Hello there, this is tradingpedia.com and this video introduces one of the most interesting indicators that exist in technical analysis. This is a Japanese indicator, called Ichimoku Kinko Hyo, and you should not be intimidated by the name, as it is not that complicated.
Where You Can Find The Ichimoku Kinko Hyo Indicator
As a matter of fact, a rough translation is “equilibrium at a glance”. It is offered by all trading platforms as a trend indicator, even though that is not necessarily true.
You can find in on the MT4 under Insert/Indicators/Trend. It is also called the Ichimoku cloud, or kumo. If you click on it, you will see three lines here – Senkou, Kinjun, Tenkan with 26, 9 and 52 periods. If you apply it on a chart, these are the elements that appear.
The Chinkou Line
Why equilibrium? Focus on the current price. The EURUSD pair trades at 1.1723 at this point. Equilibrium means that the indicator already shows future values, but also has one element that refers to past values – the Chinkou line.
The Ichimoku has five elements: the Chinkou, then this red line called Tenkan, the Kinjun (blue) and then this one called the kumo or the cloud. The cloud is made of two lines – Senkou A and Senkou B. When Senkou A crosses above Senkou B, that is called a bullish cloud. The opposite is a bearish cloud.
Equilibrium at a glance because the cloud is projected 26 periods ahead and this indicator does not repaint. What does it mean? It means that values will not change based on the future price action. Not the Ichimoku – all the values remain the same, will not change.
The trick when interpreting Ichimoku is to understand this equilibrium. If you try to look back at past prices, you should not consider the cloud below the candlestick, but the cloud 26 periods ahead.
Let’s edit the indicator, to change the Chinkou color – let’s use magenta. The Ichimoku has five elements – the cloud and three other lines.
Various ways to trade with it exists. One way is to ride the trend. Namely, to trade the so-called Kinjun-Tenkan crosses. They signal short or long trades.
This cross, for instance, formed eight or nine days ago, and if you sell it here, when the cross happened, you will already have a profit. But this does not happen all the time. For example, we may have crosses that showed a bullish or bearish signal and the market did something else in the meantime.
The Cloud’s Color
The color of the cloud plays an important role. Whenever you have a cross to buy or sell, consider the color of the cloud as a factor that reinforces the decision to buy or sell. For example, this is a bullish cross, and the cloud is bullish as well. Between taking this trade on the short side with a bullish cloud and this trade on the long side with a bullish cloud, we should favor the long one.
Another way to look at it is that the cloud offers support or resistance depending on the trend. But as you are about to find out, it is not necessarily true, but most likely the Chinkou will try to avoid obstacles.