Ichimoku is an indicator capable of defining support and resistance levels, identifying trend directions, measuring momentum and providing trading signals.
It is an indicator of Japanese origin that began to be developed in the 1930s by Goichi Hosoda . It will not be until the end of the 60s of the same century when the indicator actively sees the light, and, in the West, it will become popular at the end of the last century.Although it is quite complex to study, it is very effective when it comes to investing due to the precision of the investment signals it offers. Today it is considered one of the best trading indicators and all professional platforms have it available.
Now let's find out in detail Ichimoku and how to use it to invest in the stock market.
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What is Ichimoku?
It is an indicator that is made up of five lines and a cloud. The lines have their names and functions defined:- Tenkan-Sen and Kijun-Sen are moving averages.
- Senkou Span A and Senkou Span B are forward lines, in the style of Western trend lines.
- Chikou Span , equals the current price drawn 26 periods ago
In any case, with sideways trends, Ichimoku can be used by using oscillators and working on smaller time frames: this allows you to spot possibilities of minor trends in the main sideways trend.
It is definitely a versatile indicator, capable of defining support and resistance levels. It can also identify trend directions and, while measuring momentum, provide trading signals.
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How is Ichimoku calculated?
The Ichimoku indicator is made up of five main lines and a cloud. The chart you get will be the one that provides the information about the price action.This is the information that each component line of the indicator contains:
- Tenkan-Sen is a fast line
- Kijun-Sen is a slow line
- Senkou Span A is the first line of leadership
- Senkou Span B is the second line of leadership
- Chikou Span is a delay line
The space that forms between lines three and four is what is called a cloud or Kumo. The functions of all these elements are different from each other.
Tenkan Sen
It is a fast line whose purpose is oriented to information related to price volatility. For this it is the average closest to the price.- When they rise, interpret the highs and lows of the last nine candlesticks as rising.
- When it goes down, it interprets that the highs and lows of the last nine candles are going down.
- When the line stays flat it means the market stops going up or down.
Kijun-sen
Or slow line, it is oriented to offer information on the long-term volatility of prices, and is placed directly on the price.- If it goes up, it tells us that the highs and lows of the last 26 candlesticks are going up.
- If it goes down, it tells us that those highs and lows of the last 26 candles are going down.
- If it does not react or go up or down, it reflects a scenario free of ups and downs in the market.
Kumo
The cloud or Kumo arises from the combination of the Senkou Span A and Senkou Span B lines. The main function of the cloud is trend identification.- If SSB is higher than SSA we are in a downtrend.
- If SSA is higher than SSB we are in an uptrend.
How to trade with Ichimoku?
In the same way that it happens with several Western trading strategies that are based on average crossovers, in the case of Ichimoku, buy and sell signals are used based on the crossing of the fast average and the slow average.
Here 's how to trade Ichimoku based on the investment prompts it offers:
- If Chikou Span is above the cloud and the Kijun line: In addition, Tenkan crosses Kijun up. This can be a strong signal when the crossover of the lines and the price are above the cloud.
- When the crossing of the Tenkan line with the Kijun line happens inside the cloud, it is considered a medium strength signal.
- When the price and the crossing of Tenkan and Kijun, is above the cloud, it shows us a weak buy signal. Also, in this case, it can be interpreted as the beginning of an uptrend, or the end of a downtrend.
Advantages of Ichimoku
It is a more complex indicator than others, but it has some powerful advantages to be taken into account by the investor.- It allows us to quickly choose those configurations or preferences in a very efficient way, in addition, it makes it easier to understand the direction of price movement, and other variables such as sentiment, momentum and trend strength.
- It is a system that allows trend charts. Therefore, it performs better in trending markets. The way it helps to look for trends in price movement, it provides the trader with a good perspective to understand the direction of price movement.
- Ichimoku allows detecting price failures and breakouts, precisely because the system helps to capture the direction of the trend in the time frame in which it operates.
- It is an indicator that allows decisions to be made with a higher level of information than others, since it combines three indicators in a single graph. This makes them show more data and offers greater reliability in the information.
Conclusion
Ichimoku is a solid system that allows a more complex level than others and, in turn, a large number of strategic possibilities, thanks to the variety of the components that make it up.The ultimate objective of this indicator is to quickly offer us an overview that allows us to understand the market and take advantage of opportunities, and even adjust it over a longer period of time to detect such opportunities.
It is therefore a very versatile system, which will be able to offer us support and resistance levels, but it is also aimed at identifying trend directions, measuring impulses and, of course, offering us trading signals.
Within the different trading indicators, in this case, we see how decision-making improves compared to other options, mainly due to the increased levels of information, thanks to a greater volume of data. It is a classic within the systems aimed at providing trading signals to the trader.
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