Ichimoku trading strategy is one of the most reliable strategies. One glance equilibrium chart or with the original name in Japanese “Ichimoku Kinko Hyo” is my all-time favorite trading strategy.
There is a Japanese saying: “Consult the market about the market.” A lot of time we trade not what we see but what we think about the market. Our opinions about the market stop us giving the correct trading decisions. We find ourselves quite often on the wrong side of the market. Then let’s change our mentality for today with the help of a strategy developed by our Japanese friends. Let’s talk about the Ichimoku trading system. The system which is groundbreaking, time tested, proven to work in different markets.
Is Ichimoku A Trend Following Strategy?
The Ichimoku trading strategy is a trend based trading system. It simplifies the decision process for the traders by providing a rule-based, easy to follow methodology. Many people consider Ichimoku as an indicator, while it is a fully functional complete trading system. It is developed by Gochi Hosada and his assistants after a diligent work of 30 years.
This strategy is still commonly used today by the Japanese trading floors. I don’t know how much it is known by the western trading communities. But it is definitely better than the majority of so-called trading systems popular today.
The real challenge for a lot of traders today is the lack of discipline while giving trading decisions. Most of the traders losing money in the financial markets. The main reason for that not having a proven to work, unbiased trading system. Ichimoku system helps traders at this point. It defines certain rules to follow by eliminating possible bad trades.
Trend based systems are proven to be profitable. Although Ichimoku is a trend-based trading system, it can also be helpful to detect earlier trends while markets quit consolidation.
Ichimoku Strategy
It consists of certain moving averages and a cloud that predicts future support and resistance levels. Moving averages of the Ichimoku system is different than your normal moving averages. It is calculated by using the value of center points of the candlesticks. So, what is the difference between using the Ichimoku system rather than using regular moving averages?
Let me answer this question by using a ratio that most markets respect and most traders take account. It is the %50 Fibonacci ratio, which provides powerful support and resistance for the market. Look at the below image how Fibonacci %50 level perfectly aligns with the flat surface of the cloud. Flat surfaces of the cloud provide significant support and resistance you can implement in your trading even if you don’t trade the Ichimoku system.
Kijunsen (Baseline or Kijun line)
The baseline is nothing but the 26-period simple moving average. The difference is simple moving average is calculated by using the closing price of the candlestick. Whereas the Ichimoku Kijun line uses the average price of the open&closing prices.
Tenkan Sen (Conversion line or Tenkan line)
The conversion line is 9-period simple moving average that is calculated with the same calculation technique of Kijunsen. Markets that are in a powerful trend tend to stay above the Tenkan line. It is the very first support/resistance line in a trend.
Chikou Span (Lagging span or Lagging Line )
Lagging line is 26-period simple moving average calculated same as Kijun and Tenkan lines but shifted 26 periods back than the current price. This component of the system often overlooked by many traders. It is extremely important though. This be may sound confusing but there is some good merit in it. Gochi Hosada spent many years to develop this great system.
Senkou Span A & Senkou Span B
Senkou span A and Senkou Span B lines are the lines of the Cloud. These are the projection of 52 days high and low prices projected 26 days in the future. The cross of these 2 lines is called Kumo Twist and counted as an important change of the market.
Having talked about the components of the Ichimoku system, let’s try to understand the logic of projecting moving averages to the past and into the future. Chikou span follows the current price from 26 period past. It is accepted that if nothing intervenes the route of the chikou span, the market will continue its trend freely.