article by CryptoJelleNL
While the majority of indicators are considered to be lagging behind price, there are a few exceptions to this common problem. In today's article, we dive into Ichimoko Kinkō Hyō, a powerful indicator with Japanese origins.
Sure, the name may sound daunting, and the indicator looks complex too, but we promise that once you get to the end of this article, everything will make sense.
Ichimoku Kinkō Hyō is more commonly known as the Ichimoku Cloud, or just Ichimoku. The tool is a combination of technical indicators, which reveal the overall strength and direction of a market - while also identifying support and resistance, overbought and oversold levels, as well as trend shifts.
Developed in the 30 years leading up to 1969, the Ichimoku Cloud is one of the most well-developed and researched indicators. Over those years, Ichimoku was built to serve as an all-in-one technical indicator. The name suggests as much, as Ichimoku Kinkō Hyō translates to "equilibrium chart at a glance".
What is the Ichimoku Indicator?
The Ichimoku Indicator is a combination of several moving averages - and uses those moving averages to create a cloud, predicting where support and resistance will be, in the future.
One important caveat is that while conventional moving averages are calculated with the closing values of each period, Ichimoku uses the midpoint of each period instead.
The indicator revolves around 5 specific moving averages:
- Tenkan-Sen or Conversion Line: Moving average of the previous 9 periods.
- Kijun-Sen or Base Line: Moving average of the previous 26 periods.
- Senkou Span A or Leading Span A: Moving average of Tenkan-Sen and Kijun-Sen, projected 26 periods into the future.
- Senkou Span B or Leading Span B: Moving average of the previous 52 periods, projected 26 periods into the future.
- Chikou Span or Lagging Span: Closing price of the current candlestick, projected 26 periods into the past.
The image below corresponds to the above information. The blue line is the Tenkan-Sen, and so on. As you can tell, the area between Senkou Span A and B is coloured in. It is coloured red, when Senkou Span B trades below A, and green when A trades above B.
This cloud (referred to as the Kumo Cloud) is a unique feature of Ichimoku, because it is projected 26 periods into the future. This projection gives the Ichimoku indicator its unique forecasting insights.
Ichimoku Indicator Trade Signals
When using the Ichimoku Indicator, traders derive two types of trade signals; momentum signals and trend-following signals.
While these signals should not be traded blindly, they can serve as great indications of where price may go next. Generally speaking, signals that go against the cloud have are likelier to be fake signals, while signals that go with the cloud are more likely to play out. Essentially, traders prefer when a bullish signal has a green cloud to match it, whereas a bearish signal is most reliable when the cloud is red as well.
The trend-following signals are the simplest to understand, so we'll start there.
Traders use the Ichimoku Cloud as a trend-following tool, by monitoring the colour of the cloud, and how it is positioned relative to price. Similar to moving averages, they view the market as bullish when price trades above the cloud, and bearish when it is below. Moreover, the cloud is often viewed as dynamic support and resistance, meaning that in an uptrend, traders will look to buy retests of the Senkou Span A, and will sell retests of that same line during a bearish trend.
The Chikou Span (the current price, projected 26 periods into the past) is another tool that generates trend-following signals. In fact, the Chikou Span also serves as a reversal indicator. When this line crosses above price, it is generally considered a confirmation of the bullish trend, and a cross below prices is interpreted as a bearish signal.
Then there are momentum signals, which work similarly to MA crosses. Traders monitor the Kijun-Sen and Tenkan-Sen lines, and market prices. A cross of Tenkan-Sen above the Kijun-Sen is generally considered bullish - and the same is true for prices crossing above the Kijun. A bearish signal is derived from the Tenkan and/or prices crossing below the Kijun.
These crosses are more commonly known as a TK Cross, short for Tenkan-Kijun cross.
Using Ichimoku for Crypto Trading
As mentioned, the Ichimoku Indicator was developed a long time ago. Markets have changed significantly since then, which means the indicator needs to be adjusted for these changes as well.
The first major thing to note is that the indicator was built for the daily chart, which may result in less reliable signals on lower or higher timeframes.
Additionally, during the development of the Ichimoku Indicator, the Japanese business cycle ran on a 6-day schedule, from Monday through Saturday. The indicator works accordingly.
As such, crypto traders generally adjust the settings of the indicator to reflect the 24/7 nature of crypto markets. The Tenkan-Sen's 9 periods (representing 1.5 business weeks) is adjusted to 10 periods. The Kijun-Sen and Chikou-Span used 26 periods to represent the business days in a given month. Crypto traders generally adjust this setting to 30 periods. The same happens for the Senkou-Span's 52 periods, which is adjusted to 60 periods.
In doing so, the Ichimoku indicator is believed to be best suited for trading the crypto markets – though there is a lot of discussion around this matter, with others favoring the traditional 9,26,52 settings. We recommend backtesting either approach, and seeing which one works best for you.
All in all, the Ichimoku Kinkō Hyō is an incredibly powerful tool, that is easier to understand than the appearance and name make it out to be. The tool can serve as an all-in-one analysis solution, causing some traders to build their entire trading strategy on this indicator alone.
Nevertheless, it is recommended to combine the use of Ichimoku with other forms of analysis - such as the study of price action. When an Ichimoku signal has confluence with other analysis forms, it further increases the reliability of the signal.
If you decide to give the Ichimoku Indicator a spin, make sure you do your research. Good luck!
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for Alpha Circle as well.
Check out his twitter: twitter.com/cryptojellenl
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