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Ichimoku Kinko Hyo is a trading system originating from the East.
It was invented in the 1960s by a Japanese journalist named Goichi Hosoda, who went by the name Ichimoku Sanjin.
In the West, it is better known as the Ichimoku Cloud indicator, which can be found on many trading platforms.
At first glance at the index, even the component names are quite foreign:
Translating the terms into Western names will make it less foreign:
However, the system uses many of the concepts we already know in the West.
While the mathematical formulas are slightly different, the conversion line and baseline are moving averages.
Think of the conversion line as a 9-period moving average.
The baseline is a longer-term 26-period moving average.
All its meanings moving averages Apply.
For example, if the price is above a moving average, the asset is bullish during that time frame.
And when the price drops below and crosses the moving average, get alerted.
Having two moving averages of different periods is a familiar concept.
The fast moving average is the conversion line, which is the trigger line.
And the slowest average is the baseline.
A bullish asset will have its fast moving average above its slower moving average.
This is the case shown in the diagrams above.
Crossing moving averages can be used as signals.
This is bullish when the fast moving average crosses the bullish and above the slow moving average.
This is bearish when the fast moving average crosses down and below the slow moving average.
In the West, we have a term called a “golden cross”, when the fast 50-period moving average crosses the slower 200-period moving average.
The “death cross” is when the 50-period fast moving average crosses below the slower 200-period moving average.
Now, we look at it MACD indicator you may be familiar with.
The blue line is the “signal line”.
The red line is the baseline MACD line.
The crossing of the signal line against the baseline forms signals and is indicated by the histogram changing colors from green to red and vice versa.
In typical MACD setups, the red line is constructed by subtracting the 26-period EMA (exponential moving average) from the 12-period EMA.
The signal line is the 9-period EMA of the MACD line.
Note the numbers 26 and 9.
26 is the same number as the basic period in the Ichimoku indicator.
9 is the same number used as a sign Ichimoku and MACD.
A coincidence?
Or were there influences between East and West?
The lag interval is a line graph of the closing price shifted 26 periods back.
Look at the shape of the trailing opening.
It has the same shape as the candlestick chart.
It simply pulls 26 candles back from the chart.
This is to be used as a visual guide to compare the price now to what it was 26 years ago.
Look back at the candlestick at a time in the past to see where the price was then.
Then look at the lag to see the current price.
If the lagging interval is above the candlesticks, it is bullish.
When the trailing line is below the candlesticks, it is bearish.
This is the part of Ichomoku that has no western counterpart.
The first interval A is the average of the conversion and baseline lines plotted 26 periods ahead.
Leading Span B is the average of the highest and lowest prices over the last 52 days.
It is also planned 26 days in advance.
The two lines form the cloud, green (bullish) or red (bearish).
If the candlesticks are above the cloud, it is bullish. If it’s down, down.
What may seem foreign at first is no longer foreign.
We hope you enjoyed this article on Ichimoku Kinko Hyo.
If you have any questions, please send an email or leave a comment below.
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Disclaimer: The above information is about educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with stock trading options. Any reader interested in this strategy should do their own research and seek advice from a licensed financial advisor.
