How to Employ Ichimoku Indicator in Trading
Effective signals for a trader are invaluable. Based on them, he can make big profits where others cannot predict changes in market trends. Therefore, indicators that have proven themselves in many cases are incorporated in the Forex market treasury and are offered to traders as effective analytical tools.
Ichimoku indicator: 3D Modeling of Dominant Trends
The quality of the Ichimoku indicator can be evidenced by the fact that it was proposed back in 1930 and has been helping traders navigate the intense movement of asset prices for almost 100 years. In short, its essence is to predict future trends in relation to the current state of the capital market. A three-dimensional equilibrium is modeled along the axes
Moving Averages as Components of the Ichimoku Indicator
To predict the sustainability of future trends, a trader needs to estimate four moving averages and one price chart:
- Tenkan is a vector that demonstrates a short-term tendency in the present. This is an average over a time period of 9 days. It is calculated as the sum of the minimum and maximum prices, weighted by 2.
- Kijun is a vector that shows a long-term inclination in the present. This is an average over an average time period of 26 days. It is defined in the same way as Tenkan.
- Senkou Span 1 is a name for moving average in relation to the future over a time frame of 26 days. It is found by adding the values of Tenkan and Kijun and dividing them by 2. This value is shifted forward into the future by 26 periods.
- Senkou Span 2 — this moving average for the future also moves forward by 26 days, however, it is found according to a long time period of 52 days using the same formula as Senkou Span 1.
- Chinkou is a regular price chart but shifted back into the past by 26 periods.
The space that appears between Senkou Span 1 and Senkou Span 2 is called Kumo, which means “Cloud” in Japanese. It outlines the volatility of the capital market.
How to Employ the Ichimoku Indicator Beneficially
Kijun is chosen as the standard line:
- When Chinkou is above this line, it can be regarded as a bullish signal. In this case, there is a probability of an increase in the price of assets. It makes sense to buy them.
- When Chinkou is below this line, this is evidence of a bearish signal. Presumably, the price of assets will go down, so it’s time to get rid of them by selling.
The same can be said about the interaction of the Tenkan and Kijun lines:
- When the Tenkan (or short-term average) is above the Kijun (long-term average), it is a bullish signal.
- When Tenkan is under Kijun, such a movement is regarded as a bearish signal.
When Chinkou is above Kumo, this predicts a trend change to an increase, when below, the trend goes down, this is a bearish signal.
Discussions About the Necessity of Correcting Time Periods for Effective Trade
The indicator Ichimoku is an ingenious, elegant, and perfect tool for trading any assets. Therefore, it is one of the most demanded technical instruments present in portfolios of trading analysis tools of many traders. Some of them are trying to improve it up to this day. For example, they propose to change the time periods. They prove that periods of 9, 26, and 52 days are only relevant to Japanese society. Therefore, Western countries, they need to be corrected according to Western labor culture. Others argue that with the change of periods, the entire harmony of the indicator will be destroyed.
You can try different versions and then compare the results. Perhaps, over time, you will even offer your own version of this ingenious tool that any trader needs!