Ichimoku Kinko Hyo: the five lines

Ichimoku Kinko Hyo is the work of Goichi Hosoda, who wrote under the pen name Ichimoku Sanjin — roughly, “what the man standing on the mountain sees”. He was looking for an all-in-one model: the name comes from a journalist needing to take in the whole picture of a chart at a single glance. He began the work in 1940 and developed it after the Second World War, employing tens of thousands of student hours to run the calculations and optimisations in the era before personal computers.

The result is a framework built on an ordinary candlestick chart — usually daily, though it works on weekly candles too — with three additional elements plotted through five lines. On top of that framework sit the three theories: time, wave movement and price projection.

Note what the first two are not: they are not moving averages of closing prices. The Japanese system uses the midpoint between the highest high and the lowest low of the window. That makes the line cross price less often and generate less noise, which is particularly useful in a trend.

Tenkan Sen — the 9-period line

The Tenkan Sen is the fast line, the one that hugs price most closely.

• Trend — the short-term trend is the direction the Tenkan Sen points in. The steeper the slope, the stronger the underlying force.
• Sentiment — price above the Tenkan Sen is positive short-term sentiment; price below it is negative.
• Signals — price crossing the Tenkan Sen against the direction of the trend is a change signal. Then check whether it also crosses the Kijun Sen: if it does not, the change is minor; if it does, it may become a major change of trend.

Because it stays close to price without cutting through it constantly, the Tenkan Sen can also serve as a stop loss level.

Kijun Sen — the 26-period line

The Kijun Sen is the slow line. It sits further from price and requires a larger move to be affected.

• Trend — the medium-term trend is the direction the Kijun Sen points in. A flat Kijun Sen is a sign of price consolidating.
• Sentiment — price above the Kijun Sen is a medium-term bullish bias; price below it, bearish.
• Signals — price crossing the Kijun Sen against the trend, or while the trend is flat, is a major change signal. From that point on, a change of trend becomes a real possibility.

A flat Kijun Sen is also a clean horizontal level, which makes it a practical place to put a stop.

Crosses between the two lines

When the fast line (Tenkan Sen, 9) moves above the slow line (Kijun Sen, 26), that is a bullish signal. The Tenkan Sen crossing below the Kijun Sen is the bearish equivalent. As with any cross, the quality of the signal depends on where it happens relative to the cloud.

Chikou Span — the delayed line

The Chikou Span is simply the closing price displaced 26 sessions into the past. It is therefore a measure of momentum: it compares today against the market of a month ago.

• Sentiment — Chikou above price is a bullish bias; Chikou below price, bearish; Chikou touching or very close to price is consolidative.
• Open ground — if the Chikou is in open ground there is trend and impulsiveness. If it is about to run into the price candles, that is a brake on the trend and a lack of impulse.
• Against the Kumo — the Chikou can also be read against the cloud, not only against price.

The other lines also exert a certain support and resistance effect on the Chikou, although less than price itself. Movement windows can be used to judge the space available: a minor window of roughly five days of average advance, and a major window of roughly ten. If price touches the windows, the probability of trend is lower than if it does not and the Chikou stays in open ground.

The Kumo — the cloud

Senkou Span A and Senkou Span B are both pushed 26 periods into the future. The band between them is the Kumo. The two lines are coloured to make the chart easier to read, but the colour of the cloud is irrelevant — what matters is the position of price relative to it and the thickness of the band. The thicker the cloud, the stronger its effect as support or resistance.

• Trend — the cloud splits into the current Kumo and the part projected ahead. The current Kumo gives the trend right now; the projected part gives levels and trend expectations for the coming weeks.
• Sentiment — price above the Kumo is a bullish bias; below it, bearish; inside it, neutral.
• Signals — price breaking above the cloud generates a bullish signal, price losing the cloud a bearish one. Price entering the cloud is a consolidation signal. As always, watch for noise and dilations around the edges.

The future Kumo is the one genuinely forward-looking element on the chart. Since it is displaced 26 sessions, it describes expectations for roughly the next month.

Reading a chart: the basic questions

A complete reading comes down to a short checklist. Run through it in order and the picture assembles itself.

• Where is price relative to the Kumo — above, inside or below?
• Where are the Tenkan Sen and the Kijun Sen relative to price — above or below?
• Is the cross between Tenkan Sen and Kijun Sen bullish or bearish?
• Where do the Tenkan Sen and Kijun Sen point — up or down?
• Does the Chikou Span have open space, upwards or downwards, or is it closed in?
• Is the distance to the next major support or resistance sufficient or insufficient?
• What direction does the future Kumo take — bullish, bearish or neutral?
• For a purchase: is price near the Tenkan Sen or far from it? Near the Kijun Sen or far?

The last question is the one most often skipped. A correct reading of trend still gives a poor entry if price has already travelled a long way from both averages.