An Introduction to Ichimoku (2)

Ichimoku Components

The Ichimoku chart is composed of five separate indicator lines. These lines work together to form the complete "Ichimoku picture". A summary of how each line is calculated is outlined below:

TENKAN SEN ("turning line")

(HIGHEST HIGH + LOWEST LOW)/2 for the past 9 periods.

KIJUN SEN ("standard line")

(HIGHEST HIGH + LOWEST LOW)/2 for the past 26 periods.

CHIKOU SPAN ("lagging line")

CURRENT CLOSING PRICE time-shifted backwards (into the past) 26 periods.

SENKOU SPAN A ("1st leading line")

(TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future) 26 periods.

SENKOU SPAN B ("2nd leading line")

(HIGHEST HIGH + LOWEST LOW)/2 for the past 52 periods time-shifted forwards (into the future) 26 periods.

The chart below provides a visual representation of each of these five components:

Ichimoku Components

The senkou span A and B deserve special mention here as they, together, form the Ichimoku kumo (or cloud). We cover the kumo and its myriad functions in more detail in the section "The Kumo".

Kumo = Cloud = Area between Senkou Span A and B

Ichimoku Settings

As you can see in the Ichimoku Components section above, each line calculation has one and sometimes two different settings based on the number of periods considered. After much research and backtesting, Goichi Hosoda finally determined that the settings of 9, 26 and 52 were the ideal settings for obtaining optimum results with Ichimoku. He derived the number 26 from what was then the standard Japanese business month (which included Saturdays). The number 9 represents a week and a half and the number 52 represents two months.

The standard settings for an Ichimoku Kinko Hyo chart are 9, 26, 52.

There is some debate around whether or not these settings of 9,26,52 are still valid given that the standard work month here in the West does not include Saturdays. In addition, in non-centralized markets that do not keep standard business hours like the Forex (which trades around the clock) some have posited that there may be more appropriate settings. Nevertheless, most other professional Ichimoku traders, agree that the standard settings of 9,26,52 work extremely well and do not need to be altered.

The argument could be made that, since Ichimoku Kinko Hyo functions as a finely-tuned, integrated whole, changing the settings to something other than the standard could throw the system out of balance and introduce invalid signals.

Ichimoku uses three key time periods for its input parameters: 9, 26, and 52. When Ichimoku was created in the 1930's, a trading week was 6 days long. These parameters, thus, represent one and a half week, one month, and two months, respectively. Now that the trading week is 5 days, one may want to modify the parameters to 7, 22, and 44.

Thus, for the purposes of describing Ichimoku Kinko Hyo within this article, it will be assumed that the standard settings are being used.