The Ichimoku Kinko Hyo, also known as the Ichimoku Cloud, is a versatile indicator that defines support / resistance, trend direction, momentum and trade signals. The indicator was developed by Goichi Hosoda. You may also want to review the Library vs. Premium Ichimoku features and watch an intro video here.
Indicator Description
The Cloud:
The most characteristic feature of the Ichimoku indicator is the cloud (Kumo). As you will see, that the cloud is comprised of two lines, namely the Senkou Span A (green) and the Senkou Span B (red). A trend can be found by determining whether prices are trading above or below the the cloud. If prices are trading within the Ichimoku indicator cloud, it indicates a sideways market.
You may determine strong uptrends when the Senkou Span A (green line) has crossed above the Senkou Span B (red line), plotting a green cloud. A strong downtrend has a falling Senkou Span A (green line), crossing below the Senkou Span B (red line) and plotting a red cloud. Because the cloud is displaced 26 bars forwards, you may use it to forecast future support / resistance.
Tenkan-sen vs. Kijun-sen:
Furthermore, you may used the Tenkan-sen (blue) and the Kijun-sen (red) lines to identify faster and more frequent market moves. The Tenkan-sen is calculated using a 9-period high adding a 9-period low and dividing by two (9-period high + 9-period low)/2)). The Kijun-sen applies the same formula on a 26 period (26-period high + 26-period low)/2)).
The relationship between the two is similar to that of a 9 and 26 period moving average. The 9-period is faster and follows the price plot relatively closely whereas the 26-period is slower. The 9 and 26 Ichimoku indicator periods are identical to those used for calculating the MACD.
The classic signal is to wait for the Tenkan-sen to cross the Kijun-sen. However, although effective, the signal will occur infrequently in strong trends. Therefore, additional signals may be located when price crosses the Tenkan-sen, alternatively the Kijun-sen.
Evaluating Ichimoku Setups:
Your most favorable setups will align with the cloud and the major trend (above green cloud = bullish / below red cloud = bearish). You may also use the Ichimoku indicator to locate support for retracement entries in an uptrend. Conversely, one may use it as resistance for retracement entries in a bigger downtrend.
Finally, you will see that the Chikou Span references the current momentum, displacing the close 26 bars backwards.
The indicator is available for NinjaTrader 8 and was featured in a previous issue of the Indicator Spotlight and in a blog post on Ichimoku trading setups. You may also want to register for a free trial of the premium version of the Ichimoku Kinko Hyo indicator.
