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.

Forex Trading Markets: Recognizing Patterns

Forex works by making transactions in foreign currencies that are not centered on an exchange like the New York Stock Exchange (NYSE) instead; they take place world wide through telecommunications. The forex trade is open 24 hours a day beginning on Sundays in the afternoon until Friday afternoon. There are dealers to quote all the major currencies in nearly every time zone through out the world. After the investor decides on what currency to purchase, the transaction is made through one of those dealers. Some of these dealers can even be found online. It’s very common for investors to speculate currency prices by obtaining a credit line, as small as $500, to greatly increase the potential profits and losses. The term for this is “marginal trading.”

The term marginal trading is used for trading with a borrowed capital. Many traders find marginal trading appealing because forex investments can be made without using a real money supply. This method allows investors to invest more money with fewer costs for transfer and to open a bigger position with a small capital.

When trading in the forex market, it’s best to develop a pattern of recognition in order to become a successful trader. The forex markets often display a specific pattern that repeats over time across assorted time scales. Forex traders can develop an expertise by acquiring the information around the patterns and then discovering how to recognize these patterns for what they are.

Let’s use an analogy of a medical student who is learning how to diagnose a disease, for instance, pneumonia. Every disease is defined by a distinct set of symptoms. By running the right tests and making ethical observations of the patient in question, the medical student will be able to collect all the information needed to recognize that the disease is indeed pneumonia. A medical student can never become an expert doctor until he has seen a number of patients, thus gaining practice in putting the pieces of the puzzle together rapidly and correctly.

The brightest illustration of gaining the trading expertise is through pattern recognition and the large literature on technical analysis. Many of the technical analysis books look like the books that are carried around by medical students. They attempt to combine market symptoms into identifiable patterns that are aimed to help the trader diagnose the market. Some of these patterns may be chart patterns, while others may be based on identifying cycles and configurations, and so on. Like the medical student turned doctor, each technical analyst must cultivate a level of expertise by recognizing the various markets and by learning how to identify the patterns.

Notice how the pattern recognition and research answers lead to very dissimilar approaches to the training of forex market traders. The traders tend to learn how to improve their trading by doing their research by learning how to use more sophisticated tools, collect more data, expose the best predictors, and so on. However, from a pattern recognition advantage point, being successful at trading will not come from conducting more research. Instead, gaining the knowledge directly from the experts and through a great deal of practice will lead to the solid development of competence. The research viewpoint fundamentally treats trading as a type of science. Like scientists, we gain our knowledge by unveiling new observations and pattern recognition through a perspective that treats trading as a functioning activity. We gain our expertise through our mentors and by constantly practicing the trades.

It would seem that this type of expertise could be acquired by learning pattern recognition from other experienced traders and then attaining the experience well enough to identify them on your own. Traditionally, this is how it’s done, but because pattern recognition normally entails a dependable measure of judgment, it makes it very hard to establish outside efficacy once it leaves the hands of the experts. Simply put, an expert trader may be able to utilize more information in trading than he can actually verbalize. Expert traders often describe their work in terms of monetary value and unpredictability patterns, but it may be the way that the patterns are used that makes all the difference between novice and expertise. Although the experts may be able to distinguish patterns in their work, it remains unclear if their greatness lies in the patterns themselves.

Forex Markets: Japanese Yen vs US Dollar

The Japanese yen is the official currency of Japan and after the euro and the US dollar is the most widely traded form of currency on the Forex. The foreign exchange market can trade currencies from all over the world with each other. There are many individuals who trade on the Forex to make a profit. When doing this, it is important to understand how each form of currency works in relation to others. The Japanese yen is very comparable to the US dollar on the Forex market.

The Japanese yen was first recognized as currency in 1870 and was modeled after the monetary system in Europe. After War World II, the Japanese yen lost most of its value due to instability. Now, the yen has more value and compares more consistently with the US dollar.

The value of the Japanese yen is mostly determined in the foreign exchange markets and by simple supply and demand. When a yen holder wants to exchange that form of currency for other currencies in order to purchase goods, services or assets, the money is traded on the Forex. When the demand for the yen is high, the value goes up. Until the Bretton Woods System collapses in 1971, the value of the Japanese yen was set at Y360 per US $1. Those prices helped stabilize the Japanese economy. When that system was done away with, the value of the yen compared to the US dollar became more competitive. Up to that point in time, the yen was undervalued.

As time progressed, the Japanese government was concerned that if the value of the yen rose, it would hurt the export business in Japan. They thought it might make Japanese products less competitive and would negatively affect the industry. This is when the Japanese government often intervened with the Forex to affect the value of the yen. This was not helping and the value of the yen climbed steadily. When the increased costs of oil began to change from 1974 to 1976, the yen began to depreciate. There were several fluctuations of the yen during the late seventies and early eighties as the price of oil increased. The yen was weak compared the US dollar until the late eighties when the value began to rise because of the trade surplus that was taking place in Japan.

When the big push came to invest in overseas companies and products, the yen began to have more value. Japan currently enjoys incentives from overseas investments. With the large rise in the value of the yen, Japanese companies began to search for lower production costs and costs associated with importing and exporting.

With the popularity of exchanging and trading the Japanese yen to US dollars, the exchange rates on the Forex are important. The exchange rates represents the link between on country and their partners in other countries. The trading between countries can either negatively or positively affect the relative price of goods and services that are being traded at any one give time. The exports and imports, the assets and the profit from these trades all affect the currency rates. Japan is major import and export country. The yen is widely used and recognized on the foreign exchange market.

Over time, the fixed, or constant, rates can be predicted by looking at a wide variety of factors including the government policies of a country, current events, supply and demand and even consumer attitudes. The Forex boasts flexible rates, which means that the rates are always changing based on the trade flows, interest rates, rates of inflation and the prediction of future events.

It is also important to remember when comparing the Japanese yen to the US dollars that the foreign exchange market is the most liquid market in the world. It is not like the stock market. Money is constantly changing hands from financial institutions to other institutions. It takes an experienced broker or professional that knows and understand the various currencies and trends to understand to trade successfully on the Forex market. The Japanese yen is more comparable to the US dollar now than it was in the past. It is one of the major currencies that is traded every single day on the foreign exchange market.