Kijun Sen

The kijun sen is calculated in the following manner:

KIJUN SEN ("standard line")

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

The kijun sen is one of the true "workhorses" of Ichimoku Kinko Hyo and it has myriad applications. Like its brother, the tenkan sen, the kijun sen measures the average of price's highest high and lowest low, though it does so over a longer time frame of 26 periods as opposed to the tenkan sen's 9 periods. The tenkan sen thus provides us with all the information the tenkan sen does, just on a longer time frame.

Due to the longer time period it measures, the kijun sen is a more reliable indicator of short-term price sentiment, strength and equilibrium than the tenkan sen. If price has been ranging, then the kijun sen will reflect the vertical midpoint of that range (price equilibrium) via its flat aspect. Once price exceeds either the last highest high or lowest low within the last 26 periods, however, the kijun sen will reflect that by either angling up or down, respectively. Thus, short-term trend can be measured by the direction of the kijun sen. In addition, the relative angle of the kijun sen will indicate the strength or momentum of the trend.

Price equilibrium is expressed even more accurately in the kijun sen than in the tenkan sen, given the longer period of time it considers. Thus, the kijun sen can be relied upon as a significant level of price support and resistance (see highlighted areas in Figure II below).

Figure II - Kijun Sen Support

Price tends to move alternately away from and back toward the kijun sen in a cyclical fashion due to the kijun sen's strong expression of equilibrium or stasis. Thus, when price momentum is extreme and price moves rapidly up or down over a short period of time, a certain "rubber band" effect can be observed on price by the kijun sen, attracting price back towards itself and bringing it back to equilibrium. An analogy could be made between how price interacts with the kijun sen and how electricity always seeks to return to ground or zero potential. The "ground" in this case is the kijun sen and price will always seek to return to that level. This phenomenon is particularly evident when the kijun sen is flat or trendless, as can be seen in Figure III below:

Figure III - Kijun Sen "Rubber Band" Effect

Given the dynamics of the kijun sen outlined above, traders can use the kijun sen effectively as both a low-risk point of entry as well as a solid stop loss. These two tactics are employed extensively in both the kijun sen cross as well as the tenkan sen/kijun sen cross strategies which are covered in greater detail in our Ichimoku Trading Strategies section.

Tenkan Sen

The tenkan sen, as we have already mentioned in our Introduction section, is calculated in the following manner:

TENKAN SEN ("turning line")

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

While many may compare the tenkan sen to a simple 9 period simple moving average (SMA), it is quite different in the sense that it measures the average of price's highest high and lowest low for the last 9 periods. Hosoda believed that using the average of price extremes over a given period of time was a better measure of equilibrium than merely using an average of the closing price. This study of the tenkan sen will provide us with our first foray into the key aspect of equilibrium that is so prevalent in the Ichimoku Kinko Hyo charting system.

Consider the chart in Figure I below:

Figure I - Tenkan Sen vs. 9 Period SMA

As can be seen in the chart, the tenkan sen often exhibits "flattening" whereas the 9 period SMA does not. This is due to the fact that the tenkan sen uses the average of the highest high and lowest low rather than an average of the closing price. Thus, during periods of price ranging, the tenkan sen will clearly show the midpoint of the range via its flat aspect.

When the tenkan sen is flat, it essentially indicates a trendless condition over the last 9 periods.

It can also be seen how the tenkan sen provides a much more accurate level of price support than does the 9 period SMA. With only one exception, price action stayed above the tenkan sen in the three highlighted areas of the chart, while price broke below the SMA numerous times. This is due to the more conservative manner in which the tenkan sen is calculated, which makes it less reactive to small movements in price. On a bearish chart, the tenkan sen will likewise act as a level of resistance.

The angle of the tenkan sen can also give us an idea of the relative momentum of price movements over the last 9 periods. A steeply angled tenkan sen will indicate a nearly vertical price rise over a short period of time or strong momentum, whereas a flatter tenkan sen will indicate lower momentum or no momentum over that same time period.

The tenkan sen and the kijun sen both measure the shorter-term trend. Of the two, the tenkan sen is the "fastest" given that it measures trend over the past 9 periods as opposed to the kijun sen's 26 periods. Thus, given the very short term nature of the tenkan sen, it is not as reliable an indicator of trend as many other components of Ichimoku. Nevertheless, price breaching the tenkan sen can give an early indication of a trend change, though, like all Ichimoku signals, this should be confirmed by the other Ichimoku components before making any trading decision.

One of the primary uses of the tenkan sen is vis-à-vis its relation to the kijun sen. If the tenkan sen is above the kijun sen, then that is a bullish signal. Likewise, if the tenkan sen is below the kijun sen, then that is bearish. The crossover of these two lines is actually a trading signal on its own, at topic that is covered in more detail in our Ichimoku Trading Strategies section.

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.

An Introduction to Ichimoku

Quick Description

Ichimoku Kinko Hyo is a purpose-built trend trading charting system that has been successfully used in nearly every tradeable market. It is unique in many ways, but its primary strength is its use of multiple data points to give the trader a deeper, more comprehensive view into price action. This deeper view, and the fact that Ichimoku is a very visual system, enables the trader to quickly discern and filter "at a glance" the low-probability trading setups from those of higher probability.

The word Ichimoku can be translated to mean "a glance" or "one look". Kinko translates into "equilibrium" or "balance", with respect to price and time, and Hyo is the Japanese word for "chart". Thus, Ichimoku Kinko Hyo simply means "a glance at an equilibrium chart", providing a panoramic view of where prices are likely to go and the position one should undertake.

Ichimoku Kinko Hyo Japanese charting technique was developed before World War II with the aim of portraying - in a snapshot - where the price was heading and when was the right time to enter or exit the market. This was all performed without the aid of any other technical analysis technique (or study).

Ichimoku charts have become a popular trading tool in Japan, not only with the equity market, but in the currency, bond, futures, commodity and options markets as well. The technique was published over 30 years ago but has only gained international attention within the last few years.

History

The names of mathematicians and statisticians dominate the list of technical analysis innovators; it's not often we see newspaper writers on this list, but Tokyo newspaper writer Goichi Hosoda is an exception to the rule. In the years before World War II, Hosoda with the help of several assistants developed the Ichimoku Kinko Hyo, or "equilibrium-chart-at-a-glance technique." Released in 1968, the technique was designed to illustrate where prices were likely to go and when to trade.

He began developing this system before World War II with the help of numerous students that he hired to run through the optimum formulas and scenarios - analogous to how we would use computer simulated backtesting today to test a trading system. The system itself was finally released to the public in 1968, after more than twenty years of testing, when Mr. Hosoda published his book which included the final version of the system. The technique was designed to illustrate where prices were likely to go and when to trade.

Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since Hosoda published his book and has been used successfully to trade currencies, commodities, futures, and stocks. Even with such wild popularity in Asia, Ichimoku did not make its appearance in the West until the 1990s and then, due to the utter lack of information in English on how to use it, it was mostly relegated to the category of another "exotic" indicator by the general trading public. Only now, in the early 21st century, are western traders really beginning to understand the power of this charting system.

Equilibrium "at a Glance" 

The name Ichimoku Kinko Hyo, which translates to "Equilibrium chart at a glance" aptly describes the system and how it is to be used, as described below:

• While Ichimoku utilizes five separate lines or components, they are not to be used individually, in isolation, when making trading decisions, but rather used together to form an integrated "whole" picture of price action that can be gleaned "at a glance". Thus, a simple look at an Ichimoku chart should provide the Ichimoku practitioner with a nearly immediate understanding of sentiment, momentum and strength of trend.

• Price action is constantly measured or gauged from the perspective of whether it is in relative equilibrium or disequilibrium. Hosoda strongly believed that the market was a direct reflection of human group dynamics or behavior. He felt that human behavior could be described in terms of a constant cyclical movement both away from and back towards equilibrium in their lives and interactions. Each of the five components that make up Ichimoku provide its own reflection of this equilibrium or balance.

Ichimoku Kinko Hyo

What Does Ichimoku Kinko Hyo Mean?

Ichimoku Kinko Hyo is a technical indicator that is used to gauge momentum along with future areas of support and resistance. The Ichimoku indicator is comprised of five lines called the tenkan-sen, kijun-sen, senkou span A, senkou span B and chickou span. This indicator was developed so that a trader can gauge an asset's trend, momentum and support and resistance points without the need of any other technical indicator.

"Ichimoku" is a Japanese word that means "one look". This charting technique was created by a Japanese newspaper writer. It does look very complicated when a trader sees the indicator for the first time, but don't hesitate to give this indicator a try because the complexity quickly disappears once you gain an understanding of what the various lines mean and why they are used.

Constructing an Ichimoku Chart

First, let's take a look at an Ichimoku chart so we have a visual point of reference.

EUR/USD Ichimoku Chart

Let's see what these lines represent, and how they are plotted:

1. Tenkan-Sen - (red)
2. Kijun-Sen - (maroon)
3. Chikou Span - (pink)
4. Senkou Span A - (green)
5. Senkou Span B - (blue)

The Kumo  ( known as the "cloud") is the space between Senkou Span A and Senkou Span B. The time period is most often measured in days; however, this can be modified to be any time unit as long as it is consistent throughout all calculations.

Follow the links to learn more about Ichimoku Kinko Hyo:

• An Introduction to Ichimoku
  
  • Quick Description
  • History
  • Equilibrium "At a Glance"
  • Ichimoku Components
  • Ichimoku Settings
• The Five Lines of Ichimoku
  
  • The Tenkan Sen
  • The Kijun Sen
  • The Chikou Span
  • The Senkou Span A
  • The Senkou Span B
• The Kumo
  
  • The Basics
  • A Better Measure of Support and Resistance
  • Price's Relationship to the Kumo
  • Kumo Depth
  • Kumo Sentiment
  • Flat Top/Bottom Kumos
• How To Trade Using  Ichimoku
  
  • Trend Trading
  • A Glance at an Equilibrium Chart
  • Ichimoku Cloud Filters Information Storm
  • Trade Using Ichimoku Kinko Hyo
• Ichimoku Trading Strategies
  
  • Tenkan Sen/Kijun Sen Cross
  • Kijun Sen Cross
  • Kumo Breakout
  • Senkou Span Cross
  • Chikou Span Cross
• Ichimoku Kinko Hyo Video
• Ichimoku Indicator (for MT4)

Good luck and Happy trading.