P which are the Senkou Span A and Senkou Span B lines. S/L (stop loss levels) we will estimate using some other indicators.

If we are trading on the direction from the cloud the Senkou Span A and Senkou Span B lines will be stop loss levels (together with Kijun-sen line). In this case the profit level (T/P) will be in the place where Tenkan-sen line is changing the direction, or in some other place according to our evaluation.

It is necessary to say that Ishimoku indicator is using in candlestick charts and we are not trading in case of contradiction with candle analysis.

If the cloud was changed the color ( if the Senkou Span A and Senkou Span B lines were interchanged) we have the sign that the direction of the trend will be changed soon (will be reversed soon).

To trade inside the cloud (which should be big enoung) we are using Tenkan-sen line following the direction of the line and trading using Chinkou Span line signals: if Chinkou Span line is crossing the price curve from below to upward we have the signal to buy, and from above to below - signal to sell. In this case we will have stop loss levels out of cloud and profit levels will be the borders of the cloud. Thus, we enter using Chinkou Span, we have S/L levels somewhere outside the cloud, we have prit levels which are of the borders of the cloud. Or we may exit if Tenkan-sen line was changed the direction; if we have an other Chinkou Span line signal; if the price is crossing the one of the cloud lines.

The most strong signals for this indicator were observed on W1, D1 and H1 timeframes as the following:

- the price curve is crossing the Senkou Span B line breaking this resistance line;

- Chinkou Span line signals;

- 3 line signal (Tenkan-sen, Kijun-sen and Senkou Span B lines are going in horizontal way above each other);

- gold and dead crosses.

We will describe everything about this indicator. Step by step. In the next few posts we will know how to select the T/P and S/L levels on different timeframes practically, how to minimize the risks and which settings of the indicator we must select for the different timeframes.

some people also look for price to break above kijun for entry

not sure of timeframe for this method either and if they use that along with other signals from ichim

I think they are using all the signals together. As many as possible to minimize the risk. And they are waiting untill receive all the confirmation. But it is too late sometimes. Because very faint signal is coming the first, and then the more stronger signals are coming. I will try to describe everything that I know about time frame and settings of this indicator tomorrow. But may say that people are using not D1 only. H1 is very popular as well. Somebody said even about m5!

But D1 and H1 are more popular timeframe.

Many people understand the good trading systems as a profitability. Yes it is true. But Ishimoku indicator is the reliable system.

Ok. Thus how to estimate the stop loss and profit level? It is very important when we are working with this indicator as with a system to have 1 or 2 profit levels and one stop level.

There are 4 ways to estimate S/L levels.

First one is the technical method for S/L. It is for H1 timeframe only:

15 - 30 p on eur;

20 - 30 on gbp;

35 - 50 on jpy;

30 - 80 on chf.

The second method is mostly for D1 and W1 timeframe.

In this case we may estimate S/L using the cloud (behind the cloud) and something else (some strong support level of the indicator for example). And we will have S/L as big as 200 p (on W1) and 100-150 (on D1).

If we want to estimate S/L by the second method on H1 timeframe, we probably will have 40 - 50 on eur, 50 - 60 on gbp, 70 - 100 on chf and 60 - 90 on jpy.

The third method is always 15 p (on chf pair should be 30 p).

Probability to close the positions on stop loss is not less than:

- 40% if we are follow the trend on H1 timeframe;

- 80% if we are playing against the trend on H1;

- 50 or 60% in the flat market.

On the fourth method

we estimate S/L level using the cloud only (outside the cloud).

T/P level are estimating using the support/resistance lines or borders of the cloud. Besides, if the cloud is wide enough the 1st level of T/P may be in the middle of the cloud (if we understand the cloud as a channel).

The most stronger signals from this indicator we will have on MN and W1 timeframe. Good signals may be in H1 timeframe as well if the signal to enter is confirmed (if we are not using one signal from Kijun-sen only, we must use all the signals described above).

All the signals from this indicator are faint in case of H1 unconfirmed and M30 unconfirmed. All the signals from any other timeframes are super faint.

Risks

If you are playing with this indicator using 20,000 deposit having the rule not to open the order if S/L level is more than 2 or 5% of your deposit (daily) you are not risky man.

But as we stated above Ishimoku indicator is having the 4 signals which are not equivalent on strength. In most cases the first signal will be most faint and further signals will be more stronger. But the most stronger signal will be the last one. The probability of the signals to be real ones defers in 15 - 20 % from each other.

Thus the first signal is the most profitable but with the great probability to have S/L (for the order to be closed on S/L without profit). More risky.

Some people using 0.1 lot to open the order on the first signal and 0.4 for the most stronger signal.

On the D1 the settings is the classical one: 9; 26; 52. It is the best for D1 timeframe. For the H1 timeframe we may use: 120; 240; 480.

There are other settings:

- 6-12-24 (H1);

- 72-144-288 (M5);

- 12-24-120

- 12-60-120.

But it was seminar in Moscow in 2002 about Ishimoku and MACD and some people suggested to use 9; 26; 52 for D1 and 120-240-480 for H1 only.

But as a conslusion I may say the following settings:

M5 72-144-288

H1 12-24-120 or 120-240-480

D1 5-10-20 or 9-26-52

W1 9-26-52

But the most profitable and stable results were using the 9-26-52 on D1 and 120-240-480 on H1.

lowphat, may be 8-22-44?

Just 8 instead of your 7.

May be.

All that I posted above about ishimoku was the information which I collected from the different sources basically from russian sources.

Because as I know that:

- not everybody understands russian language and

- there is the problem with communication between the people from the different countries (russians do not want to speak english sometimes and most of us do not understand russian language, or japaniese language for example).

So I just collected.

It is not the strict rule how to use ishimoku or some scientific report.

It is the information only to have everything in one place.

Trading using Ishimoku is not simple way. I know that there are many trading schools to teach the students how to trade using this great indicator.

Thus I posted very preliminary information.

In Japanese, "sen" means line.

"Tenkan" means conversion.

"Kijun" means average or standerd.

"Senkou" means faster, and "chinkou" means later.

Some traders say he only uses Ichimoku, dosen't need other indicator.

A Japanese charting technique developed early in 20th century is enjoyng renewed popularity"

Ichimoku Charts by Ken Muranaka

So Ichimoku is the Japanese tradition. Strongly recommended.

I am not joking about the tradition. Do you know how difficult to receive the information about Ichimoku trading strategies? Very difficult. There are few book and articles and few people only in Western countries and in Russia are trading professionally using this indicator. Because Ichimoku trading strategies are based on the trading experience and practics. Some people call it 'trading secrets'. There are many trading strategies based on this indicator and many of them in Japanese language. And I am not ready to understand this language yet.

I know that this indicator was not developed for the forex. It was adapted to the forex market. Muram, if you are able to get some information in Japanese please share with us (in English). Simple description will be enough.

Chinkou span value is the close price of the current candle shifted some period back (26 in default settings). It is 26 days in D1 . It does not matter how many hours back. It depends on your setings of the indicator.

It this line is going to uptrend crossing the price (11 hours ago or some hours ago - does not matter) so we have buy signal. If we look at this indicator we will understand that this line may cross the price. Not current price. Just a price which was 11 hours ago for example.

This Chinkou span line is crossing the price curved line. Not the current price.

And about the settings. If I change the Kijun-sen from 26 to 1 for example I will have the following (see the image). Chinkou span line is inwhite color.

Ichimoku Indicator

But it is necessary to have all the signals. Not one only. There are many signals are coming: some of the signals are the coming first, some signal is the last one. Last one is strongest signal.

During the weekend I am always attaching the Ichimoku indicator to the daily and weekly charts trying to analyze the future possible direction of the price.

It helps a lot.

I am looking to the Ichimoku chart trying to understand where EURUSD will go to.

Future possible uptrend.Tenkan-sen (red line) was crossed Kijun_sen (blue line) showing uptrend in the near future. We got this buy signal on the full closed bar on D1 timeframe. But this first signal is very feeble. We will have more strognger signal if Chinkou Span line will go up crossing the price. Chinkou Span line (white line) came a short way off the price ready to go up. But did not cross the price yet.

Future possible downtrend. On the other hand, according to the Ichimoku chart the EURUSD is still on downtrend now. We have Senkou Span B line on the way to the price if uptrend (Senkou Span B line is the border line of the cloud). This Senkou Span B line is the nearest resistance line. Besides the price is located below the cloud.

Trend Reversal. According to the cloud we exect uptrend to be established in 15th of March. I mean finally established uptrend. But this situation may be changed.

Flat. Tenkan-sen, Kijun_sen and Senkou Span B lines are on horizontal way. Flat. But the situation may be changed very quickly because Chinkou Span line is not fully following Tenkan-sen, Kijun_sen and Senkou Span B lines.

So, irrespective of the buy signal the situation is not very clear and probably any news will affect on the price movement now.

RebateFXcom
79
RebateFXcom  

I never really understood Ichimoku before but I know some Asian traders use nothing else and swear by it. This explanation is a bit better than the others I have seen around the place. Testing it out now on my micro with a bit of scalping

Nadeem
1864
Nadeem  

Well, I am in same basket as well.. I will need to read this again when I have some free time.

bobai
6
bobai  

The attached document is an interesting weekly Ichimoku analysis.

I found videos from the same author too:

YouTube - Ichimoku World Weekly Market Analysis vol.1.

YouTube - Welcome to Ichimoku World

Ichimoku World by Gabor Kovacs - Blog

Files:
IWWA_vol.1..pdf 1924 kb
Tolga
3
Tolga  

Really amazing indicator. It contains many information with it. Market trend, support resistance points, buy sell signals . I believe this " More complex an indicator is means it is one step closer to real world .

RBFX
6
RBFX  

Hello,

Thank you for this very good lesson, it is one of the more complête which I saw on ichimoku.

That made a long time that I want it to use but I did not dare, certainly because it does not resemble the other methods but I believe that thanks to you, I will start. Thank you

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