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Ichimoku Kinko Hyo EA - Part 1: The Indicator

The Ichimoku Kinko Hyo is an indicator present by default in the MT4 platform. It 'an indicator developed by a Japanese journalist, hence the name that stands for equilibrium at a glance. In fact, as you can see by looking at the chart below

expert advisor - IchimokuEA 01

The indicator has a very strong visual impact which may in some cases even to discourage its use. Instead it is this graphic its strength and the means by which the indicator suggests the presence or absence of a trend.

As we can see the Ichimoku Kinko Hyo is composed of 5 lines and of a cloud called kumo that differentiates it from most of the indicators. Another characteristic of the indicator that you will notice looking at the graph is the fact that some lines, ones that form the kumo, are shifted forward, while a line, in yellow is shift back.

Let's examine now the various lines that make up the indicator to try to understand how the indicator provides us with information on price trends.

Tenkan Sen

First we start from the red line that takes the name of Tenkan Sen. This line normally is not shifted and goes to investigate a previous period of 9 candles (obviously the number of candles is set by parameter) that with D1 timeframe, in Japan, correspond a working week and a half .The Tenkan Sen is more responsive line In Ichimoku Kinko Hyo, it's the one that follows the price changes more quickly (because this just goes to check a short period of 9candles formed precisely). The calculation of the value of Tenkan Sen is as follows: it search highest maximum of 9 candles and the smallest minimum of 9 candles, then adds them together and the result are divided by 2. Going to watch the progress of the Tenkan Sen and the prices we can already get information on trends. A crossing of prices from bottom to top of Tenkan Sen we report an increasing trend, while a reverse cross indicates a decreasing trend.

Kijun Sen

The blue line, called Kijun Sen, has a behavior similar to Tenkan Sen, and is calculated in the same way but over a longer period (usually 26 candles correspondents working month in Japan). This indicator, by analyzing a peridodo largest, has a more stable and it's less affected by price variations.

These two indicators, Tenkan Sen and Kijun Sen, can be used for the input into the market. In fact, at the crossroads, when the Tenkan Sen crosses from bottom to top the Kijun Sen will signal rising trend for which we can open a bullish position (vice versa for a crossing opposite).

These two indicators are the only two that are not shifted respect to time. Another characteristic of these two lines is the presence of flat areas, which is more noticeable in Kijun Sen. A flat area reports that for a certain number of candles (the length of the plateau region), the prices have moved in of a very specific range, that is, the highest max and the smallest min are not changed. These flat areas are also important for the feature to attract the prices. As can be seen in the graph

expert advisor - IchimokuEA 02

When there is a flat zone, especially in Kijun, prices tend to revert towards the line, but at the points where the lines take on a slope the prices are pushed down or up.

Chinkou Span

The third indicator examined, in yellow, is called Chinkou Span. This indicator consists of the closing values of the candles and it is shifted back by a certain number of candles (26 candles in this case). So if we take any candle, and consider closing its value, we found virtually the value of Chinkou Span of 26 candles previous the candle in question.

expert advisor - IchimokuEA 03

This indicator is always used to get information on the trends present in a given time. Let the candle just closed and in particular its closing value. This value as we have said is the value of Chinkou span of 26 previous periods, if this value is below the corresponding candle (26 previous periods) then the trend is bearish, bullish if it is over, but if it is in the middle we have no trend.

The use which is normally done is to confirm a trend obtained via other routes (eg the cross).

Another use to which it lends Chinkou Span is to identify the strengths and supports. The negative and positive peaks of the indicator can be considered as support or resistance depending on the relative position of prices.

Kumo, Senkan Span A and Senkan Span B

Finally we arrive at the heart of the indicator, the kumo, which is formed by the two indicators Senkan Span A and Span B Senkan. These indicators are shifted forward by 26 periods for which the cloud precedes the candles. The Senkan Span A is obtained by averaging the values of the current candle of Tenkan and Kijun and then shifted forward by 26 periods. The value of Senkan Span B is obtained in the same way the value of Kijun but on a longer period (normally 52 candles) and then shifted forward by 26 periods

One feature is the double staining of the kumo. When Senkan Span A is greater than Senkan Span B the kumo is positive (we have a positive trend) and then a first staining, while when the span is less than the Senkan B the kumo is negative (we have a negative trend) and a second staining.

One use of the kumo is related to market entry. During the crossing, when the Senkan Span A cross from the bottom up Senkan Span B (and therefore the kumo changes from negative to positive) have a signal bullish trend and we can open a BUY position (a SELL position for a reverse crossing) .

Another feature of the kumo is relative to the thickness of the same and as we can see changes over time. The thickness gives us information about market volatility: The hicker the kumo greater market volatility in the corresponding period.

From the relative position between the kumo and candles we can obtain information on the trend. When the candles are within the kumo we lack a well defined trend, when the candles are above the kumo, especially when kumo is positive, we have a positive trend and finally, when the candles are under the kumo we have a downtrend .

Furthermore, since the kumo is shifted forward, we have information about the change of trend of looking at intersections of Senkan lines in periods after the current candle.

Since Senkan Span B is calculated in the same way Kijun, has the same characteristics of the latter. Can be present flat areas that attract the prices and areas with a slope that will push prices away.

For the above, the positions will be opened when prices are above or below the kumo, but never when they are inside. Another way to get the input signals in the market is linked to the exit of the candles from Kumo. When a candle breaks up the top line of the kumo we have a signal positive trend, back when it breaks down the bottom line. Of course, before opening the position may be useful to wait a candle next to the break to have a confirmation of the trend.

The values of Senkan Span A and Senkan Span B can also be used as resistance or as supports, the greater the thickness of the kumo higher the reliability of these resistances and supports.

With the analysis of Kumo we concluded the study of indicator Ichimoku Kinko Hyo.

Conclusions

One final observation on the indicator is as follows: The lines that make up the indicator should be evaluated as a whole is to obtain information on the trend of prices is to decide the time of entry into the market. Each line gives us a piece of information on trends and to get more reliable information is therefore necessary to evaluate the Ichimoku Kinko Hyo in its entirety.

 Part 2 - The Strategy with the Ichimoku Kinko Hyo


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