Ichimoku indicator: Your key to understanding market movements

08, Oct - BLOG

One of the most popular trading indicators is the Ichimoku indicator. This indicator offers a comprehensive view of an asset's price trends in the financial markets by combining multiple dimensions on a single chart. In this article, we will take a closer look at the components of Ichimoku, the trading signals it generates, and how to use it effectively in trading.

What is Ichimoku?

The Ichimoku Kinko Hyo or Ichimoku indicator is a technical analysis tool designed to provide a global view of the price movement of any asset in the financial markets. Developed in Japan by Goichi Hosoda, a journalist who specialised in financial markets, this indicator is designed to help traders determine the most accurate time to enter and exit the market. 

Ichimoku is based on three fundamental pillars: time theory, wave theory and price theory. These concepts allow for a better understanding of price fluctuations and upcoming support and resistance levels. The indicator consists of five lines which, interacting with each other, form the Ichimoku cloud. It helps to identify market trends, support and resistance levels:

• Tenkan: the average of the high and low for the last 9 periods. This line is often considered a relatively weak signal line, as it reacts faster to price changes;
• Kijun: the average of the high and low for the last 26 periods. It is often used as a support or resistance level and is considered a stronger signal line than Tenkan;
• Senkou Span A (SSA): The average of the Tenkan and Kijun. This line represents 26 periods into the future and is part of the Ichimoku cloud;
• Senkou Span B (SSB): the average of the highest and lowest levels over the last 52 periods. The line forms another part of the cloud and is used to amplify the signals given by SSA;
• Chikou (Lagging Span): closing prices delayed 26 periods into the past. It is useful for confirming trends and signals, acting as a kind of market memory.

Understanding the components of the Ichimoku cloud

The Ichimoku indicator consists of several components that, taken together, provide an overall view of the market. Understanding these components is necessary to effectively use this tool in trading.

1. The Ichimoku Cloud

When the price is above the cloud, it usually signals an uptrend - the market is moving upwards. On the contrary, when the price is below the cloud, a bearish trend is likely to begin and the market is sliding downwards. An important element is the thickness of the cloud: the thicker it is, the stronger the support or resistance, which makes it much more difficult for the price to break through these levels. In addition, a change in the colour of the cloud - from red to green or vice versa - can be an important signal of a possible trend change, allowing traders to react in time to market reversals.

2. Kijun

A price crossing above the Kijun line is often considered as a buy signal, while a crossing below it can be a sell signal. In addition, the Kijun often acts as an important support or resistance level. When the price bounces off this line, it may indicate a strong support level, which is worth paying attention to for traders looking for entry or exit points.

3. Tenkan

The Tenkan, being highly sensitive to short-term price movements, often provides quick signals for traders. When the Tenkan crosses the Kijun from the bottom to the top, it can signal the imminent start of an uptrend. In addition, a rapid rise or fall of the Tenkan line can indicate a strong impulse in the current direction of price movement, which makes this indicator an important tool for understanding the market momentum.

4. Chikou

Chikou plays an important role in confirming trends identified by other Ichimoku elements. When the Chikou is above the current price, it serves as an additional confirmation of an uptrend. In addition, a Chikou crossing above or below the price can be a powerful trading signal, especially if its movement coincides with other Ichimoku indicators, reinforcing confidence in the market direction.

Ichimoku trading signals

Here's how to interpret the buy and sell signals given by the Ichimoku indicator:

1. Buy signals

• Tenkan-Kijun crossing: this fundamental signal occurs when the Tenkan line crosses above the Kijun line. This configuration is often seen as a strong buy indicator, especially if it is above the Ichimoku cloud;
• Kumo breakout: The cloud formed by the Senkou A and Senkou B lines is the key element. A price break through the cloud from the bottom to the top is a strong buy signal, indicating a possible change in the uptrend;
• Chikou crossing above the price: The Chikou line moved back 26 periods gives another buy signal when it crosses the rising price curve;
• Senkou A and Senkou B intersection: when the Senkou A line crosses the Senkou B line on an upward path, this is often considered a buy signal.

2. Sell signals

• Tenkan-Kijun crossing: a sell signal occurs when the Tenkan line crosses below the Kijun line, especially if this movement occurs below the cloud;
• Downward cloud breakout: A strong sell signal is generated when the price breaks the cloud from the top to the bottom, indicating a change in the downtrend;
• Chikou crossing below price: a sell signal is also generated when the Chikou line crosses the price curve on the way down;
• Senkou A and Senkou B crossing on a downward move: a sell signal is generated when the Senkou A line crosses below the Senkou B line.

Conclusion

Using the Ichimoku indicator in trading allows traders to see not only the current state of the market, but also its possible future movements. Despite its complexity at first glance, Ichimoku becomes an indispensable assistant for those who seek to gain an understanding of market dynamics and make more informed trading decisions. By carefully studying its components and signals, you can significantly increase your chances of successful trading.