Ichimoku indicator. "Forex" for novice traders and investors

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Ichimoku Kinko Hyo, or Ichimoku indicator, is one of the standard distributions that is included in some trading platforms. It belongs to the category of technical indicators for the analysis of the Forex currency market. If there is no distribution kit in the terminal, it can be easily downloaded from the Internet. The trading instrument is in the public domain.

A trip to history

The developer of the program is a trader from Japan, Goichi Hosoda. Developed back in the 30s, the Ichimoku indicator was originally adapted for long-term trading in the stock markets. This is due to the fact that the advantage of investors was given to investing in stocks for the long term. The indicator analyzed market movements throughout the trading year. The indicator was used to analyze and forecast the Japanese stock market. After a while, the Ichimoku system was rebuilt for currency markets and began to show good trading results not only on weekly, but also on daily charts.

Description

Ichimoku indicator combines several options for market analysis. It is used to determinetrends (including support and resistance lines). It generates signals to buy and sell various trading instruments. A feature of the program is its unique ability to visually convey information about the state of the market to the trader. The functionality of the program allows you to change the colors of lines and clouds. Each trader can choose the color scheme that will be easy for them to perceive.

The structure of the technical analysis tool

The program is based on three time intervals that differ in time: 9, 26 and 52. The lines, which are based on average price values, allowed us to develop the most accurate mechanism for market analytics. The distribution has a certain resemblance to such a tool as the Moving Average. The only difference is in the settings. Whereas moving averages use the arithmetic mean of prices, the Ichimoku system is based on the central values of the price range. This eliminates the problem associated with the indicator lagging behind the price chart.

Ichimoku lines

Ichimoku lines are the backbone of the entire distribution. As mentioned earlier, they are based on different time periods. A color scheme is built from five lines. The areas between two pairs of lines are shaded with different colors. The grid is superimposed on the price movement chart.

Detailed market analysis is based on the location of the bars relative to the symbolism of the indicator.

• Tenkan-Sen is a trend reversal line, which, with standard indicator settings, is displayed in red on the price chart. The line allows you to determine a short-term (short) trend. It crosses the average of the highs and lows of prices over a long period of time. If the line is pointing up, the trend is up, down - down. The parallel location of the line indicates a flat.
• Kinjun-Sen is the main line, which has a blue color on the chart with standard settings. This is a long-term trend line that is calculated based on 26 time periods. Line interpretation is similar to Tenkan-Sen.
• Senkou-span A is the middle between Kinjun-Sen and Tenkan-Sen. It is shifted forward by the size of the second time interval. Indicated on the graph in sand color.
• Senkou-span B is the average price reading for the third time interval. It is shifted forward by the volume of the second time interval. It has a pale purple color on the chart.
• Chickowspan shows the price at which the current bar closed. The line is shifted by the volume of the second time interval. On the chart it has a light green color.

Distribution settings

The Ichimoku cloud is formed by the intersection of two lines: Senkou Span A and Senkou Span B. Depending on the direction of the intersection, the color of the cloud itself changes. When the price chart passes above the cloud, it indicates an upward movement. If the price is below the cloud, the movement is down. When the chart is superimposed on the cloud, a flat can be observed in the market. In this periodtrading comes with high risks.

The creator of the indicator set the following settings: 9, 26 and 50. He was guided by the following parameters.

For daily chart:

• 9 is one and a half working weeks;
• 26 - number of working days in a month;
• 52 is the number of weeks in a year.

For the weekly chart:

• 9 weeks is 2 months;
• 26 weeks is half a year;
• 52 weeks - year.

The signal is formed if the indicator line and the closing price line cross. The above are just common settings. The indicator is quite acceptable for individual adaptation to a specific strategy. In the hands of a trader who is inclined to bring any trading instrument to perfection, this system can show a decent result.

Ichimoku Settings

Ichimoku indicator is effective for analyzing the market situation with standard settings. Some traders practice using halved parameters: 5, 13 and 26.

Professional traders recommend using a number of other settings:

• For 15-minute, 30-minute and hourly charts: 15, 60 and 120.
• For hourly and 4-hour charts: 12, 24 and 120.
• For the day: 9, 26 and 52.

As long-term practice has shown, the Ichimoku trading system provides maximum profitability on timeframes longer than a day. Beginners should not change the Ichamoku settings, asthis will change the essence of the trading system, and its effectiveness may decrease.

Main signals to open

A popular Ichimoku strategy involves opening positions when the price crosses the Senkou Span B in a trending market. When the direction is from top to bottom, a signal to sell is received. In the opposite direction - a signal to buy. Strengthening of the signal takes place when the price leaves the limits of the cloud.

During a flat, with a sufficiently large cloud width, a signal to buy comes when the Kinjun-sen line crosses with the Tenkan-Sen line in the upward direction at the lower border of the cloud. The reverse situation is a sell signal.

Ichamoku indicator lines can be used as support and resistance. Open positions for a rebound and a breakout are considered very appropriate. Combining the indicator with candlestick analysis is considered effective. If a pattern, such as a pin bar, or an engulfing candle appears at the intersection of short-term and long-term trend lines, you can open according to the rules of candle trading.

Formation of a long-term trend

The Ichimoku trading system allows you to determine the beginning of a strong trend movement. In a situation where the long-term trend line and the short-term trend line take a direction parallel to each other and the Senkou-Span line, this will be a signal for the formation of a strong and prolonged movement. When a rollback to one of the lines with an established trend, you can add positions. In an uptrend, the top position should be occupied by the lineTenkan-Sen, in the center - Kijun-Sen, and in the lower part of Senkou-Span. With a downward price movement, the location of the upper and lower lines should be mirrored. The intersection of two trend lines in the language of traders is called the "golden cross". This is one of the strongest signals that major market players practice while trading.

Ichimoku as the basis of a trading system

Ichimoku cloud is perceived by major market players rather ambiguously. The presence of fans is compensated by a similar number of opponents of the trend instrument. In its pure form, the tool brings a small percentage of profit, somewhere in the range (30-40%). The main signals for currency pairs are rare, no more than 3-4 times a month.

If you use the indicator as a base, supplementing it with signals from other indicators and using PriceAction, you can achieve a good result. It would be useful to supplement the system with trading by levels. And finally. Like any other instrument, Ichimoku requires trading with the trend. Going against the market is not only risky, it is fraught with the loss of a deposit. Therefore, signals that go against the trend should be ignored. This strategy also allows trading on pending orders. General fundamental analysis will help reduce the number of losing trades. Tracking interest rates, the implementation of the averaging policy, the statements of the heads of central banks, you can respond in time to a trend reversal.

Pros and cons of the system

The main advantage of the strategy is the ability todetermine the state of the market with accuracy up to a candle: flat or trend. The accuracy and visual perception of the chart allows you to "bite off" a significant part of the movement. The lines react very quickly to the appearance of new peaks on the charts. They do not tend to lag like moving averages. The only disadvantage of the tool is that if the Ichimoku cloud is small (narrow), you should not focus on any of the signals. In such a situation, the system does not work well.

Recommendations from experienced traders

In order for the Ichimoku strategy to give a good ratio of profit and loss, you need to clearly follow the main recommendations of experienced market participants:

• The technical stop order should be placed in the range from 15 pips to 80, depending on the currency pair. If for the euro and the dollar the optimal stop range is from 15 to 30 points, for the pound it should vary between 30 and 80 points. This rule is relevant for small timeframes. If trading is carried out on a daily or weekly chart, the stop order is set within the third or fourth level. It can reach 200 points.
• You need to open trades on the indicator, starting from strong levels. You need to choose between the price cloud and the level, considering the option that is closer.
• The size of the stop order will directly depend on the target and timeframe. The recommended ratio of profit and loss should be 1 to 5.
• If trading with the trend, the probability of a stop order being triggered is only 20%. With a countertrendtrading, the probability of getting a “moose” is 80%.
• Stop under no circumstances should be within the cloud. Thanks to the masterful work of hedge funds, he can easily get hurt when in the wrong position. The minimum stop size must be 5 pips from the cloud limits.

The effectiveness of using Ichimoku in trading on the Forex currency market is also confirmed by the fact that analysts of dealing centers willingly use this tool to predict the movement of currency pairs. Forecasts for this system are made for the long term. Popping up and closing open deals during the day is categorically unacceptable. For effective trading, you will have to hold positions for a week, or even more. The tool will bring results in the hands of the trader who knows how to restrain emotions and is serious about the rules of money management. Beginners should not start analyzing the market with this tool, they can choose simplified trading functionalities.