Overview of Ichimoku Kinko Hyo

Overview of Ichimoku Kinko Hyo

Submitted by adil on Tue, 03/18/2014 - 08:12

Trying to extract accurate and reliable guidance from price charts is no easy feat. Various technical tools are used in conjunction with one another to provide the trader with a possible glimpse of what is about to come, and enter in profitable positions. The trader needs to know about momentum, the trend, the possible breakouts and resistance and support levels, all at the same time, to make most effective decisions.

Ichimoku Kinko Hyo is a single answer to all of the needs of a trader. Incredibly complex to look at and decipher anything from it for the first timers, however, Ichimoku in Japanese means, one look. Therefore, with if the trader tugs away the anxiety and fear regarding how tough this tool looks, the tool really does offer a one look a solution. The trader can know about momentum, trend, resistance and support through this tool.

Essentially, the Ichimoku identifies a tradable trend to the trader. The tool has 5 components or lines. First is Tenkan-sen, it is calculated as (highest high + lowest low)/2, that is, it averages the highest high and lowest low for past 9 periods. It is used as a signal line and is an indicator of the market trend. It is also a minor support/resistance line. It demonstrates an uptrend if it is rising and a downtrend if it is falling. When it moves horizontally it shows that price is ranging, and that probably trader should switch to range trading tools.

The second component is Kijun-sen. It is calculated the same way Tenkan-sen is calculated; however, it is done for a much longer period, that is, 26 periods. Therefore, Tenkan-sen is slower and longer period moving average, which is less sensitive compared to Tenkan-sen. This line acts as an indicator of future price movement. If the price is above this line, it can move higher. If the price is lower than this line, it can move lower. The diagram at the end of this article shows this phenomenon.

The third component can be said to be Kumo or cloud, which is made up of two components, Senkou span A and Senkou span B. Senkou span A is calculated as (Tenkan-sen + Kenjun-sen)/2 over 26 periods whereas span B is calculated as (highest high + lowest low)/2 spread over past 52 periods and plotted 26 periods ahead. Both these spans form the two edges of Kumo and represent future support and resistance lines.

Finally, the last element of Ichimoku is the Chikou span, which is a lagging component. It is today’s closing price plotted back 26 days on the price chart, and it is used as a support/resistance aid.

By changing the period to much shorter duration, a binary options trader can very effectively use the Ichimoku or its individual components to make excellent trading decisions. The most important of these components are Kumo, Tenken-sen and Kijun-sen which can be easily used in binary options trading. These can be utilized to identify bullish and bearish trends, changes in trends or current trend’s continuity, etc.