Ichimoku Kinko Hyo
An indicator that is not widely known about in Western countries and hence struggling to take hold, is one called Ichimoku Kinko Hyo.
This form of analysis was invented and developed by a Japanese journalist, Goichi Hosoda back in the 30s, in collaboration it seems with some students, before being published in the late 60s following a long perfecting process.
Hosoda was known as Ichimoku Sanjin, which translates to “that which a man can see from the mountains”. The method was only introduced to the western world in the 1990s, but in my opinion, it has never been taken as seriously as it deserves to be.
With this technical analysis “indicator” there are 4 different identifiable time intervals and 5 different lines. It can be used to determine the market trend, levels of support and resistance and to generate buy and sell signals; in conclusion much more than an “indicator”, it is a true, legitimate technique. Ichimoku has become the basis of my analysis; essential, though obviously combined with other indicators that may be more or less recognised.
The indicator is composed of the following:
Tenkan-sen: similar to a moving average of 9 periods, it is the most sensitive line and that which most closely follows the price trend.
Kijun-sen: similar to a moving average of 26 periods, it moves more slowly than the Tenkan following the price trend of monthly averages.
Senkou Span A: represents the first of the two “cloud” limits and starts as an average point between the Tenkan and the Kijun, forecast however for 26 future periods (The line that forms the cloud known as Kumo).
Senkou Span B: represents the second limit and forms the clouds along with Span A, also representing a forecast of the future price variation, though with 52 periods.
Chikou Span: follows the trend of those prices, forecast from 26 periods in the past.
Foreign names and the amount of obscure information should not discourage the comprehension of the Ichimoku indicator. The visual attached to these elements provides a clear, simple and functional interpretation of the price trend. It’s main advantage is it’s capacity to provide many points of data with just one glance at the graph.
A price above the cloud indicates a strong upward leap, while a price found under the cloud indicates an opposite movement. The prices that remain within the cloud indicate weakness or indecision in the market. A trend tending to go upwards is very clear on the graph.
Levels of Support and Resistance
The components of the moving average of the indicator can be used to identify levels of support and resistance. The Tenkan (or short term moving average) indentifies a short term support/resistence, while the Kijun (or medium term moving average) identifies medium to long term MAs. The Chikou Span line helps to confirm these levels, acting as a signal of market sentiment and is therefore a pertinent confirmation of the trend.
The Moving Average Crossover (Tenkan-Kijun)
Another important use of the Moving Average components is the Tenkan-Kijun Crossover; in essence, a Moving Average Crossover. A Moving Average Crossover that indicates a potential upward trend is determined by the Tenkan that crosses over the Kijun at the top; inversely, a negative signal is established when the Tenkan crosses over the Kijun at the base. There is a lot more that can be said about this and much yet to discover as we keep learning. If you get the opportunity, try to study it further as it could be an excellent way to heighten your ability in seeing opportunities.