Ichimoku Kinko Hyo is an investment method created by Japanese journalist Goichi Hosoda. Born in 1898, Hosoda began working for the newspaper Miyako Shimbun in 1924. He wrote under the pseudonym Tarō Sagami and was head of the financial market department. After the war, he went by the name Sanjin Ichimoku (Ichimoku Sage) and sporadically published articles in various publications including the prestigious newspaper Nihon Shōken Shimbun.
In 1969, he published the first book on his strategy: Ichimoku kinkōhyō. By 1981, he had published seven books. Today, due to legal and copyright issues, four recently reprinted books are available and another three can be found on online auctions at astronomical prices.
In 1996, Hidenobu Sasaki published Ichimoku Kinko Studies, a book in which he collects the speculation and investment techniques described by Hosoda. Sasaki's book was a huge success and won the best technical analysis book award in Japan for nine years in a row. Another book describing Ichimoku strategy was written by Hosoda's grandson, Correct interpretation of Ichimoku.
What is Ichimoku?
Ichimoku is a trend following method. That means it follows the dominant trend, so it is essential to understand what "trend" refers to. The shortest and perhaps best definition of trend can be found in John Murphy's book Technical Analysis of the Financial Markets:
“In a general sense, the trend is simply the direction of the market, which way it's moving”
Understanding Market Trends
Sideways Trend: A sideways trend is defined by the absence of a trend, when peaks and troughs follow no pattern:
Uptrend: An uptrend is when the price follows a pattern of rising peaks and troughs. We can roughly define the uptrend as when the price is trading above Ichimoku averages.
Downtrend: A downtrend is a series of declining peaks and troughs. Conversely, we can detect a downtrend using Ichimoku lines, when the price is below Ichimoku averages.
Sideways Movement: A sideways trend or lack of trend, when the price is "stuck" between the averages.
Our goal is to identify the trend we are dealing with early enough. We can do it at a glance using the Ichimoku indicator.
The Five Lines of Ichimoku
The Ichimoku indicator comprises five lines, of which four averages and the price line displaced 26 periods back. Now let's take a closer look at all the lines in the indicator. We will focus on three aspects of each line:
- How it is created
- How the direction changes
- How it is interpreted
We will use the Japanese names: Tenkan Sen, Kijun Sen, Senkou Span A (some Japanese texts call this Senkou Span 1), Senkou Span B (again, some texts call this Senkou Span 2) and lastly, Chikou Span.
1. Tenkan Sen (転換線)
This line is an average between the price high and low over the past nine periods (nine candlesticks). The calculation formula is: (HH+LL)/2 for the past nine periods, where HH is the highest high and LL is the lowest low.
How the Tenkan Average Changes Direction
The Tenkan average can change direction in two ways:
1. With new highs or new lows: When the price reaches a new high, the Tenkan average changes direction from sideways to an uptrend. New lows shift the Tenkan average from sideways to a downtrend.
2. "Candlestick death": The Tenkan line can also reverse direction in what is referred to as "candlestick death" in Japanese. Candlestick death refers to when a candlestick marking a high or low is no longer taken into account as it becomes the tenth candlestick.
Interpreting the Tenkan Line
The direction of the Tenkan line suggests price movement direction. The Tenkan line, like all Ichimoku averages, also represents support and resistance levels. Usually a bounce in the Tenkan line is a good time to add lots to an open position.
We believe it is very important to be able to identify the cause of a reversal in the Tenkan average, unlike an Expert Advisor or a careful trader, to give these changes the proper weighting on the chart.
A break in this average does not mean the trend is likely to change direction, as the Tenkan line indicates short-term momentum. The last point of interest when looking at the Tenkan line is the distance of the price. If the price moves too quickly away from the average, we can usually expect a slight correction.
2. Kijun Sen (基準線)
This line is an average calculated using the formula: (HH + LL)/2 for the last 26 candlesticks, which is the highest high and lowest low in the price over the past 26 periods.
How the Kijun Line Changes Direction
1. New highs or lows: The Kijun line changes direction like the Tenkan line, when the price hits a new low or new high.
2. "Candlestick death": The candlestick marking a high or low is no longer taken into account, goes back 26 periods.
Interpreting the Kijun Line
With the Kijun line, direction becomes secondary to its function as an indicator of support or resistance. We can call it a turning point in the trend, and a break in this line usually means a trend reversal, at least in the medium term.
Despite the downtrend of the Kijun line, the price above this line indicates an uptrend. The candlesticks closing in around the Kijun line indicate a clear sideways movement. Only when the price breaks the Kijun line and later bounces back can we consider the movement to be a clear trend reversal.
3. Senkou Span A (先行スパン)
This line is the average determined by adding the Tenkan Sen and Kijun Sen, dividing the sum by 2, and plotting it out on the chart 26 candlesticks ahead. The formula is: (Tenkan Sen + Kijun Sen)/2
This is another unique point in Ichimoku analysis. An average positioned 26 periods into the future is used to interpret how price will behave with respect to the average.
The Senkou Span A line changes direction at the same time as the Tenkan and Kijun lines. This leading line is an excellent way of predicting future support and resistance levels. In conjunction with the Senkou Span B line form the heart of the Ichimoku system that is the cloud, from Japanese kumo.
4. Senkou Span B (先行スパン)
The Senkou Span B line is determined by adding the highest high and the lowest low over the last 52 periods (or candlesticks). The sum is divided by two and plotted 26 periods ahead.
Understanding the Kumo (Cloud)
The space formed on the chart between Senkou Span A and Senkou Span B is called "Kumo" or cloud. The Kumo is the very heart of the strategy. This cloud is what makes it possible to identify "at a glance" if price trends are bullish or bearish.
When Senkou Span A is above Senkou Span B, the Kumo cloud is bullish.
If Senkou Span A is below Senkou Span B, the Kumo cloud is bearish.
“The Kumo shows the relationship between the long-term trend (the average between the high and low reached in the last 52 periods) and the short- and medium-term trend (the Senkou Span A line, which represents the average between Tenkan and Kijun lines).”
Cloud Crossover Signals
The cloud provides important information about potential trend changes:
When the SSA line (Senkou Span A) crosses the SSB line (Senkou Span B) from the top to the bottom, despite long sideways movements the price eventually drops considerably.
Conversely, when the SSA crosses the SSB from bottom to top, we are dealing with a possible uptrend.
5. Chikou Span (遅行スパ)
This line is generated by plotting closing prices 26 candlesticks into the past. It is used to gauge momentum.
Analyzing the Chikou Span
Analysing the Chikou Span is simple:
- A line above the price plotted 26 periods behind confirms a bullish trend
- A line below the price plotted 26 periods behind confirms a bearish trend
Support and Resistance with Chikou Span
The Chikou Span line is an excellent indicator of support and resistance levels. Traders need to be able to spot valid support and resistance points. If the price is too close to a support or resistance line, it's often better to wait for the price to cross this line before confirming that the trend is strong enough to invest.
The Chikou Span line is used to determine support and resistance levels by taking monthly candlesticks and looking for points where the price has changed direction on the horizontal line close to the current price. Support and resistance points found as far back as 2018 can still be relevant on current charts.
Ichimoku Indicator Signals
The Ichimoku system provides traders with several ways to act: by reading signals from its lines, by analyzing how price reacts around key levels, and by using its unique lagging indicator for confirmation. These perspectives together highlight momentum, support, and possible reversals — and are grouped into three main types of interpretation.
First Group: Signals Generated by Observing Movements in Ichimoku Lines
a) Intersection of the Tenkan and Kijun lines
The Tenkan-Kijun Cross, when the red line crosses the blue line, is one of the most recognized signals in the Ichimoku system. The signal appears when the Tenkan line (red) breaks through the Kijun line (blue), indicating a possible change in trend.
- Golden Cross: When the Tenkan line crosses the Kijun line from bottom to top, a bullish signal is generated.
- Death Cross: When the Tenkan line crosses the Kijun line from top to bottom, a bearish signal is generated.
The signal is strongest when a Golden Cross forms above the cloud (Kumo) or a Death Cross below the cloud, while signals inside the cloud are considered neutral.
b) Intersection of the Senkou Span A and Senkou Span B lines
The crossover of Senkou Span A and Senkou Span B provides a strong signal, especially on higher timeframes such as daily candlesticks. This signal reflects shifts in long-term market sentiment.
- Buy Signal: When Senkou Span A crosses Senkou Span B from bottom to top, the Kumo expands upward, suggesting a buying opportunity.
- Sell Signal: When Senkou Span A crosses Senkou Span B from top to bottom, the Kumo expands downward, signaling a potential sell setup.
The further apart the two lines are after the crossover, the stronger the trend confirmation tends to be.
c) The signal of three lines
This setup appears when three Ichimoku lines align in a specific order, confirming the direction of the trend.
- Increasing signal: When Tenkan, Kijun and Senkou Span A are arranged from top to bottom, the market is considered to be in a strong uptrend.
- Decreasing signal: When Senkou Span A, Kijun and Tenkan are stacked from top to bottom, the market is viewed as being in a strong downtrend.
This signal is particularly reliable when the alignment occurs alongside price action outside the Kumo, confirming trend strength.
Second Group: Signals Generated by Price Behavior
The key factor in the second group is the price, and signals are generated if:
a) The price bounces off any Ichimoku line
b) The price crosses over any Ichimoku line
The strongest signal in this group is a crossover with the cloud (Kumo).
Price Intersections with Specific Lines
Price intersects with the Tenkan line: A crossover by the price with the Tenkan line only has meaning if the price returns to the main trend after a small correction. After a long run, the price often "rests" a while. When it returns to the bullish trend and the candlestick closes above the Tenkan line, traders can add lots to any open positions.
Price intersects with the Kijun line: A crossover by the price with the Kijun line usually means the closing of trades. The Kijun line is often used for stop loss placements. A breakout in the average usually indicates the start of a trend that can last up to several weeks.
Third Group: Signals Derived from the Chikou Span
a) If the price line from 26 periods behind crosses the Chikou Span line
b) If the price line going back 26 periods bounces off the Chikou Span line
The Chikou Span line is usually used as confirmation. If we have any signal to open a position, always look for confirmation in the Chikou line:
- If the Chikou Span is above the price candlestick 26 periods behind, you can buy
- If below, you can sell
A price breakout 26 periods behind shows the beginning of a medium-term trend. That is why it is important to "filter" any signals from the Chikou Span line.
Setting your Stop-Loss and Take-Profit Levels
Ichimoku lines are excellent reference points when making decisions about opening (entry signals), and SL and TP positioning.
Two Main Signal Groups for Risk Management
Signals generated by the Tenkan and Kijun lines: When we have a strong signal emerging from the Tenkan and Kijun lines, the stop loss is placed on the Kijun line (maybe some pips above to avoid accidental closures).
Signals generated by the Kumo: If the signal is generated by the Senkou Span A and Senkou Span B lines, the stop loss is placed on the opposite side of the Kumo.
Risk/Reward Ratio
As one of the core principles in trading is the risk reward (the trade-off between risk and potential gain), simply set the take-profit level as a multiple of the stop loss. In practice, this creates a risk/reward ratio of 1:4 in favor of the trader, which is optimal.
This guide has described the basics of the Ichimoku trading method, which can be the beginning of a long journey as a profitable trader. However, remember that in trading, beyond a solid strategy, sound money management is equally crucial.
The Ichimoku method provides a comprehensive approach to technical analysis, combining trend identification, momentum assessment and support/resistance levels in a single indicator. With practice, traders can learn to recognise the most important opportunities and apply them effectively in their strategies.
Additional References
The concepts and explanations outlined in this guide are based on well-established sources in technical analysis. For readers who want to explore the Ichimoku Kinko Hyo method and related trading principles in greater depth, the following references provide further verification and insights:
- John J. Murphy, Technical Analysis of the Financial Markets – A foundational text explaining market trends and charting techniques.
- Goichi Hosoda, Ichimoku Kinko Hyo – The original work introducing the Ichimoku system.
- Hidenobu Sasaki, Ichimoku Kinko Studies – A comprehensive compilation and analysis of Hosoda’s techniques.
- Alexander Elder, Come Into My Trading Room – A modern take on trading psychology, risk management and system-based strategies that align with Ichimoku principles.
The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material.