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Ichimoku Kinkō Hyō explained

Ichimoku Kinkō Hyō is a type of technical indicator.

Unless you have an understanding of Japanese, the terms Kijun, Tenkan, Senkou, Kumo, Chikou must seem rather obscure. Yet they actually refer to one of the most popular trading systems: the Ichimoku system.

The origins of Ichimoku

Ichimoku Kinkō Hyō, or simply Ichimoku, is a trading system that was developed by Japanese journalist Goichi Hosada in the 1930s, and published in the 1960s.

The literal translation of Ichimoku Kinkō Hyō means "equilibrium chart at a glance". It defines support and resistance, identifies trend direction and gauges momentum. Investors and traders can therefore identify the trend and look for potential trading signals with one look.

A bullish crossing of one of the Ichimoku levels indicates a buy signal, while a bearish crossing indicates a sell signal.

Key levels and formulas used by Ichimoku

The Ichimoku trading system is comprised of five main key components: Kijun Sen, Tenkan Sen, Senkou, Chikou and Kumo.

Kijun-Sen and Tenkan-Sen are medians. The median Kijun is usually calculated on 26 time periods and the median Tenkan on 9. They both have the same formula: (period high + period low) / 2.

Senkou consists of two spans: Senkou A and Senkou B. Senkou A corresponds to the average of Kijun and Tenkan, projected 26 time periods in the future. Senkou B corresponds to the median of the last 52 time periods, also projected 26 periods in the future.

Chikou is simply the price plotted 26 time periods in the past.

Lastly, Kumo corresponds to the "cloud", which is the space between Senkou A and Senkou B.

To sum up, Chikou represents the market’s past, Kijun and Tenkan its present, and Kumo aims to represent its future.

The limitations of the Ichimoku trading system

The success of the Ichimoku trading system among investors could be attributed to its rather unfamiliar and intriguing nature, as so far, its performance is yet to be proven.

The indicators used by Ichimoku are somewhat complex compared to traditional technical indicators, but they work in the same way. Indeed, like any technical indicator, it is just a visual representation of information already included in the chart.

Why does the crossing of these price levels indicate a buy or a sell signal? It depends on the person. For some, it is simply a self-fulfilling prophecy or mere sheep-like behaviour among investors, but going from that to obtaining any real benefit from it, to anticipate price changes, once again, this is yet to be proven!

Disclaimer

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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