Ichimoku indicator is very much used by traders especially those who like using only one indicator at a time. The Ichimoku is well known to be an independent indicator that can be used on it won for profitable trading. The indicator acts as a trend, momentum and support and resistance indicator all at the same time.
Although at times it may appear quite complicated especially for novice traders, this indicator is not as complicated as it seems. It is actually one of the simplest Forex trading Indicators there is for doing technical analysis despite the wide information that it displays at the same time. After going through this article, you will understand how to use this great indicator.
Understanding the properties of Ichimoku indicator
To start with, the Ichimoku indicator has two major components: the conversion and base lines and the Ichimoku cloud.
- The Base and conversion lines
These are the two lines which resembles the moving averages. They normally plot the medium of the high and lows with a specified period.
The conversion line normally plots the medium of the highs and lows within a period of 26 by default. In this case period stands for the number of candlesticks formed in the past. It is also referred to as the Tenkan Sen.
On the other hand, the Base line plots the medium of the highs and lows within a period of 9 by default. The base line is also referred to as the Kijun Sen.
The trader can however change the period of the two lines to whichever periods he desires. However, the period of the base line should always be maintained below that of the conversion line for better results.
The trader can also change the colors of the two lines depending on the background color of his/her trading chart. The color of the lines should be distinct to allow easy identification.
- The Ichimoku cloud
The Ichimoku cloud is made up of two boundaries with a space in between the two boundaries (one is a fast moving boundary while the other one is a slower moving boundary) which is either shaded green or red by default although traders can changes these colors respectively as they wish.
The fast moving boundary, which is also known as the Senkou Span A, is normally a plot of the average of the conversion and base lines. On the other hand, the slower moving boundary, which is also known as Senkou Span B, is obtained by plotting the medium of the highs and lows for a period of 52 candlesticks. However, the trader can change the value of this period but it should be a multiple of 26.
Interpreting the Ichimoku indicator signals
Each of the components (the conversion & base lines and the Ichimoku cloud) give separate signals which upon combination give a clear signal of what the trader should do (whether to open a trade or close a trade or wait for the market to provide a better trading chance).
We shall look at the trading signals provided by the two components individually and then see how to combine them later.
- Trading Signals by the conversion and base lines
The base and conversion lines act as support and resistant levels and also show the momentum of the market trend.
The trader should take note of when the two lines cross each other. Take note of which line goes above and which line goes below. The trader should also take not of whether the price is trending below or above the two lines.
If the market is trending above the two lines and the conversion line is above the base line, it shows that the trend is bullish with a positive bullish momentum.
If the market is trending below the two lines and the conversion line is below the base line, it shows that the trend is bearish with a positive bearish momentum.
When placing a buy order, you should ensure that the price is above the two lines. Also, when placing a sell order, you should ensure that the price is below the two lines.
- Trading signals by Ichimoku cloud
The Ichinoku cloud mainly shows the trend of the market.
When the fast moving boundary, senkou span A, rises above the slower moving boundary, senkou span B, the cloud between the two boundaries is normally colored green by default showing that the trend is bullish. However, the trend is confirmed when the prices goes above could. Therefore for a trader to place a buy order, he must ensure that the two conditions are met.
On the other hand, when the senkou span A gets below the senkou span B and the color of the cloud is red, the trend is bearish. The bearish trend is confirmed by the prices going below the cloud. Therefore, for a trader to place a sell order, the two conditions must be met.
If the two boundaries cross each other and the price remain within the cloud, the trader should avoid placing any type of trade.