Ichimoku Trading System

The Ichimoku trading system is one of the few default indicators available on most charting platforms that in itself makes up for a complete trading system. But of course, traders can use the independent components of the trading system to build customized strategies.

In English language, the Japanese word Ichimoku translates to equilibrium or equilibrium of price. The Ichimoku trading system or indicator stands out due to the clouds, which are support and resistance levels..  As the name suggest, a view of the Ichimoku trading system gives the trader a clear idea on the trend and the general view of price.

Although the Ichimoku Kinko Hyo trading system might look complicated, it is in fact very simple and one of the easiest trading systems to use.

The Ichimoku trading system is also a mechanical trading system. There are many automated trading strategies using the Ichimoku trading rules.

The Ichimoku trading system was developed by Goichi Hosoda in Japan, around the time of World War II. Originally known as Ichimoku Kinko Hyo the trading system is used in a wide range of markets including forex, commodities and equity markets.

The Ichimoku system was adopted by the West in the 1990’s and the different components have also been renamed, ex: Turning Line, Standard, Close, Lead 1, 2.

It does make sense however to keep the original terminology intact to avoid any confusion.

Components of Ichimoku Trading

The Ichimoku cloud uses 5 individual indicators.

  • Tenkan sen is the mid-point of price taken from the 9 period’s high/low
  • Kijun sen is the mid-point of price taken from the previous 26 period’s high/low
  • Chikou Span is a 26 period lagging indicator depicting the current closing price
  • Senkou Span A is the mid point of the Tenkan Sen and Kijun Sen and shifted forward for 26 periods
  • Senkou Span B is the mid point of the past 52 periods, shifted forward for 26 periods

The Senkou Span A and B together form the Ichimoku cloud that one see’s ever so often.

Ichimoku Trading System
Ichimoku Trading System – Components

The default settings of Ichimoku trading system is 9, 26, 52 which has stood the test of time. Traders can us different settings as well.

Ichimoku Trading System Usage

The trading rules are quite simple with a long position taken when the following rules are met:

  • Current Price is above the cloud
  • A bullish cross-over of Tenken and Kijun Sen (above the cloud)
  • Finally, Chikou span should be above the Candles

Following the crossover, traders can enter a position on the open of the next session. Stops are placed to either trail the cloud or to trail the Kijun-sen.

Example: Ichimoku Long Trade
Example: Ichimoku Long Trade

For going short, the following conditions should be met.

  • Current Price is below the cloud
  • A bearish cross-over of Tenken and Kijun Sen (below the Cloud)
  • Chikou span should be below the Candles

Trades are not initiated when price is inside the cloud. Besides Kijun sen, the upper and lower levels of the cloud can also be used as stop levels. In effect, they behave as support/resistance levels. The thicker the cloud is, higher the strength of the support or resistance, whereas a flat kumo infers that the support or resistance level can be broken.

What happens when one of the conditions are not met?

Simply do not trade. It might mean that traders will have to sit on the sidelines while the trade continues to move in their direction, but discipline is something that most traders do not follow and thus result in losing most of their equity.

The Ichimoku trading system if followed strictly can prove to be quite a profitable trading method in itself. Given that the Ichimoku trading system originated in Japan, traders can also make use of the Heiken Ashi Candles in order to improve their trade entry’s along with the Ichimoku trading system.

To learn more about Ichimoku trading system, here are some great resources: