Ichimoku Indicator
Ichimoku is a Japanese charting technique that was created before by a Japanese newspaper writer, with the pen name of Ichimoku Sanjin.
- Ichimoku means "a glance" or "one look"
- Kinko means "equilibrium" or "balance"
- Hyo is the Japanese word for "chart"
Thus, Ichimoku means, "a glance at an equilibrium chart". Ichimoku attempts to identify the likely direction of stock index price & help the trader to figure out the most suitable time to enter or exit the stock index trading market.
Calculation
This indices technical indicator consists of five lines drawn using the midpoints of previous highs & lows. The five lines are calculated as follows:
1) Tenkan-Sen: Conversion Line: Red Line (Highest High + Lowest Low) / 2, for the last 9 stock index price periods
2) Kijun-Sen: Base Line: Blue Line (Highest High + Lowest Low) / 2, for the last 26 stock index price periods
3) Chikou Span: Lagging Span: Green Line Today's closing stock index price drawn 26 stock index price periods behind
4) Senkou Span A: Leading Span A = (Tenkan Sen + Kijun Sen) / 2, plotted 26 stock index price periods ahead
5) Senkou Span B: Leading Span B: (Highest High + Lowest Low) / 2, for the past 52 stock index price periods, drawn 26 stock index price periods ahead
Kumo: Cloud: area between Senkou Span A and B
Indices Technical Analysis & How to Generate Trading Signals
Bullish signal - Tenkan-Sen crosses Kijun-Sen from below.
Bearish signal - Tenkan-Sen crosses Kijun-Sen from above.
However, there are different levels of strength for the buy and sell stock index trade signals generated.
Technical Analysis in Indices Trading
Bullish crossover trading signal forms above the Kumo (clouds),
Very strong buy signal.
Bearish cross-over trading signal forms below the Kumo (clouds),
Very strong sell signal.
If a bullish/ bearish cross-over trading signal takes place within the Kumo (clouds) it is considered a medium strength buy or sell trading signal.
A bullish cross-over that occurs below the clouds is considered a weak buy signal while a bearish crossover that occurs above the clouds is considered a weak sell signal.
Support and Resistance Levels
Support and resistance levels can be predicted by the presence of Kumo (clouds). Kumo can also be used to identify the current stock indices trend of the stock index trading market.
- If stock index price is above the Kumo, the prevailing market stock indices trend is said to be upwards.
- If stock index price is below the Kumo, the prevailing market stock indices trend is said to be downwards.
Chikou Span or Lagging Span is also used to determine the strength of the buy or sell signal.
- If the Chikou Span is below the closing stock index price of the last 26 periods ago and a sell short signal is given, then the strength of the stock indices trend is downwards, otherwise the signal is considered to be a weak sell signal.
- If there is a bullish signal and the Chikou Span is above the stock index price of the last 26 periods ago, then the strength of the stock indices trend is to the upside, otherwise it is considered to be a weak buy signal.
