The Ichimoku Indicator

Technical Analysis has made enormous strides in the past few decades due to advances in both hardware and software technology. Gone are the days of tedious pencil and paper charts and laborious statistical calculations. Today's sophisticated trading platforms can swallow mountains of data and produce technical pictures that are worth more than a thousand words to every trader from Tokyo to Timbuktu. Traders are now looking for every "edge" they can find, customizing existing indicator software or adapting an "old" innovation to newer technology,

In the latter class, the "Ichimoku Trading System" seems to have burst upon the scene. Both Forex and stock commentaries now abound with references to this Japanese "tool" that was developed in the sixties by a newspaper reporter and his assistants to fathom the vagaries of the commodities and futures markets. The system is now readily available on Tradestation for stocks and on popular Metatrader4 Forex trading software, but for the untrained eye, this "combination" approach can be visually intimidating.

Roughly translated, "Ichimoku" means to provide "one look" for the trader at a point in time. The Ichimoku trading system is classified as an "oscillator" since the various components fluctuate over and below pricing candlesticks for chosen time periods. The system also has the unique quality of extending into the future, while also depicting prior market sentiment. Nomenclature follows Japanese tradition, but the "cloud" is the distinguishing feature with three additional line indicators that help signal potential trading patterns and set-ups.

Here is a brief summary for each of the noted components:

• Kumo Cloud: These areas depict support and resistance, derived from previous pricing data. These "borders" of the cloud, referred to as Senkou-span A or B, are averages of the two moving-average lines and for high and low points for the past 52 candlesticks, each moved forward 26 periods. Key alerts occur when candlesticks exit the "cloud" (Bullish if above, and Bearish if below) or when various lines enter or pass through the designated regions;
• Tenkan-sen and Kijun-sen: These lines, similar to moving averages, are calculated from previous highs and lows over 9 and 26 periods, respectively. The "Green" line, or Tenkan-sen, is the quicker of the two, and its intersections are key trading signals, while its slope tends to measure momentum;
• Chinkou-span: This line measures market sentiment, based on current closing prices, but is moved backward typically 26 time periods. Its position relative to pricing data indicates if Sellers or Buyers are dominating the action, while the cloud's position may portend resistance if it enters the picture.

Position traders are the primary users of these charts since longer timeframes work best with this tool. The above chart is a 4-hour chart, but daily and weekly versions have also gained support. Longer timeframes help eliminate market "noise" and increase the effectiveness of this technical support indicator.

Traders tend to focus on the Ichimoku key points of reference, which are when the various components intersect. There is a wealth of information available on varying probabilities related to each type of alert, but a conservative trader generally waits for pricing candlesticks to break free from the "cloud" and other lines. The green and red circles on the chart designate typical entry and exit alerts.

As with any technical indicator, an Ichimoku chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a stock or Forex trader an "edge", a necessary factor for consistent winning trades.

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