Ichimoku Kinko Hyo - The Most Underrated Indicator (e.g. NAS100)
Updated
Welcome to my first educational post. This is a big one, Ichimoku Kinko Hyo is the most underused, underrated, least understood and yet most powerful trend indicator available to the general public. I'll first briefly describe the 4 components:
- Tenkan Sen (turning line): it's like a small period moving average but calculated slightly differently. So if price breaks it, it's a first signal of a trend reversal but always wait for the retest.
- Kijun Sen (standard line): it's like a larger period moving average but like the Tenkan it's calculated differently. One interesting note is that when it flatlines it represents the 0.5 fib level of the current range.
Together, they are used for crossovers just like classic moving averages.
- Kumo (Cloud): which is composed of 2 special moving averages called the Senkou Span A and the Senkou Span B. Generally serves as a support/resistance zone and is also subject to crossovers that can confirm reversals (not signal) since it is too slow to signal them. The thicker the cloud the stronger the trend and vice versa.
- Chikou Span (Lagging Span): Mirrors current price action 26 periods in the past. In simple terms, it puts things into perspective and can detect potential blocking points for price.
Here is a case study of the NAS100 and monthly Ichimoku:
What do we see? (Follow the steps)
1) Price breaking the Tenkan and retesting it twice. This is already a major bearish signal.
2) Following the Tenkan break, price doubled down and broke the Kijun + retested it TWICE!
A strong bearish confirmation that the downtrend will continue.
3) The Tenkan/Kijun crossover, this is like a death cross of MAs (look it up).
4) This is a reversal signal. You'll notice how price never touched the cloud again. The monthly Ichimoku really puts things into perspective. It really enables you to see the bigger picture and that it is okay to buy in a bear market. You just have to let it guide you.
5) First confirmation of the reversal: the break of the Tenkan + retest.
6) Second confirmation of the reversal: the break of the Kijun + no retest was even needed.
7) 'Golden cross', the Tenkan/Kijun crossing over which is the third confirmation and that price is simply extremely bullish.
8) The Chikou Span breaking past price. This is similar to price breaking a resistance level, it gives the same kind of signal. This is the final bullish confirmation.
This a very summarised explanation of how the Ichimoku Kinko Hyo indicator should be used BUT if you want to learn more about it, I strongly suggest you read the book by Karen Péloille: Trading With Ichimoku, A Practical Guide to Low-Risk Ichimoku Strategies.
As always, have a lovely Sunday and happy trading! ;)
- Tenkan Sen (turning line): it's like a small period moving average but calculated slightly differently. So if price breaks it, it's a first signal of a trend reversal but always wait for the retest.
- Kijun Sen (standard line): it's like a larger period moving average but like the Tenkan it's calculated differently. One interesting note is that when it flatlines it represents the 0.5 fib level of the current range.
Together, they are used for crossovers just like classic moving averages.
- Kumo (Cloud): which is composed of 2 special moving averages called the Senkou Span A and the Senkou Span B. Generally serves as a support/resistance zone and is also subject to crossovers that can confirm reversals (not signal) since it is too slow to signal them. The thicker the cloud the stronger the trend and vice versa.
- Chikou Span (Lagging Span): Mirrors current price action 26 periods in the past. In simple terms, it puts things into perspective and can detect potential blocking points for price.
Here is a case study of the NAS100 and monthly Ichimoku:
What do we see? (Follow the steps)
1) Price breaking the Tenkan and retesting it twice. This is already a major bearish signal.
2) Following the Tenkan break, price doubled down and broke the Kijun + retested it TWICE!
A strong bearish confirmation that the downtrend will continue.
3) The Tenkan/Kijun crossover, this is like a death cross of MAs (look it up).
4) This is a reversal signal. You'll notice how price never touched the cloud again. The monthly Ichimoku really puts things into perspective. It really enables you to see the bigger picture and that it is okay to buy in a bear market. You just have to let it guide you.
5) First confirmation of the reversal: the break of the Tenkan + retest.
6) Second confirmation of the reversal: the break of the Kijun + no retest was even needed.
7) 'Golden cross', the Tenkan/Kijun crossing over which is the third confirmation and that price is simply extremely bullish.
8) The Chikou Span breaking past price. This is similar to price breaking a resistance level, it gives the same kind of signal. This is the final bullish confirmation.
This a very summarised explanation of how the Ichimoku Kinko Hyo indicator should be used BUT if you want to learn more about it, I strongly suggest you read the book by Karen Péloille: Trading With Ichimoku, A Practical Guide to Low-Risk Ichimoku Strategies.
As always, have a lovely Sunday and happy trading! ;)
Comment
And if you really want to get technical, use the MTF Ichimoku indicator (anthonyf50) so that you can use the power of multiple timeframe analysis.
Comment
I recommend for a general trend analysis the 4h to monthly timeframes.
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