What is The Ichimoku Kinko Hyo Indicator?
The Ichimoku Kinko Hyo indicator provides traders with the market’s current momentum, direction and trend strength. The main advantage of using the Ichimoku Kinko Hyo indicator is that it helps traders understand the overall market sentiment at a single glance. In our article, we take a look at the Ichimoku Kinko Hyo indicator in depth.
What is the Ichimoku Kinko Hyo?
The Ichimoku Kinko Hyo is a momentum indicator that determines a currency pair's support and resistance levels. Determining these levels provides traders with information about when the market is going to reverse and the ideal price points to buy or sell the order. The indicator is called ‘Ichimoku’ because, in Japanese, the word means ‘one look’, meaning that traders only need to take a single look at the trading chart to identify trend momentum as well as support and resistance levels. Ichimoku Kinko Hyo indicator provides us with an Ichimoku cloud called Kumo, which indicates the support and resistance levels of a currency pair. Whenever a currency pair price moves above this cloud, it indicates an uptrend. Similarly, when prices move below this cloud, it indicates a downtrend.
- The upturned signals traders to place buy or long orders.
- The downtrend signals traders to place short or sell orders.
What are the main components of Ichimoku Kinko Hyo?
The Ichimoku Kinko Hyo consists of five lines, namely –
- The Tenkan-Sen line, also called the conversion/fast line, is drawn by adding the highest high price level and the lowest low price level over the last nine periods and divided by two. This line indicates a support or resistance level, which can be used as a single line for market reversals.
- The Kijun-Sen line, also called the base/slow line, is drawn by adding the highest high price level and the lowest low price level over the last 26 periods and divided by two. This line indicates another vital support or resistance level, confirming the trend change and is an ideal trailing stop-loss level.
- The Chikou-Span line, also called the lagging/delay span line, is calculated by plotting the closing prices of the last 26 periods behind the last trading candlestick. It is used to indicate potential support and resistance areas as well.
- The Senkou Span A line, also called the leading Span A line, is drawn by adding the Tenkan-Sen line and Kijun-Sen line, and then dividing the number by two. The result we get is plotted 26 periods ahead of the current period. This line forms the first edge of the cloud, helping traders identify future support and resistance areas.
- The Senkou Span B, also called the leading span B line, is drawn by adding the highest high price level and the lowest low price level over the last 52 periods. The result is then divided by two, and plotted 26 periods ahead of the current period. This line forms the other edge of the cloud (also called Kumo), which can identify potential future support and resistance levels.
The Ichimoku Cloud or Kumo is formed by combining Senkou Span A and Senkou Span B lines and helps identify trends.
When the current market price of the currency pairs is above the cloud formed, the upper line indicates the first support level, and the line below it marks the second support level. When the current market price of the currency pairs is below the cloud formed, the lowermost line forms the first resistance level, and the upper line forms the second resistance line.
- It is a buy signal when the Chikou Span line travels through the price chart in the bottom-up direction.
- It is a sell signal when the Chikou Span line travels through the price chart in the top-down direction.
How to trade using Ichimoku Kinko Hyo
1. Identify the Kijun and Tenkan lines
Identifying the Kijun and Tenkan lines along with where they cross acts as a moving average cross signal. It can identify the first price action and where the market is moving.
- When the Tenkan line falls below the Kijun line, it signals a price decline indicating a downtrend and sell signal.
- When the Tenkan line falls above the Kijun line, it signals a price incline indicating an uptrend and buy signal.
2. Confirm the trend with the Chikou line
The Chikou line, like an oscillator, helps traders track the price movement through upper and lower bands. The downtrend or uptrend confirmation helps them place buy or sell orders accordingly.
3. Identify the price breaking through the Kumo
When the current currency pair price breaks through the cloud or Kumo, it indicates the confirmed support or resistance level coming into action. Placing an entry or exit order at this level increases the probability of a successful trade.
How To Use the Ichimoku Kinko Hyo Indicator in MetaTrader 4
Ichimoku Kinko Hyo indicator comes pre-installed in MetaTrader 4. The indicator comes in MT4’s bundle of core tools, which you can find by typing the indicator’s name in the Navigator tab. You can launch the indicator under the trend folder. After clicking on it, a dialogue box opens, which shows several graphical elements you can use with this indicator. You can choose whatever visual effects you want in the chart and also set the number of periods you want to consider from the Parameters tab. The best time frame for Ichimoku Kinko Hyo is already set on the indicator as default. You can customise the colours to configure which line means what easily. After doing this, all you have to do is press the ‘ok’ button, and the indicator is added to your trading chart.
Add the Ichimoku Kinko Hyo indicator in your trading charts
When used correctly, the Ichimoku Kinko Hyo indicator can successfully identify ideal support and resistance levels. It provides you with a clear image of the current market condition and where it is headed. Sign up with our forex trading platform to access MT4 and enjoy the capabilities of the Ichimoku Kinko Hyo Indicator. Sign up for a live trading account or try a risk-free demo account.
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