Before we begin the discussion about the Ichimoku indicator more deeply, we first look at the history of this indicator
A Japanese columnist and trader, Goichi Hosoda, introduced the first comprehensive technical analysis using Ichimoku Kinko Hyo. The basic technique is to provide a vision of momentum, the strength of a chart and also trend sentiment.
This technique continues to grow until now and many people use this technique because it feels quite accurate in analyzing it, this is because there are enough supporting components in this indicator.
Ichimoku is designed to automatically provide support & resistance levels, where the trend direction moves and also entry & exit points. The essence of Ichimoku is a cloud (cloud) in Japanese called Kumo that can provide information about the level of support or resistance of a price.
With this indicator, you can also see price predictions in the future through the Ichimoku cloud.
Cloud or in Japanese is called Kumo, giving you an idea of how a trend can be accurately analyzed or not. Simple reading is if the price is above the cloud, what often happens is the price confirmed the uptrend. But if the price is below the cloud, what often happens is that the price is confirmed downtrend.
The origin of the name "Ichimoku Kinko Hyo" is a combination of "Ichimoku" which means "at a glance", "Kinko" means "Balance in a glance", and "Hyo" means "Graph". Literally, meaning "Equilibrium chart at a glance".
Although at first glance it looks complex when installed stacked with a price chart, the Ichimoku indicator is actually easy to use. If you really have mastered it, users of the Ichimoku indicator can find out trends while finding potential trading signals in just one glance.
The basic formula of Ichimoku Kinko Hyo
Before discussing more how to trade using Ichimoku Kinko Hyo, we will get to know the components inside the Ichimoku Kinko Hyo indicator
Tenkan Sen: (HIGHEST HIGH + LOWEST LOW) / 2, with standard period 9.
Kijun Sen: (HIGHEST HIGH + LOWEST LOW) / 2, with a standard period of 26.
Chikou Span: The price of closing and shifting back as much as 26 periods.
Senkou Span A: (KENJEN SEN + KIJUN SEN) / 2 then advanced by 26 periods.
Senkou Span B: (HIGHEST HIGH + LOWEST LOW) / 2 of the last 52 candles which were then advanced by 26 periods.
Chickou Span - The range of chickou, or range of lagging, is the closing price of the current period plotted 26 days back on the chart. This line is used to indicate the possibility of support and resistance areas.
You can see the basic shape of the Ichimoku indicator in the image below, with blue-red bars representing the actual price chart:
What the best timeframe for Ichimoku?
After looking at the formula above, we can conclude that in fact, the period in the default setting of the Ichimoku indicator is 9, 26, 52. This is normal because Ichimoku is basically used to analyze price movements in long-term analysis
Thus the timeframe that is often used is daily because of this indicator for long-term analysis
Information has not yet been found to date regarding whether Ichimoku can be used in shorter time frames like in day trading or even scalping. However, the base period (9, 26, 52) can be changed.
How to Trade Using Ichimoku?
The general theory on the Ichimoku indicator if the price is above the cloud, the trend, in general, will possibly move a bullish, and if the price is below the cloud then the trend is generally bearish.
There are also similar to Moving Average indicators (Tenkan and Kijun lines) that function like MA crossover signals. If Tenkan crossing Kijun from below, it is a bullish signal. While if Tenkan crossing Kijun from above there is a bearish signal.
In connection with the development of today's online trading software, you no longer need the struggle to calculate and draw all the lines with yourself. Moreover, the Ichimoku indicator is available in the MetaTrader4 software system. To install this indicator in the MetaTrader4 software, you can simply look at the "Indicator" menu, then click "Custom", then select "Ichimoku Indicator".
Although the Ichimoku Indicator has been around since the early '70s, its usefulness has only reached the wider world around the 1990s.
After the spread of PC usage among Western traders began, the Ichimoku indicator was widely used and began to be realized as one of the most complete technical indicators that ever existed, while having a very good level of accuracy
How to Use Ichimoku Cloud?
The essence of Ichimoku is the existence of clouds or commonly called "Kumo" in Japanese. With this Kumo, a trader can find out where is the resistance or support point of a price movement, how thick the support or resistance is, also about how a trend will occur.
While the other components in the Ichimoku indicator that can find out whether a signal is strong or not in a price movement are Tenkan Sen, Kijun Sen, and Chikou Span. Meanwhile, the two lines that limit the cloud are called Senkou Span A and Senkou Span B. In some other charting software it is also often called Up Kumo and Down Kumo.
If the price moves above the Senkou cloud, that means the price is in an uptrend. The cloud below is a support area of price movements.
If the price is inside the cloud, that means the price is entering a period of consolidation where the up or down trend is unknown, or it can also be called the Sideways condition.
In various circumstances, clouds (Kumo) often change in terms of thickness. In this case, we must understand the concept of Support / Resistance according to the Hosoda. The creator of the Ichimoku indicator assumes that support and resistance are not merely lines, but tend to be identified as areas.
That is why the Support and Resistance area of a price according to the Ichimoku can move thickened or thinned. When the cloud thickens, it means that the support/resistance area is also thickening. Usually, this happens when the trend has begun to weaken and will end soon.
Besides that, one of the unique Ichimoku is Kumo which is displayed up to the front, which is able to pass the final price. Thus the users of the Ichimoku indicator can predict areas of Support and Resistance that will occur, even when prices have not yet been formed. Therefore, a trader can get a shadow of what might happen a few candles in the future.
Tenkan dan Kijun Sen
When viewed from its basic form, we can know that in fact both of these lines Tenkan and Kijun Sen have used similarly to Moving Average, periods 9 and 26.
However, the method of plotting is not exactly the same as the MA. If the MA is plotted by summing all the close points in the agreed period and then averaging, the Tenkan and Kijun Sen lines are plotted only by dividing 2 between the highest and lowest points of the price. The result is a line that resembles a Moving Average but has a higher sensitivity.
Because the way to use the Tenkan Sen and Kijun Sen is the same as the use of MA, the two lines function as Trend indicators like the MA. If Tenkan Sen is above Kijun Sen, it is said that the price is in an uptrend and vice versa if Tenkan Sen is below Kijun Sen then the price is in a downtrend.
Meanwhile, the intersection between the two is a sign of a trend transition from up to down or vice versa.
Thus, so far we have two trend confirmations, namely Tenkan Sen / Kijun Sen and the price position against the Senkou cloud.
Meanwhile, to be able to find out the price support and resistance points, the cloud boundary is the confirmation
Thus, so far we have two trend confirmations, namely Tenkan Sen / Kijun Sen and the price position against the Senkou cloud. While to be able to know the support and resistance points of a price, the cloud boundary becomes the confirmation.
Chikou Span In Ichimoku
The Chikou Span is actually just the closing price data shifted to the left for 26 periods. If we change the appearance of a price from Candlestick to Line Chart, it will be seen that the Chikou Span value will be exactly the price that is going on.
Chikou Span can be used to provide further confirmation about how the current trend is taking place.
If the Chikou Span is above the price, it can be said that an uptrend tends to be strong. Conversely, if the Chikou Span is below the last price, this means a stronger downtrend.
Why did this Chikou span use data 26 periods ago? According to the inventor, this number 26 is the most appropriate number, because it is based on people working 26 days for one month and in half a year is 26 weeks. Trusted, this 26 period brings luck to traders in long-term analysis.
Senkou Span, Factor Forming Cloud (KUMO)
The cloud is a characteristic of the Ichimoku Kinko Hyo indicator, where the cloud represents many support and resistance levels in various levels.
Cloud itself consists of two lines Senkou Span where one line is white and the other is brown.
The basic technique of this cloud is that if prices are above the cloud, what often happens is that prices are confirmed bullish. But if the price is below the cloud, what often happens is the price is confirmed bearish.
But be careful if the price is right in the middle of the cloud because it will be in a non-bias or unclear position.
To determine the support and resistance of this cloud, when prices are above the cloud, the top of the cloud will be a support level.
Likewise, if prices are below the cloud, the bottom of the cloud will be a resistance level. And if there is a non-bias condition, the bottom of the cloud can be a break out point.
But one that must be remembered and noticed, the thickness of the cloud indicates strong or weak a breakout. The thicker the cloud will reduce the risk factor for false breakouts that can harm you.
Summary of How to Read the Ichimoku Indicator
With so many different ways of reading the Ichimoku indicator, we can actually find out whether the trend is strong or not, as well as the trading signals that appear. Here are conclusions from various signals that will be possible and how the Ichimoku indicator indicates each price movement:
Ichimoku indicator condition
Strong Bullish Signal (Strong up trend)
Kumo is below the price, while Tenkan Sen is above Kijun Sen and Chikou Span is also above the price.
Medium Bullish Signal (Trend increases with medium strength)
Kumo is below price, Tenkan Sen is above Kijun Sen but is inside Kumo. While the Chikou Span is above the price.
Weak Bullish Signal (Trend up is weak)
Kumo is above the price, Tenkan Sen is above Kijun Sen, but below Kumo. While the Chikou Span is above the price.
Strong Bearish Signal (Trend drops very strongly)
Kumo Above price, while Tenkan Sen below Kijun Sen and Chikou Span are also below the price.
Weak Bearish Signal (Trend drops weakly)
Kumo is below price, while Tenkan Sen is below Kijun Sen but above Kumo. Chikou Span is below the price.