Introduction

From IchiWiki - The Definitive Reference to the Ichimoku Kinko Hyo Charting System

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Quick Description

Ichimoku Kinko Hyo is a purpose-built trend trading charting system that has been successfully used in nearly every tradeable market. It is unique in many ways, but its primary strength is its use of multiple data points to give the trader a deeper, more comprehensive view into price action. This deeper view, and the fact that Ichimoku is a very visual system, enables the trader to quickly discern and filter "at a glance" the low-probability trading setups from those of higher probability.

History

The charting system of Ichimoku Kinko Hyo was developed by a Japanese newspaper man named Goichi Hosoda. He began developing this system before World War II with the help of numerous students that he hired to run through the optimum formulas and scenarios - analogous to how we would use computer simulated backtesting today to test a trading system. The system itself was finally released to the public in 1968, after more than twenty years of testing, when Mr. Hosoda published his book which included the final version of the system.

Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since Hosoda published his book and has been used successfully to trade currencies, commodities, futures, and stocks. Even with such wild popularity in Asia, Ichimoku did not make its appearance in the West until the 1990s and then, due to the utter lack of information in English on how to use it, it was mostly relegated to the category of another "exotic" indicator by the general trading public. Only now, in the early 21st century, are western traders really beginning to understand the power of this charting system.

Equilibrium At a Glance

The name Ichimoku Kinko Hyo, which translates to "Equilibrium chart at a glance" aptly describes the system and how it is to be used, as described below:

  • While Ichimoku utilizes five separate lines or components, they are not to be used individually, in isolation, when making trading decisions, but rather used together to form an integrated "whole" picture of price action that can be gleaned "at a glance". Thus, a simple look at an Ichimoku chart should provide the Ichimoku practitioner with a nearly immediate understanding of sentiment, momentum and strength of trend.
  • Price action is constantly measured or gauged from the perspective of whether it is in relative equilibrium or disequilibrium. Hosoda strongly believed that the market was a direct reflection of human group dynamics or behavior. He felt that human behavior could be described in terms of a constant cyclical movement both away from and back towards equilibrium in their lives and interactions. Each of the five components that make up Ichimoku provide its own reflection of this equilibrium or balance.

Ichimoku Components

The Ichimoku chart is composed of five (5) separate indicator lines. These lines work together to form the complete "Ichimoku picture". A summary of how each line is calculated is outlined below:

TENKAN SEN ("turning line")     

(HIGHEST HIGH + LOWEST LOW)/2  for the past 9 periods

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KIJUN SEN ("standard line")
                                 
(HIGHEST HIGH + LOWEST LOW)/2  for the past 26 periods

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CHIKOU SPAN ("lagging line") 
                                 
CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods

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SENKOU SPAN A ("1st leading line")

(TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future) 26 periods

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SENKOU SPAN B ("2nd leading line")

(HIGHEST HIGH + LOWEST LOW)/2 for the past 52 periods time-shifted forwards (into the future) 26 periods

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The senkou span A and B deserve special mention here as they, together, form the Ichimoku "kumo" or cloud. We cover the kumo and its myriad functions in more detail in the section "The kumo".

The chart below (FIGURE I) provides a visual representation of each of these five components:

FIGURE I - Ichimoku Components
FIGURE I - Ichimoku Components

Ichimoku Settings

As you can see in the Ichimoku Components section above, each line calculation has one and sometimes two different settings based on the number of periods considered. After much research and backtesting, Goichi Hosoda finally determined that the settings of 9, 26 and 52 were the ideal settings for obtaining optimum results with Ichimoku. He derived the number 26 from what was then the standard Japanese business month (which included Saturdays). The number 9 represents a week and a half and the number 52 represents two months.

The standard settings for an Ichimoku Kinko Hyo chart are 9,26,52.

There is some debate around whether or not these settings of 9,26,52 are still valid given that the standard work month here in the West does not include Saturdays. In addition, in non-centralized markets that do not keep standard business hours like the Forex (which trades around the clock) some have posited that there may be more appropriate settings. Nevertheless, we at Boersma & Hunt, as well as most other professional Ichimoku traders, agree that the standard settings of 9,26,52 work extremely well and do not need to be altered.

The argument could be made that, since Ichimoku Kinko Hyo functions as a finely-tuned, integrated whole, changing the settings 
to something other than the standard could throw the system out of balance and introduce invalid signals.

Thus, for the purposes of describing Ichimoku Kinko Hyo within this wiki, it will be assumed that the standard settings are being used.