How to use the Ichimoku indicator
The Ichimoku Kinko Hyo indicator is an advanced technical analysis tool used in financial markets to identify trends and provide buy and sell signals. It was developed in Japan in the 1930s and its name means “one-eye view,” as it provides a comprehensive view of the market situation. Here is how it works and its main components:Ichimoku Indicator Components:
Conversion line (Tenkan-sen): Calculated as: (highest high + lowest low) ÷ 2 over the last 9 periods.
Function: It is a short-term trend indicator.
Base line (Kijun-sen): Calculated as: (Highest high + Lowest low) ÷ 2 over the last 26 periods.
Function: Used to identify support and resistance levels and confirm the trend.
Kumo cloud: It consists of:
Senkou Span A: Average of the conversion line and the base line, drawn forward 26 periods.
Senkou Span B: (Highest High + Lowest Low) ÷ 2 for the last 52 periods, also drawn forward 26 periods.
The cloud represents support and resistance areas, and when the price is above the cloud, the trend is up, and if it is below it, the trend is down.
Chikou Span: This is the current closing price, but drawn backwards 26 periods.
Its function: It is used to confirm the trend. When it is above the current prices, this indicates an upward trend.
How to use the Ichimoku indicator:
Buy signals: occur when the conversion line crosses the base line from bottom to top, preferably when the price is above the cloud.
Sell signals: occur when the conversion line crosses the base line from top to bottom, preferably when the price is below the cloud.
Cloud: It acts as an indicator of future support and resistance levels. The thicker the cloud, the stronger the resistance or support level.
Market direction: It is determined based on the position of the price relative to the cloud:
If the price is above the cloud, the trend is up.
If the price is below the cloud, the trend is down.
Advantages of the Ichimoku indicator:
Combines different elements into one chart, providing multiple information about the market.
Helps to accurately identify support and resistance areas and market trend.
Its disadvantages:
It may seem complicated to beginners due to the large number of ingredients.
It is not recommended for use in markets with low volatility or very short time periods.
By using the Ichimoku indicator, traders can make better decisions based on a comprehensive and clear picture of the market.
