Forex Journal

Busy alpha traders continually peruse their screens in search of the next big signal, but they only sporadically experiment with methods other than basic Fibonacci retracement levels, moving averages and trend lines. Those who do might use the “cloud” for another approach to support and resistance levels.  It is a good first step, but is clearly only a small step. The cloud represents only 40 percent of the entire Ichimoku Kinkou-Hyo method and it is a pity to leave the rest of the information on the table.

Ichimoku Kinkou-Hyo

Japanese financial writer Goichi Hosoda developed the Ichimoku Kinkou-Hyo method before World War II. Those of us who do not speak Japanese might call it Ichimoku or the Cloud, but it really means “one-look at the equilibrium prices.” Technically, this study gauges midpoints of historical highs and lows at different lengths of time and different time periods to identify support and resistance levels, yielding entry and exit points. Hosoda used three key time periods for its input parameters – 9, 26 and 52.  If you find these numbers to be slightly familiar,it is because you have seen them used in the Moving Average Convergence/Divergence oscillator, which was developed approximately two decades later.

The Ichimoku Kinkou-Hyo consists of five lines.
Trend line  (Kijun)
Signal line  (Tenkan)
Lagging line  (Chiku)
Leading lines  (Senkou Span A and Span B).

Combine the two leading lines and you have a cloud.  See Figure 1 for the application of this method on the weekly dollar/yen chart. Please notice that the cloud extends past the current price, which means you get a clear forecast of either further support, or in this case, future resistance.

When I first saw it, I found the method unclear at best and the look clearly crowded the chart in a way that basically thwarted my technical analysis. I needed to break down the system and analyze its nuts and bolts in order to understand it. Let’s follow this approach again.

Trend Line (Kijun)

The trend line, or the Kijun Line in Japanese, suggests that traders should follow its directional lead. It suggests buying when the line is rising and selling when the trend line declines. 

The formula for the Trend line is calculated as follows:

Trend Line = (highest high + lowest low) / 2 for the past 26 days

This is an excerpt from December 2008 issue of Forex Journal.