Welcome to Lesson 9 of the Forex Indicators series. This lesson covers the ichimoku kinko hyo, a comprehensive trend direction and momentum indicator that provides key trading signals based on support and resistance levels.
The ichimoku indicator has four main components: the Tenkan Sen Line, the Kijun Sen Line, the Chikou Span, and the Kumo Cloud (also known as the Ichimoku Cloud).
The Ichimoku Kinko Hyo cloud indicator uses line crossovers to generate entry signals:
However, the strongest Ichimoku Kinko Hyo signals happen when the price is outside the Kumo Cloud:
- Long trades are valid only when the price is above the Kumo Cloud.
- Short trades apply when the price is below the Kumo Cloud.
- Ignore any crossovers that happen while the price is inside the Kumo Cloud, as this indicates market consolidation or range trading.
Using the Chikou Span as a Filter
The Chikou Span plots the current price against past periods (commonly 60 days in advance) and helps filter false signals:
- For valid long entries, the Chikou Span should be above the Kumo Cloud.
- For valid short entries, the Chikou Span should be below the Kumo Cloud.
For example, if the Tenkan Sen just crossed below the Kijun Sen and the price is below the Kumo Cloud, this suggests a short entry. But if the Chikou Span remains above the cloud, wait for it to cross below before entering the trade. Close positions when the price crosses back above the Kijun Sen Line.
Ichimoku Kinko Hyo cloud Strategy for Longer-Term Trends
By mastering the ichimoku cloud strategy, you can identify strong trends likely to last, enabling you to maximize profits. Applying this to currency pairs like EUR/USD often reveals clear trading opportunities.
Summary
The ichimoku kinko hyo is a versatile indicator that combines trend, momentum, and support/resistance analysis into one system. Knowing how to use ichimoku cloud and the ichimoku indicator components allows you to execute more informed trades and spot lasting trends early.
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