The Ichimoku Kinko Hyo Japanese charting technique was developed before World War II by a Japanese newspaper writer with the pen name of Ichimoku Sanjin. The word Ichimoku can be translated to mean "a glance" or "one look". Kinko translates into "equilibrium" or "balance", and Hyo is the Japanese word for "chart". Thus, Ichimoku Kinko Hyo simply means, "a glance at an equilibrium chart". Ichimoku charts attempt to identify the probably direction of price and help the trader to determine the most suitable times to enter and/or exit the market.
The Ichimoku chart consists of five lines constructed using only the midpoints of previous highs and lows. The five lines are calculated as follows:
1) Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) / 2, for the past 9 periods
2) Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, for the past 26 periods
3) Chikou Span = Lagging Span = Today's closing price plotted 26 periods behind
4) Senkou Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead
5) Senkou Span B = Leading Span B = (Highest High + Lowest Low) / 2, for the past 52 periods, plotted 26 periods ahead
The Kumo (or clouds) is the area between Senkou Span A and Senkou Span B.
A bullish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from below. A bearish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above. However, there are different levels of strength for the buy and sell signals of an Ichimoku chart.
If a bullish crossover signal occurs above the Kumo (or clouds), it is considered a very strong buy signal. In contrast, a bearish crossover signal that occurs below the Kumo is considered a very strong sell signal.
If a bullish or bearish crossover signal takes place within the Kumo (or clouds) it's considered an average or medium strength buy or sell signal.
A bullish crossover that occurs below the Kumo (or clouds) is considered a weak buy signal while a bearish crossover that occurs above the Kumo is considered a weak sell signal.
Additionally, support and resistance levels can be predicted by the presence of Kumo (or clouds). The Kumo can also be used to help identify the prevailing trend of the market. If the price is above the Kumo, the prevailing trend is said to be up; if the price is below the Kumo, the prevailing trend is said to be down.
Lastly, the Chikou Span (or Lagging Span) can also be used to determine the strength of the buy or sell signal. If the Chikou Span is below the closing price for 26 periods ago and a sell signal is issued, then the strength is to the downside, otherwise it is considered a weak sell signal. Conversely, if there is a buy signal and the Chikou Span is above the price for 26 periods ago, then the strength is to the upside, otherwise it can be considered a weak buy signal.
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