Ichimoku Kinko Hyo Indicator Explained

Definition of the Ichimoku Kinko Hyo Indicator

Discovered by Goichi Hosoda, the Ichimoku Kinko Hyo indicator is a complex-looking indicator which is actually very easy to use, once you have an understanding of all parts and components of the indicator.

The Ichimoku is made up of several parts which confer on this indicator a firm status as a standalone indicator which can produce signals even without being combined with other indicators.

Ichimoku Kinko Hyo: Components
The Ichimoku indicator is made up of:

  1. Kumo (cloud)
  2. Senkou span A
  3. Senkou span B
  4. Tenkan sen (line)
  5. Kijun sen (line)
  6. Chikou Span

Components of the Ichimoku Kinko Hyo

Ichimoku

1) Kumo

The cloud (Kumo) is the large area shaded with dots. This is the area located between the two Senkou span lines. When price is located between these lines, the market is range-bound. The Kumo is a strong support-resistance tool. When price is above the Kumo, the upper Senkou span is the 1st support, while the 2nd support is the lower Senkou span. This is important when setting trade entries and exits based on the Kumo. Similarly, when price action is located below the Kumo, the lower Senkou span forms the 1st resistance, while 2nd resistance is formed by the upper Senkou span line.

The Kumo is of two types: the Up Kumo seen in bullish markets, and the Down Kumo seen in bearish markets.

The Senkou Spans A and B

The Senkou spans form the upper and lower border of the cloud. During a bull market (i.e. when there is an Up Kumo), the upper border is the Senkou span A while the lower border is the Senkou Span B. In a bear market (where there is a Down Kumo), the upper border is the Senkou span B while the lower border is the Senkou span A.

So what really happens is that when the trend changes, it is as if the Kumo twists itself around its own axis.

Tenkan Sen

The Tenkan sen (Tenkan line) is the red line on the chart.

Kijun Sen
The Kijun sen (line) is the blue line on the chart.

Chikou Span

The Chikou span is a trade filter. The relationship of the price action to the Chikou span determines the trade direction. If the price is below the Chikou span, this is bullish. If price is above Chikou span, this is bearish. When the Chikou span is found intermingled with price action, the market is range-bound.

Usage of Indicator

All components of the Ichimoku Kinko Hyo can be used to generate trade signals. Several kinds of trades can be generated with the Ichimoku: trend reversals, breakouts, bounces, etc. The Ichimoku Kinko Hyo is a trend indicator.

Indicator Settings

The indicator is listed on the MT4 in its own category of indicators. To attach it to the MT4 chart, click on Insert -> Indicators -> Trend -> Ichimoku Kinko Hyo

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The lines of the various components can be enhanced by either increasing the line thickness or to change their colour to make them visually distinct.

Usage of the Ichimoku Kinko Hyo in Forex Trading

The Ichimoku Kinko Hyo can be used to trade several types of setups in the forex market.

  1. The cross of the Tenkan line and the Kijun line (TK cross) is one of the popular trades performed with the Ichimoku Kinko Hyo. This move mimics the moving average crosses. This is a trend reversal trade. In this setup, the Tenkan line is used as the support-resistance line, while the Kijun line performs the cross. The MACD coloured indicator can be added to confirm the signal.
  2. The Tenkan sen, Kijun sen, the Senkou span A and Senkou span B lines can be used as support and resistance zone markers. Once price breaks downwards below the Tenkan and Kijun lines, they become the first and second resistance levels, while the two Senkou lines become the first and second support levels. Breaks and bounces can be traded with these lines.
  3. The break of the cloud (Kumo) is another trade strategy, since the Kumo functions as a support and resistance (depending on where price is coming from). This is one of the breakout trades for this indicator.

Even though the Ichimoku Kinko Hyo can be used in several ways as a standalone indicator, it is usually good practice to add some form of confirmation to the setup by using other indicators to filter the trades.

Trade Example

The trade example we shall feature here is simply a snapshot showing various trade setups for the daily chart of the AUDUSD, using the Ichimoku Kinko Hyo. We see the following:

  1. A bullish TK Cross (long trade)
  2. A Kumo break to the upside (long trade)
  3. Various bounces of price on the Tenkan line in an uptrend (long trade).

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We have already discussed some Ichimoku strategies featuring each of these setups. You can visit the Forex Strategies section to read them up and perform detailed practice of these strategies on a demo account before going live.

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