Ichimoku charting system

Beginner Questions
1

One of the indicator system I have been using is the Japanese trading charting system called Ichimoku or Ichi for short.

This tool looks complicated and fuzzy to start with but it is actually a useful thing to have. It has five indicator lines, two of them also create an Ichi cloud.

The ichi cloud on longer term time frames like an hour or above in my opinion is one of the best indicator of support and resistance and since it actually sits on the price/candles it provides visual R1 and R2 and S1 and S2 levels. The thicker the cloud, the higher is the volatility and hence you have two predictions for resistance (R1 and R2) and similarly (S1 and S2). When the candles are inside the cloud you know the instrument is ranging.

I would like to exchange ideas on Ichimoku if anyone has any interest.

Cheers,

Mich

2

Hello,
Your system sounds interesting. I am also practising trades under able guidance of mentor named Tymen. He is also trading using candle sticks. You can see some trades posted in the thread The Joy of CandleStick Trading - Part 2 that is started by our mentor. I would like to know more about the system since it is also using candle sticks.

Regards,
Muthu.

3

Hi Muthu,

Thanks for the interest.

I have seen the PDF of the “The ultimate candelestick trading method” by Mr Tymen Wortel. Interesting stuff. I have a number of queries about the candle patterns that have been described in that document that hopefully I will query later from the author.

If my recollection is correct the method in that PDF combines candles with BB and also candles with BB plus Starc bands. Bollinger bands essentially use SMA as the middle line (indeed if you create an SMA with the same period as BB, the SMA will be sitting on the middle bollinger band) and take 2 standard deviations (SD) as the limit of volatility on each price. The 2 sigma is supposed to provide 95% confidence level (CL) that the price fluctuations will be bound by the upper and lower bollinger bands. If you want 99% CL then you can go for three sigmas and wider BB.

As you may already know SMA by default uses closing prices in its calculation. Ichi lines differ from SMA in a sense that Ichi bands measure the average of price’s highest high and lowest low for different periods. Ichi inventor believed that using the average of price extremes over a given period of time was a better measure of equilibrium than merely using an average of the closing price.

If there is further interest I will ellaborate more on Ichimoku method.

Cheers

4

Hello,

Thank you so much for your patient explanation. I will look forward for more information about this method. Preferably some pictorial examples and word/pdf explanation will come handy if there is one.

Thanks in advance and yes you can gain excellent insight from the pdf that Tymen has posted.

Regards
Muthu.

5

Theres plenty of ichimoku threads on this site if you use the search function

6

A glance

A charting method that encompasses a number of indicators that work in tandem. According to Kumotrader website:

�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.�

As I said before at first the tool looks complicated and fuzzy. However, if one spends a bit time on it, it can be deployed fairly easily. Like anything in a trading system it will need familiarisation and trained eyes.

I created a PDF of hourly GBP/USD chart with candles today that is attached. So let us quickly see what these are. Icihomoku (Ichi) relies on 9, 26 and 52 periods for various elements. Like MACD in the core of it they are two lines. I call them TS and KS. The full name is given in the PDF.

TS is the purple fast moving one built on 9 periods. It is functionally defined as follows:

TENKAN SEN (TS) = (HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods

The slower moving one is called KS (blue) and is built on 26 period

KIJUN SEN (KS) = (HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods

Yeah a bit like MACD and signal line in MACD

There is a third line that some ignore it but I find it useful. It is called CS. In the PDF it is the orange line and is described as follows:

CHIKOU SPAN (CS)= CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods

Now this is an interesting indicator that we will come to it later.

Then there is the black line SSA which is defined as follows:

SENKOU SPAN A (SSA) = (TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future) 26 periods

And finally there is the grey line called SSB defined as

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

You also see some red and yellow dashed area between SSA and SSB. This is called kumo or cloud. When SSA is above SSB then the color is red and it is bullish cloud. Otherwise when SSB is above SSA is it bearish cloud. We will come to these later.

The second diagram shows the purple (TS) and blue (KS) lines and compares them to simple moving averages (SMA). In the second attached PDF we have the 9 period ichi line TS against the 9 period SMA (heavy and light purple lines respectively). Also we have 26 period ichi line KS against 26 period SMA (heavy and light blue lines respectively).

Ok let us first compare TS to a simple 9 period SMA, it is quite different in the sense that it measures the average of price’s highest high and lowest low for the last 9 periods. The argument is that using the average of price extremes over a given period of time is a better measure of equilibrium than merely using an average of the closing price. The same argument can be made for the blue lines. There is another matter of interest in here. When price is ranging KS the blue line provides better level of equilibrium than the 26 period SMA. That is reflected in a flat movement of KS which shows sign on trendless. For example if we look at the recent 1 hour candles we will see a solid blue horizontal line with a fair length for KS. This reflects the fact that the price action is in a range, whereas the 26 period SMA is sliding down. Anyway more of it later.

Cheers

ichi_defs.pdf (71.2 KB)

ichi_lines_and_SMA.pdf (52.7 KB)

7

Hi,
Thank you for your patient explanation. I just downloaded the pdf files and will have a look into it. Hope i dont have to know japanese to understand it :wink:

Regards,
Muthu.

8

Ichi is quite different from the candlestick method in that (in my understanding) the higher timespan (4 hour, daily, weekly) are more accurate and you go long/short for longer periods of time.

Of course there are many many other differences, like the dependence on indicators, etc …

9

Hi There,
Thank you for the heads up.

Regards,
Muthu.

10

Hi,

In my experience ichi works fine on both 1 hour and 15 minutes indicators. Of course with any indicator the longer the period, the more stats there is and hence from statistical point of view there is more weight to it and the corresponding deviation decreases.

Cheers

11

I mentioned the fact that there is time shifting line called CHIKOU SPAN (CS) that takes the current closing price and time shift it backwards 26 periods . There are two rationals for this namely 1; it allows us to quickly see how today’s price action compares to the price action of 26 periods ago, which can help determine trend direction. As you can see the current position of the price is below the price of 26 periods ago (see the attached GBP/USD daily chart with the red candle above CS (orange) closing tip in the blue ellipse). That would indicate that there is a potential for more bearish price action to come since the price tends to follow trends. Conversely, if the current closing price is above the price of 26 periods ago, that would then indicate the possibility for more bullish price action to follow.

and 2; CS also provides clear levels of support and resistance, given that it represents prior closing prices. Currently the price is howering around 1.5941 and has been testing this for the past few days. If we take CS we can draw a line at 1.6000 as resistance and 1.5886 as support. Now if the price breaks further down then having past 1.5886 it may go down to 1.5169 (see the discussion on thread about Elliot Wave in “Elliot Wave Cycle applied to GBP/USD hourly chart”) or even below. On the other hand any break above 1.6000 should take GBP/USD up to 1.6140.

HTH,

Mich

GBPUSD_day_chart.pdf (34.3 KB)

12

mich,
Nice clear explanations and great information, I’m starting to get a clue about the Ichimoku charts. I�ll be following your thread. I appreciate your effort, thanks

13

We will be looking at different elements of Ichmoku system with reference to GBP/USD as of Friday 9th October 2009.

We have already defined Tenkan Sen (TS), Kijun Sen (KS), Senkou Span A, Senkou Span B, the ichi kumo or cloud and Chikou Span (CS). To avoid confusion I will use the abbreviations in the brackets when I refer to these lines.

OK we mentioned that TS and KS act as a pair of simple moving averages (SMA). The only difference being that these two Ichi line are based on the moving average of the highest high and lowest low over a specified period.

The normal period used for TS is 9 period. For KS is 26 periods. CS is the current price plotted 26 period behind. SSA is the average of the TS and KS, plotted 26 period ahead. SSB The average of the highest high and lowest low over the last 52 days, plotted 26 periods ahead. The area between SSA and SSB is called kumo or cloud.

These periods 9, 26, 52 and 26 are based on the original periods used in Ichi in Japan. Japanese being hard working people as they are used to work 26 days in a Month. 9 days was 1.5 weeks (yes 6 working days in a week) and 52 was 26 x2 = 2 months. Thse periods are still widely used and IMO you can use them effectively in 1 hour or 15 minutes charts. They are opinion holders that believe that ichi is more suitable to longer periods. I believe one of the empirical factors that every trader needs to consider is the appropriate time-frame to use for every indicator and like any other indicator such as SMA different time frames should be considered.

In the attached diagram we have:

Currency:GBP/USD
Time frame: 1 hour
Indicators: All Ichimoku components, TS in purple, KS in blue, CS in orange, SSA in black, SSB in grey and bullish cloud with red shadow and bearish cloud with yellow shadow.

The current price is shown at 1.5844 with a green arrow. TS the faster line is below the slower line KS that in normal conditions implies bearish conditions. Note that TK crossed KS from above in the section marked as 26 periods and shown with a blue ellipse. Also note that the candle is below this cross giving more prominence to the bearish signal. We will come to these a bit later.

CS the orange line is the closing prices shifted 26 periods behind. So what is the point of this? First it is used as an indication of bearish or bullish signal. Secondly the fact that you draw prices as a line (as opposed to candle) visually makes it easier to see the support and resistance at various points (the bends). Personally I find drawing trend lines against CS much easier with a better clarity. I have already done so from 1.5996 to 1.5835 (the trend line in 52 periods section), for that sharp fall.

Now let us go back to SSA and SSB. SSA (26 period) is the faster of these two lines and as such reacts to price changes faster than SSB (52 periods). So what is the point of shifting these two lines 26 periods forward from the current price and filling them in between! Let us assume that the price will always respect equilibrium. After all every single indicator that we use (SMA, Bollinger bands, MACD etc) all rely on the averages of prices in one form of the other. The equilibrium or mean is the preferred position for all things in life. Imagine boiling water. By putting heat/energy you are exciting molecules and forcing them to move away from each other. As soon as the water cools down, the molecules get closer together and back to where they were i.e. equilibrium. Anyway you get the drift.

Let us go back to the definition of SSB. It is the average of the highest of the high and lowest of the low in the previous 52 periods shifted forward 26 period from the current price. In the section on 52 periods you see the highest of the high (the green candle). You just about see that blue circle at 1.6119. Also the lowest of the low in the past 52 periods is shown by the blue circle just before the current price closing at 1.5825. So the value of SSB is (1.6119 + 1.5825)/2 = 1.5972 (see the graph). Similarly if you work out SSA it turns up to be 1.5932.

Note that for most of the projected period SSB remains flat. Why is that? Because for the majority of this period the highest of the high and lowest of the low were not moved. In contrast SSA has been moving faster as the price moved higher and moved down as the price started moving down crossing SSB at the green ellipse as you can see on the graph in the section “26 periods forward projected”. That crossover is a bearish signal that coincides with the start of the downtrend (that big fall as shown by the trend line). We will come to it later

Now the cloud is the area between SSA and SSB. There is the current cloud (or the cloud I call it) where the current price is and the leading cloud (the one projected 26 periods from the current price). The leading cloud is primarily used to indicate probable future support and resistance levels. Top of the cloud indicates the first level of support and the bottom the second level when the price is above the cloud. Conversely, the bottom of the cloud indicates the first level of resistance and the top the second level when the price is below the cloud. A price above the current cloud indicates a bullish trend and a price below indicates a bearish one, while price within the cloud indicates a potentially trendless or range bound situation. The thickness of the cloud shows the level of historical volatility, as well as the strength of support or resistance. The ticker the cloud the more volatile is the price. Volatility simply means rapid movement of the price within a short period. If the price is trapped in the cloud then the top and bottom lines are resistance and support respectively.

HTH,

Mich

ichi_lines.pdf (73 KB)

14

I had a nice 2000 pip week using ichimoku exclusively. (In demo) Right now there are at least 3 awesome ichi trends in days/weeks. When I go live I plan to continue trading with this method. It would be cool to have someone to talk to before entering/exiting.

15

Cool. We will be glad to exchange and share views.

Cheers,

Mich

16

Do you trade live or demo?

17

live trades with mini-lots usually GBP/USD.

HTH

18

Here we just consider the market conditions (as opposed to entry or exit strategies). See the attached definition charts

  1. Check the position of Tenkan-sen with respect to Kijun-sen, is it above, overlapping or below
  2. Is the current price above, below or within the cloud
  3. Check the position of the closed candle that the lagging line (Chikou Span) pointing to the current position of the candle (tip of Chikou Span). Is the closed candle above, cutting through or below Chickou Span
  4. What is the sentiment of the current cloud. Is the Senkou Span A (the 26 periods) above Senkou Span B (52 periods), crossing or below.
  5. Is the top line of the cloud horizontal
  6. Check the position of Kijun-sen. Is it pointing up, pointing down or horizontal.
  7. Check to see if both Tenkan-sen and Kijun-sen are in parallel position
  8. Check the active cloud (the one projected 26 periods ahead). Is it bullish or bearish.

This sounds a lot. However, for a trained eye it should not take more than few seconds

ichi_defs.pdf (71.2 KB)

19

Yup those are questions I ask myself before entering but I know there is more to is than just that. The length of the horizontal line on the kume cloud tells you how strong its resistance is…the thickness of the kumo cloud tells you volatility etc.

On a good trend do you exit when the tenkan again crosses the kijun? Where so you se your s/l? Do you adjost your s/l and t/p as you ride the trend up?