The Ichimoku Kinko Hyo Japanese charting technique was developed before World War II with the aim of portraying in a snapshot where the price was heading and when was the right time to enter or exit the market.
Ichimoku Kinko Hyo is a phrase in Japanese language which means “Chart Equilibrium at a glance”.
It includes five curves:
1) Tenkan-Sen (Brown): Shows the average price value during the first time interval defined as the sum of maximum and minimum within this time, divided by two.
2) Kijun-Sen (Blue): Shows the average price value during the second time interval.
3) Chinkou Span (Yellow): Displays the closing price of the current candle, shifted back on value of the second time frame.
4) Up Kumo (Green): Displays the midpoint between the previous two lines, shifted forward on value of the second time frame.
5) Down Kumo (Red): Displays the average value of the price for the third time frame, shifted forward on value of the second time frame.
The two Senkou Span (leading) lines are pushed forward in time to represent past support and resistance & the area between them is shaded to make it like a cloud. This “cloud” not only defines the trend but acts as support and resistance for price.
A very basic precept is: if price is above the cloud then the trend is higher and vice versa.
- Buy signal issued when the Tenkan-Sen (brown) crosses the Kijun-Sen (blue) from below. Conversely.
- A bearish signal is issued when the Tenkan-Sen crosses the Kijun-Sen from above.
If there was a bullish crossover signal and the price, at that time, was trading above the cloud, this would be considered a very strong buy signal.
If there was a bearish crossover signal and the price, at that time, was trading below the cloud, this would be considered a very strong sell signal.
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