If you are a trader, you have probably heard of the Ichimoku indicator. It is a technical indicator that was developed in the 1930s by a Japanese trader, Goichi Hosoda. Since then, it has become very popular among professional and amateur traders due to its ability to provide accurate and comprehensive trading signals. In this article, we’ll take a close look at it, what it is, how to use it in trading, and an example trading strategy.
I – What is the Ichimoku indicator ?
The Ichimoku indicator is a complex technical indicator that provides comprehensive market analysis. It is made up of five different lines, each offering a different view of the market. The five lines of the Ichimoku indicator are :
1. Tenkan-sen
The Tenkan-sen is the conversion line of the Ichimoku indicator. It is calculated by taking the average of the highest and lowest of the last ten periods. This line is used to identify short-term trends.
2. Kijun-sen
The Kijun-sen is the baseline of the Ichimoku indicator. It is calculated by taking the average of the highest and lowest of the last 26 periods. This line is used to identify medium-term trends.
3. Senkou Span A
The Senkou Span A is the first line of the shadow area of the Ichimoku indicator. It is calculated by taking the average of the Tenkan-sen and the Kijun-sen and then plotting it 26 periods forward. This line is used to identify support and resistance levels.
4. Senkou Span B
The Senkou Span B is the second line of the shadow area of the Ichimoku indicator. It is calculated by taking the average of the highs and lows of the last 52 periods, then plotting it 26 periods forward. This line is also used to identify support and resistance levels.
5. Chikou Span
The Chikou Span is the lagging line of the Ichimoku indicator. It is calculated by plotting the current closing price 26 periods back. This line is used to confirm the trend.
II – How to use the Ichimoku indicator in trading ?
Now that you know what the Ichimoku indicator is and how it is calculated, it’s time to learn how to use it in trading. Here are some common ways to use it:
1. Identify trends
The Ichimoku indicator is a great tool for identifying trends. If the price is above the Kijun-sen line, it indicates an upward trend. If the price is below the Kijun-sen line, it indicates a downtrend. Tenkan-sen can be used to identify short-term trends. If the Tenkan-sen is above the Kijun-sen, it indicates a short-term uptrend, and vice versa.
2. Identify support and resistance levels
Senkou Span A and B lines can be used to identify support and resistance levels. If the price is above the shadow area, it indicates a support level. If the price is below the shadow area, it indicates a resistance level.
3. Confirm trend
The Chikou Span can be used to confirm the trend. If the Chikou Span is above the current price, it indicates an uptrend. If the Chikou Span is below the current price, it indicates a downtrend.
III – Example of a trading strategy with the Ichimoku indicator
Now that you know how to use it, here is an example of a trading strategy using this indicator.
Step 1 : Identify trends
First, use the Kijun-sen and Tenkan-sen lines to identify the trend. If the Tenkan-sen is above the Kijun-sen, it indicates an uptrend. If the Tenkan-sen is below the Kijun-sen, it indicates a downtrend.
Step 2 : Identify support and resistance levels
Use Senkou Span A and B lines to identify support and resistance levels. If the price is above the shadow area, it indicates a support level. If the price is below the shadow area, it indicates a resistance level.
Step 3 : Confirm trend
Use the Chikou Span to confirm the trend. If the Chikou Span is above the current price, it indicates an uptrend. If the Chikou Span is below the current price, it indicates a downtrend.
Step 4 : Take position
If you are in an uptrend, wait for the price to touch the support line and for the Tenkan-sen to cross above the Kijun-sen to enter a buy position. If you are in a downtrend, wait for the price to touch the resistance line and the Tenkan-sen to cross below the Kijun-sen to enter a sell position.
Step 5 : Money and risk management
Use stop loss orders to limit losses if the trade goes in the opposite direction than expected. Use take profit orders to take profits if the trade goes in the expected direction.
In conclusion, it is a valuable tool for traders looking to analyze the market comprehensively. Using the different aspects of this indicator, traders can identify trends, support and resistance levels, and confirm price movements. This allows them to make more informed trading decisions and maximize their profits.
It is important to note that the it should not be used alone. Traders must also consider other indicators and fundamental analysis to make solid trading decisions.
Q&A :
- Is the Ichimoku indicator suitable for all types of markets ?
The Ichimoku indicator can be used in all types of markets including currency, stock and commodity markets.
- Should I use it alone or in combination with other indicators ?
Mastering the Ichimoku indicator can take time and requires regular practice. This may vary depending on the experience level of the trader.
- Should I use the Ichimoku indicator alone or in combination with other indicators ?
It is recommended to use it in combination with other indicators and fundamental analysis to make sound trading decisions.
- Is the Ichimoku indicator useful for beginner traders ?
The Ichimoku indicator can be useful for novice traders, but proper training is required to understand how to use it effectively.
- Does the Ichimoku indicator guarantee profits in trading ?
No indicator can guarantee profits in trading. The Ichimoku indicator is a useful tool, but it should be used with caution and in conjunction with other analysis to make sound trading decisions.
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