The Ichimoku indicator or Ichimoku Kinko Hyo is a multifunctional indicator that measures the momentum of price movement, shows support and resistance areas and trend direction. It is a powerful trading and market analysis tool, but many traders feel overwhelmed by all the lines and information this indicator provides and often misinterpret Ichimoku signals. In this article, I will look at this tool in detail and show you step by step how to use it correctly to make trading decisions.
The Ichimoku indicator was developed by Japanese journalist Goichi Hosada before World War II. He later published his trading technique in 1969.
Ichimoku Kinko Hyo is a Japanese term that translates from English as follows:
- Ichimoku - "look".
- Kinko - "balance".
- Hyo - "graph".
That is, the balance of looking at the graph.
Let's see what this indicator looks like and what it does.
Ichimoku indicator lines:
- Blue line (Kijun Sen) or baseline. Calculated by taking the average of the highest highs and lowest lows over the last 26 periods.
- Red line (Tenkan Sen) or turning line. Calculated by averaging the highest high and low of the last 9 periods.
- Green line (Chikou Span), which is a lagging line. This is today's closing price placed 26 periods behind.
- Orange and purple lines (Senkou Span). The Senkou A line is determined by averaging the Tenkan and Kijun lines and plotted 26 periods ahead. The Senkou B line is calculated by averaging the highest high and low of the last fifty-two periods and plotted 26 periods ahead.
- The cloud is located in the area formed by the Senkou lines A and B.
The Tenkan Sen and Kijun Sen lines look like moving averages, however they show an average of 9 and 26 periods of highs and lows. That is, they take the highest and lowest price levels during given periods and then draw a line in the middle of the range.
In the chart below, I have also plotted the 9-period moving average in white for comparison.
Even though the Ichimoku indicator includes five different lines, it is quite easy to read the price chart using it. You need to determine where the price is currently located relative to the Senkou A or Senkou B lines.
Once the Senkou A or Senkou B lines are identified, the cloud component of the indicator will be darkened. When Senkou B is above Senkou A, it indicates to traders that price momentum is currently upward. In this case, the graph will be colored green.
On the other hand, when Senkou A is below Senkou B, the price is likely moving in a downward direction. When this happens, the cloud will be extremely red. Despite the complexities of the chart, simply looking at the colors of the cloud can help you determine the direction of the market.
Signal lines of the Ichimoku indicator
Cloud Ichimoku
Methods of trading using the indicator
How can I place a stop loss and exit trades using the Ichimoku indicator?
Let's sum it up
Ichimoku cloud and moving averages
Ichimoku indicator: trading strategy
Signal lines of the Ichimoku indicator
- When Tenkan crosses Kijun from below, it is a bullish signal.
- When Tenkan crosses Kijun from above, it is a bearish signal.
- When the Chikou Span crosses the current price, it is a signal in the direction of the crossover.
The Tenkan and Kijun lines have two purposes. First, they act as areas of support and resistance during trends, similar to moving averages. Secondly, they provide information about the momentum of price movements. When the price trades above the two lines and when the Tenkan line is above the Kijun line, it signals bullish momentum.
The intersection of two lines confirms the momentum of the price movement. When the shorter Tenkan line crosses over the longer term Kijun line, it indicates that bullish momentum has occurred (and vice versa).
Carriages galloping ahead... Signals Senkou Span, A and Senkou Span B
Let's move on to analyzing the following signals of the Ichimoku indicator from the Senkou Span, A and Senkou Span B lines. These lines provide us with the following types of signals:
- Crossing lines.
- Price movement inside the cloud.
- Senkou Span V price breakout.
- Using the Senkou Span, A and Senkou Span B lines as dynamic support/resistance levels.
Intersection of Senkou Span A and Senkou Span B lines
The Ichimoku cloud itself is a very interesting thing. As you may remember, Kumo consists of two lines. These lines, similar to Tenkan and Kijun, can intersect each other, and relative to which of the lines is at the top, the area is shaded with that color. You may also remember that the Senkou Span, A and B lines are also called proactive lines. So, the intersection of these lines forms a kind of proactive signal that can predict a change in the current trend in the market. If a “dead cross” is formed, this is a proactive signal for the emergence of a bearish trend, while a “golden cross” can predict the emergence of a bullish trend in the market in the future.
This happens due to the fact that the cloud is shifted a certain number of periods forward (so to speak, into the future).
On this chart, I highlighted the Senkou Span, A and Senkou Span B lines of the Ichimoku cloud and the bar where this intersection actually occurred. Why this particular bar? Because the price lags behind the cloud by 26 bars (or the value that you specified in the settings). As you may have noticed, after this bar closed, a small correction began, which soon ended, and a very strong bullish trend continued.
Let's look at another example for a more complete understanding of this signal. This is the daily chart of the EURJPY currency pair:
In area number 1 we can see the “golden cross” of the Ichimoku cloud. As you understand, this is a proactive signal that can indicate a possible change in market sentiment. I used a yellow area to highlight the bar at the time of its formation when the Kumo lines crossed. Afterwards, the price rises, and we can observe how the price breaks through the Tenkan and Kijun lines, respectively, and after that a “golden cross” is formed between the Tenkan-sen and the Kijun-sen.
In marked area No. 2 we see the reverse intersection of the leading lines or the “dead cross”. I again highlighted in yellow the bar during the formation of which this intersection occurred. And if we look at this situation in the context of the current situation at that time and look at the price behavior, we will definitely notice that the previous three candles or bars formed a candle formation called the Inside Bar or Harami, which, together with the Ichimoku indicator could “predict” the beginning of a corrective movement.
These signals are very strong and with a high degree of probability allow you to very accurately “catch” the beginning and end of corrective or impulse movements. But I would recommend using this type of Ichimoku signals only to those traders who understand what is currently happening in the market, i.e. can clearly determine the dominant trend in the market, its current phase, find significant zones of supply and demand (price levels resistance and support). And then only as a confirming signal. I would not recommend using it for beginners, since thoughtless trading on this signal can lead to disastrous results, which will certainly be reflected in the deposit.
Price movement inside the cloud
Let's move on to the next warning line signal. The meaning of this signal is that when the price enters the cloud, it is said that a certain trading corridor is being formed in the market, in which you can trade according to the same rules as in a flat, i.e. from the boundaries of this corridor.
For me this is a very contradictory signal; in all the time I have been “communicating” with this instrument, I have never learned to interpret it correctly. The only thing I noticed is that on the stock market, this signal looks much more interesting than on Forex. Probably due to the fact that Forex is a more volatile market than the stock market. But let me try to illustrate this type of signals:
Daily chart of the USDJPY pair. At point “1” we observe how the price has found support at the lower boundary of the cloud (Senkou Span B). After that there was a correction. At point “2” we see how the price again finds support at the same line. At point “3” we can again see price support from this Senkou Span B and a false breakout subsequently. After a false breakout, the price returned within the cloud again and in the further upward movement it was the Senkou Span line, A (point “4”) that provided resistance to the price.
This signal is much easier for me to understand and interpret from the same resistance support levels. So, if the price has entered the cloud, this does not mean that it should move from one border to another and will definitely return to the opposite side of the corridor.
Breakout of the price of the Senkou Span B line
This signal is considered one of the most significant signals of the Ichimoku indicator . In order to understand why, we must again refer to the indicator parameters and the Senkou Span V calculation formula.
From the first article about the Ichimoku indicator, you should remember that Senkou Span B is the average price over the last 52 periods. That is, this line symbolizes a long-term trend in the market and a price breakdown of this level can serve as the beginning of a new long-term (global) trend.
Very often this level acts as a significant supply/demand level. Quite often, in order for the price to break through this level, it takes time and several approaches. If a breakdown occurs on the first try (approach), then this breakdown is accompanied by the appearance of volumetric candles (with a wide spread) or price gaps. Also, very often the price returns after a breakout to this level in order to test it.
I strongly do not recommend opening against the price movement if it managed to break through the Senkou Span B line. Since the likelihood that you will stand against the crowd and a strong trend will be indecently high!
For a graphical example, I will attach a daily chart of the USDCAD currency pair:
Pay attention to what a stable bullish trend followed after the price broke through the Kumo cloud lines and, in particular, the Senkou Span B.
By the way, look at the current chart (at the time of writing) we see how the price tried to break through the cloud, but our support is at the Senkou Span line B. What do you think will happen next? Two scenarios are possible: either the price will still break through this level, or it will go into a correction. And the Ichimoku indicator, more precisely its Tenkan-sen, Kijun-sen and Senkou Span A lines, can also help us determine the depth of a possible correction.
Using Senkou Span, A and Senkou Span B lines as dynamic support/resistance levels
I have already written more than once about this feature of not only the leading lines, but also the other lines of the Ichimoku indicator, both in the previous and in this article. Of course, I don’t want to repeat myself, but once again I will write that the indicator lines perfectly show the location of support and resistance levels. This is the best information this wonderful indicator can provide!
Cloud Ichimoku
The cloud is the main component of the Ichimoku indicator:
- When the price is above the cloud, it is a bullish signal.
- When the price is below the cloud, it is a bearish signal.
- When the price is in the cloud, the market is in a state of uncertainty.
The Ichimoku cloud consists of a bottom and top border, and the space between the two lines is often shaded green or red.
The cloud top or Senkou A line is the average value between the Tenkan and Kijun lines. The lower, slower boundary or Senkou B is the average between the 52-period high. An important characteristic of the cloud is that it is projected 26 periods into the future.
Because many of the lines on the Ichimoku cloud chart are created using averages, its readings are often compared to simple moving average readings. However, the Ichimoku indicator is more dynamic than simple moving averages.
In the chart below, I have plotted two moving averages side by side and shifted them by 26 periods. You can see that the moving averages are almost identical to the Ichimoku cloud.
The general idea of a cloud is very similar to the Tenkan and Kijun lines, as its boundaries are based on the same principle. Firstly, the cloud acts as support and resistance, and also provides information about the direction of the trend and the momentum of the price movement. But because the cloud uses 52 periods (as opposed to 9 and 26), it moves slower than the Tenkan and Kijun lines.
Basically, a cloud confirms an uptrend when the price is above the cloud and a downtrend when the price is below the cloud. The space inside the cloud is an area in which trading should be avoided. An uptrend is strengthened when the cloud turns green, and a downtrend is confirmed by a red cloud. The cloud is therefore a way to trade the longer term trend.
Indicator characteristics
Platform: MetaTrader 4 Currency pairs: EURUSD, GBPUSD, EURJPY, GBPJPY, EURAUD, GBPAUD, EURCAD, GBPCAD, EURNZD, GBPNZD, USDCHF, GBPCHF Timeframe: H1 – W1 Trading hours: around the clock Recommended brokers: Alpari, RoboForex, Exness
Methods of trading using the indicator
With the help of the Ichimoku cloud, traders can easily choose between a long-term uptrend or a downtrend. When the price is below the boundaries of the cloud, it strengthens the downtrend and vice versa. During strong trends, the cloud also acts as support and resistance boundaries.
Thus, the cloud is ideal for filtering signals between bullish and bearish market phases. However, like most trend indicators, the Ichimoku cloud loses its relevance during consolidations.
The Tenkan and Kijun lines are the fastest moving components of the Ichimoku indicator and provide earlier signals. On the chart below I have marked the numbers 1 to 4 that we will go through.
- The Tenkan line crosses the Kijun, which is a bullish signal. At that time, the price also traded above both lines, confirming the bullish sentiment in the market. The price briefly returned to the cloud but found support. Here you can look for the entry point.
- The price began to cross the Kijun line, which is a warning signal of a trend change. The Tenkan and Kijun lines also crossed into a bearish impulse, once again confirming the trend shift. Finally, the price entered the cloud, finally confirming the change in price movement in the market.
- The price crossed the Tenkan and Kijun lines, and the Tenkan line also crossed the Kijun line. These are all bearish signals. At the same time, the price was trading below the cloud. All of these signals confirm a strong downward trend and can be used as entry points to sell.
- The price has started to cross the slower Kijun line, which is a warning signal. Then the Tenkan and Kijun lines continued to intersect, which once again confirmed that the price momentum was changing its direction.
The strength of Ichimoku signals is assessed based on three factors:
- How far is the price relative to the cloud?
- How far is Chikou Span relative to the cloud?
- How far is the intersection of the lines relative to the cloud?
Let's consider a combination of the RSI indicator and Ichimoku, which work well together.
When using the Ichimoku indicator to track trends, it is important to understand when the current trend has ended and you should exit the trade. The chart below shows that by adding RSI and looking for divergences with RSI, high probability reversals can be identified. If, after RSI divergence, the price crosses the Tenkan and Kijun lines, a trend reversal in the opposite direction is very likely.
Three lines
This signal can help not with finding an entry point, but with determining the state of the market. It can be used as an addition to the trend strategy to determine whether there is a trend.
The fact that a trend has formed in the market is indicated by the ordering of prices and indicator lines:
• if in the direction from top to bottom there are: price chart, Tenkan, Kijun, cloud, then there is clearly a growing trend in the market. By this time, the deal should already be open. The screenshot shows a perfect example of an uptrend - the lines and the price are diverging. At the same time, there was a good entry point at the very beginning of this movement;
• the reverse position of the price, lines and cloud indicates a downward trend.
When identifying a trend in this way, be sure to take into account the angle of the lines. If the distance between the price and the Tenkan line begins to decrease, as well as the angle of inclination, then there is a possibility that the trend is beginning to run out of steam.
How can I place a stop loss and exit trades using the Ichimoku indicator?
Just like moving averages, the Ichimoku indicator can be used to place stop losses and exit trades. It is important to consider several things:
- When price crosses the Tenkan and Kijun lines during a downtrend, it may signal a temporary change in momentum, but as long as the cloud holds the price, the trend cannot be considered broken.
- When the price breaks above the cloud, the downtrend finally ends.
- Traders can use Ichimoku to exit positions conservatively and aggressively.
A conservative trader will exit his trades as soon as the Tenkan and Kijun lines cross in the opposite direction of the ongoing trend. An aggressive trader will exit his trade only after the price breaks the cloud in the opposite direction.
Recommended values for Ichimoku parameters
The values are listed in ascending order. The recommended values for the Ichimoku indicator are:
- 9, 26, 52. Classic meanings from the author. They work well on H1.
- 8, 24, 48. An alternative set that works well on watches.
- 15, 60, 120
- 24, 72, 120
- 12, 24, 120. You can find an excellent entry point for a long trend movement. There are many possible false signals.
- 120, 240, 480. Excellent filters false signals, gives more accurate signals, but there are fewer of them.
The greater the absolute value of the parameters, the more reliable the signal will be. The price to pay for this is that they will be few and late.
Let's sum it up
Overall, the Ichimoku indicator is a very reliable all-in-one indicator that provides a wealth of information. However, it is best to combine it with other tools such as support and resistance levels, price action, as well as other indicators.
To summarize, here are the most important things you should know:
- Use the cloud to determine the direction of the long-term trend. Trade only in the direction of the cloud.
- The cloud also acts as support and resistance during trends. But when price enters the cloud, it signals a change in momentum.
- When the Tenkan line crosses the Kijun, it may signal a price shift towards a bullish trend.
- During a trend, Tenkan and Kijun act as support and resistance.
- Trade only in the direction of the Tenkan and Kijun lines.
- The trader can either use the Tenkan and Kijun lines for stop losses or exit when the price breaks the cloud.
- During consolidations, the Ichimoku indicator becomes useless.
The most interesting thing from the history of creation
The past is important and sometimes interesting. Briefly about the main thing:
- The Ichimoku indicator was developed by the Japanese journalist-analyst Goichi Hosoda back in 1930, with the aim of analyzing the Nikkei index;
- The world learned about the Ichimoku indicator only in 1968. It got its name from the author’s pseudonym – Ichimoku Sanjin;
- The original name sounds like Ichimoku Kinko Hyo, or “graphic balance at first sight,” which may not be the most accurate, but the most understandable translation.
Ichimoku cloud and moving averages
Let's compare the Ichimoku indicator with moving averages and try to understand their advantages and disadvantages.
Let's look at the chart below, which plots three exponential moving averages (EMAs): the 10-day EMA (representing the short-term trend), the 50-day EMA (representing the medium-term trend), and the 200-day EMA (representing the long-term trend).
Now let's look at the same chart, but this time we will plot an Ichimoku cloud consisting of five different lines (Tenkan Line, Kijun Line, Chikou Span Line, Senkou A and Senkou B Lines).
Before we dive into the analysis, let's compare the functionality of both indicators:
| Functionality | Moving averages | Cloud Ichimoku |
| Determines the direction of the trend | + | + |
| Determines the strength of the trend | + | + |
| Determines the direction of the trend | + | + |
| Determines dynamic support and resistance levels | + | + |
| Provides an entry point into the market | + | + |
| Shows the difference in short-term, medium-term and long-term trends | + | — |
| Predicts future potential areas of dynamic support and resistance | — | + |
Even though both indicators are quite similar, there are certain differences between them. The best way to compare two indicators and understand the differences between their performance is to apply them to the same set of trading tools.
Let's analyze a gold futures with three exponential moving averages (EMA).
Now let's try to apply the Ichimoku indicator.
The differences between the indicators highlight the discrepancy between Ichimoku and the EMA indicators. What is important here is not that they are inconsistent with each other, but how they differ in their interpretation of past and predicted price movements.
Let's analyze price events filtered by the Ichimoku cloud.
Let's try to overlay the analysis of the Ichimoku indicator on top of the original EMA chart.
You can see how the short-term EMA sometimes crosses the medium-term EMA, often giving us a false signal. For the Ichimoku cloud, the readings are not as detailed as in moving average combinations.
The two traditional trend signals associated with this moving average combination are the bearish Death Cross (where the 50 EMA crosses below the 200 EMA) and the bullish Golden Cross (where the 50 EMA crosses above the 200), which we can clearly see on the chart. Ichimoku indicated a change in trend much earlier, thus providing some advantage. Similar to the EMA, cloud support coincided with the 50 and 200 EMA.
The strength of a trend can be assessed using only one indicator. If the moving average moves upward in a steep manner, then we can assume that the trend is relatively strong. A flat moving average can indicate an indecisive trend. A downward moving average indicates a pronounced downward trend. What can be useful about using three moving averages is that you can see the strength of the short-term and long-term trend direction, and how much stronger one may be than the other.
There are many more differences that can be found between both indicators. A single tool cannot provide a comprehensive sample for comparison. Now that you have learned about the differences in some details, I recommend that you further explore the differences between them.
How to install?
Today the indicator is available for trading on any platform - for example, in the MT4, MT5 terminal, live chart, etc. Adding it to the screen is quite simple. For example, for MT4 and MT5 terminals the instructions are as follows:
- Go to the "Insert" section on the top panel.
- Select "Indicators".
- Select "Trade".
- Find “Ishimoku Kinko Hyo” in the list.
As a result, the following graphics will appear. Similar colors are used here as in the indicator description. These are the default settings and can be changed at any time.
Traders who prefer to use a live chart can also install the Ichimoku indicator. To do this you need:
- Go on the website.
- Click on the indicator icon.
- Select "Ishimoku Cloud".
- As a result, the following picture will appear on the chart.
It is a little more convenient compared to displaying Ichimoku in the terminal. The fact is that here the clouds are marked in red (resistance zone) and green (support zone). Therefore, a trader can easily identify them and use them in his work as a main or additional tool.
The tool can be downloaded for free on almost all specialized websites. It is often called Ichimoku or Ichimoku Cloud - in fact, they are the same thing. The resulting file should be downloaded to your terminal and used to enter the market. The algorithm of actions is quite simple:
- .
- Save the resulting folder to your desktop.
- Open it and copy the file (usually it contains only 1 document in which the entire system is “packed”).
- Open your terminal and go to "File".
- Then go to the data directory and open the MQL4 or MQL5 folder (depending on the terminal version).
- In it select “Indicators”.
- Copy the resulting file there.
- Reload the program - that is, exit the terminal and then enter it again.
- Install the indicator on the cryptocurrency chart in exactly the same way as described above.
Sometimes the tool is used to develop trading advisors and robots. These are automated trading programs that can independently open and close positions. It is not recommended for beginners to use them - it is better to start analyzing the market on your own to see how the indicator works from the inside.
Note! On some sites you can download Ichimoku with alerts - these are special sound and graphic signals that are triggered when the price reaches the channel boundaries, the chart crosses the Ichimoku lines, etc. (depending on the settings). Such systems can be used as auxiliary tools for entry, since the final decision should always be made independently.
Conversion and baseline lines
As I said earlier, Conversion and Baseline lines are similar to moving averages on charts, but they have a different meaning. Conversion and Base lines show the middle of the 9 and 26 high and low periods. This means they look back at periods 9 and 26 (candles), take the highest and lowest price levels during that period, and then draw a line in the middle of that range.
In the screenshot below, the green and red line are the Ichimoku Conversion and Base Lines. For comparison, I also plotted a 9 period moving average in white on the chart; The moving average is very similar to the conversion line, but does not match it 100%.
Tenkan Sen/conversion line: Midpoint of 9-period high and low
Kijun Sen/Baseline : Midpoint of 26-period high and low
