Ichimoku Trading Indicator

Ichimoku Trading Indicator

Visually, the Ichimoku trading indicator is impressive and at the same time overwhelming. As the name suggests, it is an indicator formulated by a Japanese – a journalist! Goichi Hosoda developed the indicator in the 1960s and it comprises five lines plotted on the candlestick price chart, forming clouds as well.

Sample of the Ichimoku indicator on RHB TradeSmart.

The Ichimoku indicator appears in different colour codes on various machines but on the RHB TradeSmart advanced charting tool, the coloured lines are:

  • Tenkan-sen: Conversion line (Red line) – 9 day moving average
  • Kinju-sen: Base Line (turquoise line) – 26 day moving average
  • Senkou span A: Leading Span A (blue line)
  • Senkou span B: Leading Span B (purple line)
  • Chikou span: Lagging Span (green line)

How to read the trading signals

The first signal: The Cloud

Depending on how the Leading Span A and Leading Span B cross one another, the cloud colour is determined.

Purple cloud: Leading Span A is above leading span B (indicating uptrend)

Blue cloud: Leading Span B is above leading span A (indicating downtrend)

Analyse the Cloud:

The trend is up when the price chart is above the cloud, down when the price chart is below the cloud, and flattish when prices are in the cloud. An uptrend is further strengthened when a purple cloud is produced by Leading span A (blue line) rising above Leading span B (purple line).

Trading in an uptrend

Buy:

Price candle above the cloud, red line crosses above turquoise line

Example of uptrend: price candles above the purple cloud (leading)

Trading in a downtrend

Example of downtrend: price candles below the blue cloud

Leading Span A (blue line) is below the leading Span B (purple line) producing a blue cloud.

Sell: Below the cloud, red line crosses below turquoise line

Flat, lack of trend: price candles inside the cloud.

There is no clear identification of a trend of any sort in the following chart.

Before making a buy/sell call, it would be advisable to confirm the Ichimoku indicator signals with other indicators.

Sources:

http://www.tradersbulletin.co.uk/ichimoku-explained-5-minutes

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ichimoku_cloud

https://www.incrediblecharts.com/indicators/ichimoku-cloud.php