Ichimoku Kinko Hyo Japan has been undoubtedly the most innovative trading leader for many years now. They have started off by inventing candlestick charts and they are still being used worldwide, during the technical analysis of the financial markets. Japan has also given us another powerful trading tool Ichimoku Kinko Hyo. In order for you to learn to trade like an old Japanese master and gain the market advantage you need to take a step back and look into the history of Ichmoku Kinko Hyo. We have prepared a detailed introduction into Goichi Hosoda s legacy. The tutorial has been divided into following sections: Table of contents Ichimoku 101 and history...2 Basic Ichimoku Lines...3 Kumo the cloud...5 Trading signals generated by Ichimoku...6 IchiBO strategy for binary options...7 1
Ichimoku 101 and history Ichimoku Kinko Hyo trading system was invented by Japanese journalist Goichi Hosoda (A.K.A. Ichimoku Sanjin). He began developing the strategy before WWII with the help of his students and conducted all the effectiveness tests using only pen and paper (due to lack of computers). However the whole strategy was published many years later (in late 60 ) in Hosoda s book describing Ichimoku. Goichi Hosoda Ichimoku Kinko Hyo creator and propagator. It is still one of the most popular and common trading strategy used every day all around the world. It works great in pretty much every market from currencies to stocks and securities Despite of its massive success on Asian financial markets, the strategy didn t make its debut in other parts of the world until early nineties (due to lack of proper system description in English). Up until then, the general trading public perceived it as another exotic indicator. As it turned out, the strategy was great not only for currency traders, but also futures and stocks. Today, western investors use Ichimoku Kinko Hyo eagerly and with a high level of effectiveness. "Equilibrium chart at a glance" If we tried to translate Ichmoku Kinko Hyo into English it would mean equilibrium chart at a glance - the phrase that describes the whole system in the way it should be used. Ichimoku strategy is represented by five separate lines or components (moving averages) that can be used individually or together (when used together they show the whole picture of the price movements). That is why just one glance at the chart gives us all the information about the market s condition, momentum and trend strength. Hosoda strongly believed that the market reflects human group s dynamics and behavior. He thought that society s habits can be described by using constant, cyclical move to and from equilibrium level. 2
Basic Ichimoku Lines Ichimoku consists of five basic lines which complement each other. These lines are moving averages with simple modifications a summary of how each line is calculated is explained below: Tenkan-sen (turning line) (highest high + lowest low) / 2 for the last 9 periods. Used primarily as a signal lined and support / resistance line (the minor one). It is derived by averaging the HH and the LL for the last nine periods on the chart. If Tenkan-sen moves horizontally market is ranging, if it moves up or down, market is trending. Kijun-sen (confirmation line) (highest high + lowest low) / 2 for the past 26 periods. It works as a support / resistance line and is commonly used as railing stop line. It acts as a future price movement indicator if price found itself above the blue line it could go higher (and opposite if it found itself below Kijun-sen, it could keep depreciating). Senkou-Span A (leading line 1) (Tenkan-sen + Kijun-sen) / 2 plotted 26 periods ahead. It forms one of the Kumo (cloud edges). It serves as a support or resistance level. Senkou Span B (leading line 2) (Highes high + lowest low) / 2 for the past 52 periods and plotted 26 periods ahead. Forms another edge of Kumo and may serve as a support / resistance. Chikou Span (lagging line) closing price of the current price projected back 26 days on the chart another support / resistance aid. It is also broadly used to confirm the trend. If price moves below we have downtrend, if above we have uptrend. It also generates purchase / sell signals (when crossing the price). Kumo (cloud), which is one of the most important Ichimoku indicators will be described in the next chapter. But as it was said before, it is formed by using the space between Senkou Span A and Senkou Span B depending on the lines movement we may find downward and upward Kumo. Here is an example of what Ichimoku Kinko Hyo chart looks like: 3 Ichimoku chart with all the key components; it is all you need for effective trading
Before we go any further, you need to learn how to setup the Ichimoku indicator. You can now do it in almost every Meta Trader 4 platform that FX and Binary Options brokerages offer. If you want to open Ichimoku Kinko Hyo just go to Insert -> Indicators -> Trend -> Ichimoku Kinko Hyo. In a picture showed below you can change the basic colors and line properties (that will make Kumo and other Ichi MAs more visible). You can use your own settings or try the ones suggested here: Using these will make your chart look just like the one above What s more, you can also change the colour of your chart background. In order to do it just press F8 and in Colours section customize Background to Dark Grey or any color of your choice. Now your Ichimoku indicator is clear, transparent and ready to use! You can now clearly see the Kumo formation and movements of other lines 4
Kumo the cloud In this section we will focus on Kumo (cloud), as it will be one of the most important parts of our trading strategy. As described earlier Kumo consists of two lines Senkou Span A and Senkou Span B. The range between them is essential when price found inside the cloud (the colored zone) we assume that market is not tradable. One of the strongest investment signals is a cloud breakout. When price breaks above Kumo it means a purchase signal. When below, we assume that we may open short (sell) positions. If the price is captured between two Senkous then market is in consolidation phase and is non-tradable situation. The signals strength may vary, depending on which type of the cloud we are dealing with (upward or downward one). Breaking above / below Kumo is one of the most significant Ichimoku signals. Clouds works also as important support / resistance levels (as every moving average). Try to open Ichimoku indicator on different time-frames from M1 to W1 or even monthly. You will see that it works great regardless of the time interval. Thus it may be used successfully by every trader scalpers, intraday or long-term. On left you can see EUR/USD M1 chart and Ichimoku. It is worth mentioning that the cloud breakouts work here as good as on Breaking below green Kumo provided a strong sell signal and dynamic downward movement 5
Trading signals generated by Ichimoku Ichimoku Kinko Hyo provides various trading signals depending on which lines we are currently using. However, you should always pay attention to the whole picture at these patterns in particular: Tenkan-sen crosses Kijun-sen from the bottom and price is below the cloud weak purchase signal Tenkan-sen crosses Kijun-sen from the bottom and price is inside the cloud neutral purchase signal Tenkan-sen crosses Kijun-sen from the bottom above the cloud strong purchase signal Tenkan-sen crosses Kijun-sen from the top above the cloud weak sell signal Tenkan-sen crosses Kijun-sen from the top inside the cloud neutral sell signal Tenkan-sen crosses Kijun-sen from the top under the cloud strong sell signal Remember! When you are selling, the price should always be below Chikou span (downtrend). When buying the price should be above (uptrend)! The chart below indicates the ideal Ichimoku signal. The price is broken above the upward Kumo (the green line), Tenkan-sen crosses Kijun-sen from the bottom and rate is already above the cloud. Furthermore, Chinkou span moves above candlesticks, so we are definitely in an uptrend. As you can see, the price moved almost 400 pips after the signal, boosting the trader s profit enormously. Example of Ichimoku Kinko Hyo purchase signal price broke above the cloud and all of the others conditions have been met 6
IchiBO strategy for binary options This may all sound tricky for trading novices. Fortunately for them, there is a much easier (and still effective!) binary options strategy based only on price crossing Kumo IchiBO (Ichimoku + binary options). IchiBO Main rules: CALL signal price break above the upward Kumo (green) PUT signal price break below the downward Kumo (red) Use options expiring three-four candlesticks after signal was generated (e.g. M5 chart 15 minutes expiry, M15 chart 1 hour expiry) Trade on main currency pairs (GBP/USD, EUR/USD, USD/JPY, etc.), most popular stock indices (S&P500, DAX, etc.) and commodities (GOLD, OIL, etc.) Choose only trending markets use Chikou Span to identify the trend Chart below shows trading signal examples for M5 chart and options with 15 minutes expiration time: Breaking below or above Ichimoku cloud generates effective binary options trading signals One of the most important thing is to learn how to identify Ichimoku signals and choose legitimate clouds (the biggest ones) and strong breakouts (long candlesticks). That is when the probability of successful trade is the highest (oscillating even up to 70-80%)! 7
Chart below shows trading signal examples for M15 chart and options with 1 hour expiration time: You can use Kumo breakout strategy on many intervals and options of expiration time from the shortest to the end of the day expiry However, Ichimoku Kinko Hyo will not work when the market is moving sideways. So you need to identify trending assets by using higher intervals for proper identification (e.g. D1). When candlesticks are moving clearly upward or downward, the market is then tradable. When they are moving in consolidation, we should choose another currency pair, index or commodity. Examples of tradable and non-tradable market when using Ichimoku Kinko Hyo strategy Congratulations! You have now gained the basic knowledge necessary to start with Ichimoku trading. Nonetheless, in order to take the full advantage of IchiBO you need to expand your technical analysis skills. 8