Indicator Is Hard to Say, Easy to Trade

05/31/2012 6:00 am EST

Focus: FOREX

Sara Patterson, contributor to DailyForex.com, explains a proven Japanese indicator that is gaining worldwide acceptance for its ability to spot key turning points in the currency markets and beyond.

Developed in the mid-20th century by Goichi Hosada, a Japanese journalist, the Ichimoku Kinko Hyo formula for market charting was actually introduced to the public in 1968 after years of testing done by Hosada and his students. Upon release, the indicator wasn’t entirely popular, and it was limited mostly to usage throughout Japan and other pockets of Asia.

The indicator was only popularized on the global scale in the past decade, since traders worldwide have taken a renewed interest in the notable success of the system. In addition to being a popular forex indicator, Ichimoku Kinko Hyo is also used for trading commodities, stocks, and futures.

See also: Trading on Clouds: The Art of Ichimoku

Translated literally, Ichimoku Kinko Hyo means “equilibrium chart as a glance,” and the system uses five distinct components to create a full picture of how the market is trending.

Each component of the system is not meant to be used individually, but to be considered as part of the whole view of the market and the instrument being analyzed. The Ichimoku Kinko Hyo works best at the daily and weekly intervals, and its components include:

  1. Tenkan Sen: Literally, “the turning line,” this is the highest high + lowest low divided by 2 for the last number of time periods being analyzed (ex. 9 periods)
  2. Kijun Sen: Japanese for the “the standard line,” this is the highest high + lowest low divided by 2 for a second, longer time interval (ex. 26 periods)
  3. Chikou Span: Translated as the “lagging line,” this is the value of the closing price over the same time period as the Kijun Sen
  4. Senkou Span A: This “first leading line” is the tenkan sen + kijun sen divided by 2, looking at a longer interval into the future (ex. 26 time periods forward)
  5. Senkou Span B: The “second leading line” is the highest high + lowest low divided by 2 for a time span that is double the kijun sen into the future (ex. 52 time periods forward)

Sound confusing? Perhaps this is why it took so long for Ichimoku Kinko Hyo to catch on. But with a bit of patience, you too can learn to understand this helpful forex indicator.

How to Trade the Ichimoku Kinko Hyo Indicator

Consider this: If the price of a pair is higher than the kijun sen, the prices will likely continue rising. When the price crosses the kijun sen, chances are good that the trend will begin to shift in the opposite direction.

Many people who follow Ichimoku Kinko Hyo believe that you can get signals from the kijun sen. A buy signal would occur when the tenkan sen crosses the kijun sen in the bottom-up direction. If the signals cross in the top-down direction, a trader would opt to sell.

Tenkan sen can also be used to measure a channel if the indicator is found horizontally on the chart.

For further reading, see our three-part series on trading Ichimoku cloud charts here.

By Sara Patterson, contributor, DailyForex.com

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