DEDICATION

This is dedicated to my long suffering family who have had to put up with me
getting up at all hours of the night to do my trading; something they have done
with minimal complaints.
SECONBD EDITION
Copyright © 2014 Raoul Hunter All rights reserved.
Disclaimer
Trading is speculative and Risky:

Trading in Foreign Currency is highly speculative. It is only suitable for those

users financially able to assume losses significantly in excess of margin. It is not
an appropriate investment for retirement funds.

Past Results Performance Disclosure:

Past results are not necessarily indicative of future results and cannot be
guaranteed to perform as such.

General Risk Disclaimer:

All Trading involves risk.
Leveraged trading has large potential rewards but also large potential risk. Be
aware and accept this risk before trading.
Never trade with money you cannot afford to lose.
All statistics are derived from historical performance and are therefore not a
guarantee of future results.
No account will achieve profits or losses similar to those discussed. There is no
guarantee that even with the best advice available you will become a successful
trader.
Contents
DISCLAIMER
CONTENTS
CHAPTER 1 - OVERVIEW
CANDLESTICKS
THE ICHIMOKU KINKO HYO
ADDING THE INDICATOR
ICHIMOKU SETTINGS
CHAPTER 2 - ICHIMOKU COMPONENTS THE THREE LINES
THE ICHIMOKU CLOUD
KUMO SENTIMENT
ICHIMOKU KINK HYO COMPONENT SUMMARY ICHIMOKU INTERPRETATION SUMMARY
MARKET BIAS
CHAPTER 3 - TRADING WITH THE ICHIMOKU TRADING THE KUMO
CLOUD
KIJUN-SEN– PRICE CROSS
CHINKOU SPAN– KIJUN-SEN CONFIRMATION TENKAN-SEN– KIJUN-SEN CROSS
CHINKOU
CHINKOU SPAN CROSS
CONCLUSION
CHAPTER 4 - ICHIMOKU COMBINATIONS ICHIMOKU WITH MACD
CONFIRMATION
ICHIMOKU WITH FIBONACCI RETRACEMENT LEVELS ICHIMOKU WITH FIBONACCI
EXPANSION LEVELS
CHAPTER 5 - ICHIMOKU STATISTICAL ANALYSIS OVERVIEW
THE APPROACH
MEASUREMENTS
CALCULATED FIELDS
THE RESULTS
DETAILED REPORTS
CONCLUSION
AFTERMATH

CHAPTER 5 - TABLE OF CAPTIONS FIGURES

CHARTS
ABOUT THE AUTHOR
Chapter 1 - Overview
Traditionally, the Forex market is separated into three sessions during which
trading activity peaks: the Asian, European and North American sessions. More
casually, these three periods are also referred to as the Tokyo, London and New
York sessions. These names are used interchangeably as the three cities represent
the major financial centres for each of the regions. The markets are most active
when these three powerhouses are conducting business as most banks and
corporations make their day-to-day transactions and there is a greater
concentration of speculators online.
When liquidity is restored to the Forex (or FX) market after the weekend, the
Asian markets are naturally the first to see action. Unofficially, activity from this
part of the world is represented by the Tokyo capital markets, which are live
from midnight to 6 a.m. Greenwich Mean Time. However, there are many other
countries that exert considerable impact that are present during this period
including China, Australia, New Zealand and Russia, among others. Considering
how scattered these markets are, it makes sense that the beginning and end of the
Asian session is stretched beyond the standard Tokyo hours. Allowing for these
different markets' activity, Asian hours are often considered to run between 11
p.m. and 8 a.m. GMT.

Figure 1 - Market Times

The Figure above shows the various market’s open and closing times, converted
to South African time. Daylight saving has not been taken into consideration as
it changes usually by one hour depending on the time of year – you would need
to make those adjustments yourself. It is important to note that unlike the other
major Forex trading sessions; the Asian session is quieter most of the time.
Those traders used to trading in the volatile environments of the European and
North American time zones will find the Asian session rather docile and not at
all volatile.

Figure 2 - Average Pips per Hour

The table above shows the average pip movement for the four major pairs since
2000 plotted over the time of day. This will give you an indication of which time
– and therefore which markets - are the most active. The times have been
converted to South African time but without considering daylight saving.
As logic would suggest, a currency is typically most active when its own
markets are open. For example, the Euro, British pound and Swiss franc see
higher volatility on average when the European session is active. This is the case
as banks, businesses and traders from any specific country will use their
domestic currency in the majority of their foreign exchange transactions.
There are several ways in which you can maximize profits through trading
during the Asian trading session. Firstly, you need to hold longer positions
instead of rushing in to trade short term while the market is slow. This involves
making longer term trades and holding your position overnight if need be.
Another technique to you can use to profit on the Asian market is to use
indicators more commonly used by the Japanese traders; the Ichimoku Kinko
Hyo is probably the most commonly used in the Asian market. The reason for
doing this is that if enough traders use the same indicator it has greater chance of
becoming a self-fulfilling prophecy when you follow it.
Candlesticks
I thought it might be interesting to add a little about candlesticks as part of the
introduction. I am doing this because strangely enough, both candlesticks and
the Ichimoku Kinjo Hyo indicator originated in the Far East; and there is a
degree of interdependency between them.

Remarkably the use of charting around started around 1500 to 1600 in Japan,
and increased as they emerged from a feudal period of constant war, where the
emperor in Kyoto and his military deputy, the shogun, had lost their control.

The next significant period was the Edo period which produced a significant
process of unification which lasted until the Meiji Restoration in 1868. What had
the biggest effect though, was that during this time, Japan cut themselves off
from the outside world and internally developed a highly individual society and
set of values. Any missionaries were expelled in 1587, and in 1633 a decree was
passed prohibiting Japanese from trading with foreigners or even living abroad.
Most of the populace saw this as a time when every aspect of their daily life was
uniquely Japanese.
The next interesting change was when Tokugawa Ieyasu – a general responsible
for restoring order in Japan at the beginning of the Edo period
– became Shogun in 1603. He governed from Edo - now Tokyo - and his
government, known as the Bakufu, were the territorial administrators. One of the
key roles of the Bakufu was the collection of taxes, which was performed
through the Samurai officials.
After many elaborate surveys, all land was recorded and assessed for crop yields.
This was the basis of taxation and the land was measured as to how many Koku
of rice it would yield - one Koku equals about five bushels. The farmers paid
40% to the Edo, usually in rice but later also in cash. Interestingly, the land
under cultivation during this period doubled with substantially improved yields.
Another development was that trade between regions grew steadily with Osaka
which started to dominate Japanese finance and commerce. It had many large
warehouses where raw materials were stored for future distribution.
The Dojima Rice Exchange was set up in the late 1600s and was the first of its
kind in the world. By 1710 it was trading in rice as well future warehouse
receipts. This futures trading developed from a scenario where, to generate
additional income, rice farmers began to sell receipts for future delivery,
becoming some of the world’s first commodity futures traders.
Due to a number of political issues, enforced by significant class barriers, the
Bakufu, in 1859, were forced to open up their ports to foreigners. A noticeable
figure in this market at this time was Munehisa Homma, a wealthy rice farmer
and commodity trader. He was nicknamed ‘Sakata’ as he first worked at Shonai
Sakata, a commercial town on northern Japan.

He believed that markets were influenced by human emotions which often

created a rift between current prices and their intrinsic value. He went on to
invent Candlestick Charts in an attempt to capture some of these emotions; and
also as an attempt to predict future price movements.

As late as around 1989, Candlestick analysis was still a secret to Westerners and
known only to the Japanese stock traders. Steve Nison, a writer and former
technical analyst at Merrill Lynch, stumbled upon Candlesticks while talking to a
Japanese stockbroker. He researched these ideas and later brought Japanese
Candlesticks back to America where it took root in mainstream technical
analysis. Nison wrote a book, Japanese Candlestick Charting Techniques in
1992, which is still considered as the formative work on Candlestick Charting
today.

It is from these beginnings that Candlestick Charts have become the principal
form of technical analysis around the world.
It is interesting to note that the price charts evolved in Japan in the 17th century,
followed by candlesticks in the 18th century – all easily predating the first
American bar charts which appeared around the 1880s.

All this lead to a journalist called Goichi Hosoda – known as Ichimoku Sanjin -
started adapting and refining candlestick analysis by adding a series of moving
averages. This took place just before the outbreak of World War II and was the
advent of the Ichimoku Kinko Hyo indicator.

Bar and Candlestick Comparison As a point of interest, here is a comparison

of Bar charts and their equivalent Candlestick.

Figure 3 - Bar and Candlestick Comparison

The first example shows a Bullish Bar and Candlestick. Note that here the
Candlestick is black which is the MetaTrader default colour for a Bullish
Candlestick.
The second pair shows the Bearish equivalent; in this case the Candlestick has a
white body.
It is important to mention that these colours, although the default for
MetaTrader, can often be reversed, or filled with other colours. It is therefore
essential to understand what colours represent which type of Candlestick when
you are analysing a chart.
The Ichimoku Kinko Hyo
Ichimoku Kinko Hyo is an award winning Japanese technical indicator which
combines elements of time, sentiment, volatility, Support and Resistance all in
one indicator. It is a Japanese phrase that translates to "equilibrium chart at a
glance". Directly translated Ichimoku means “one glance”; Kinko means
Equilibrium or Balance and Hyo translates to Chart
– One Glance Equilibrium Chart.

It is made up of a number of elements, or sub-indicators, and is used to define

market trends, levels of Support and Resistance as well as generating Buy or Sell
signals. Generally, it is used to illustrate where prices are likely to go and when
to trade. This indicator was developed so that a trader can gauge the trend,
momentum and Support and Resistance points without the need of any other
technical indicator - it is considered to be an entire trading system on its own.
One of the biggest differences between the Ichimoku and most Western
indicators is that the Ichimoku is not drawn using the daily closing prices
– in almost all of its calculations the Ichimoku uses mid-prices. Basically this
takes the average of the high and low price of the period and divides it by two -
which is then not adjusted for volume. This method is ideally suited to markets
where there is an arbitrary cut-off time, such as the Forex market.

Ichimoku Kinko Hyo is a technical trend trading charting system that has been
used by Japanese commodity and stock market traders for decades. It is gaining
increasing popularity amongst western traders where it is commonly referred to
as Ichimoku Cloud charts.

Although Ichimoku is still relatively new to Western markets, it is deeply

ingrained in the Japanese trading community and has a massive following
throughout Asia. This makes the Ichimoku indicator a real player when trading
any of the Yen crosses - it often becomes a self-fulfilling prophecy due to the
volume of Japanese traders using it. There is no other example where a single
indicator so dominates an entire market.
More recently, the method was revived by Hidenobu Sasaki of Nikko Citigroup
Securities, who published “Ichimoku Kinko Studies” in 1996. Now in its 18th
edition, this is the book most commonly used by Japanese traders, and has been
voted the best technical analysis book in the Nikkei newspaper for 9 consecutive
years.

From all of this, it is obvious that the Ichimoku is an indicator that traders should
seriously consider incorporating into their routines of technical analysis. One of
the real beauties of Ichimoku is the speed and ease with which significant price
levels are identified, making it an easy addition to any trader’s repertoire of
technical analysis.

History

Ichimoku Kinko Hyo was developed by Goichi Hosoda in the 1930’s.

He was a Japanese journalist who used to be known as Ichimoku Sanjin, which
can be translated as "What a man in the mountain sees."
This is probably one of the few indicators not developed by either a
mathematician or a statistician.
He spent some thirty years perfecting the technique before releasing his findings
to the general Japanese public in the late 1960s.
He initially utilised a large team of students who for some twenty years,
manually back-tested the various formulae – there were no computers then - so
as to perfect the accuracy of the indicator.
His results were published in 1968 it but was only introduced to the Western
world in the 1990’s.
It is considered an all-round indicator as it defines Support and Resistance,
Trend Direction, Measures Momentum and provides Trading Signals – all “at a
glance.”
The first example shows a clean candlestick chart with no indicators loaded.
Chart 1 - Basic Candlestick chart
The second example shows the complexity of the Ichimoku Kinko Hyo when
loaded on the same chart.
Chart 2 - The Ichimoku Kinko Hyo
It is this complexity that often scares traders away from using it. I am aware of
one trader who when first seeing it, referred to it as a multi-coloured mass of
Spaghetti – and to be honest, it is rather daunting when you see it for the first
time.
Adding the Indicator
MetaTrader4 has the Ichimoku Kinko Hyo preloaded as one of its standard
indicators.
The only issue with trying to find it is that it is under the Oscillator section of the
available indicators – even though it is not an oscillator!

Figure 4 - Locating the Ichimoku Kinko Hyo

To locate the Ichimoku and add it to your chart, go to Insert on the Main Menu,
select Oscillators, and then double click Ichimoku Kinko Hyo.
Ichimoku Settings
There is very little you can do to modify the settings of the Ichimoku Kinko Hyo
other than to change the Tenkan-Sen period, the Kijun-Sen projection period and
the Senkou Span period.

Figure 5 - Ichimoku Kinko Hyo parameters

The default settings for the Ichimoku Kinko Hyo are 9, 26, 52 and after
significant research and back testing over many years, Goichi Hosoda finally
determined that these settings were the ideal settings for obtaining the optimum
results.

There is however, one area of contention; he derived the number 26 – the Kijun-
Sen period - from what was then the standard Japanese business month, which
happens to include Saturdays. The number 9 represents a week and a half and
the number 52 represents two months.

The debate is whether or not these settings of 9, 26, 52 are still valid given that
the standard working month in the West does not include Saturdays. Also, in
non-centralised markets, those that do not keep standard business hours such as
the Forex market which trades around the clock, many analysts believe that there
may be a more appropriate setting. That may be the case but I certainly use the
standard settings, and as far as I am aware, so do majority of the traders. Perhaps
most importantly, so do all the Japanese traders – and that is enough of an
indication for me to stay with the default settings.
You can however also change the colours of the various components.

Figure 6 - Ichimoku Kinko Hyo colours

The example shows the MetaTrader 4 default colours for this indicator. I tend to
leave them all as the default as it is now becoming more common for traders to
refer to the lines by their colours, however, you may want to change the Up and
Down Kumo colours as the default colours are quite close and this makes it a
little difficult to distinguish between the two.
Chapter 2 - Ichimoku Components
The Three lines
There are four major components – five lines – that make-up the Ichimoku but in
this first section we are going to focus on the first three lines only.
The example chart below shows only these three lines.

Chart 3 - The Tenkan-Sen, Kijun-Sen and Chinkou Span lines

These three lines are; the Tenkan-Sen, the Kijun-Sen and the Chinkou Span.
You can read a lot of information from the Tenkan-Sen and Kijun-Sen lines
alone. These lines essentially represent Moving Averages of data points over
short and medium term periods. When the two lines cross, and more specifically,
when the Kijun-Sen line crosses above the TenkanSen line, the implication is
that short term prices are rising above the medium term trends which indicates a
potential up trend in the price movement.

Tenkan-Sen
Tenkan Sen – this is a price action line which gauges the underlying momentum.
This is almost similar to a 9 SMA – but not identical to it; it is therefore also
reasonably fast.

Chart 4 - Tenkan-Sen

The major difference between the Tenkan-Sen and the 9 SMA is that the Tenkan-
Sen has periodic flat bottoms and is not as rounded as the 9 SMA. This flattening
gives a better representation of the price equilibrium but it also produces a much
better Support or Resistance line than the 9 SMA. You will also notice that the
SMA is broken more times by the price than is the Tenkan-Sen. This is due to the
more conservative manner in which the Tenkan-Sen is calculated; this makes it
less reactive to small price movements.
The Tenkan-Sen is primarily used as a signal line and as a minor Support and
Resistance line. It is also known as the Turning line and is derived by averaging
the highest high and the lowest low for the past nine periods. The Tenkan-Sen is
also a good indicator of the market trend. If it is moving up or down, it indicates
that the market is trending, while if it is moving horizontally, it signals that the
market is ranging.
The angle of the Tenkan-Sen can also give you an idea of the relative momentum
of price movement - a steeply angled Tenkan-Sen will indicate a nearly vertical
price rise over a short period of time or strong momentum, whereas a flatter
Tenkan-Sen will indicate lower momentum over that time period.

Kijun-Sen

The Kijun-Sen is a trend indicator which gauges the overall trend direction. The
Kijun-Sen therefore provides us with all the information the Tenkan-Sen does,
but just on a longer time frame.

Chart 5 - Kijun-Sen

Due to the longer time period that it measures, the Kijun-Sen is a more reliable
indicator of short-term price sentiment, strength and equilibrium than the
Tenkan-Sen. If price has been ranging, then the Kijun-Sen will reflect the
vertical midpoint of that range – the price equilibrium - through its flat aspect.
The Kijun-Sen is closer to a 26 SMA but also not identical as it is a little slower;
just as with its brother the Tenkan-Sen, the SMA lacks the flat tops or bottoms of
the Kijun Sen.
This is a Confirmation line as well as a Support and Resistance line. The Price
equilibrium is expressed even more accurately in the Kijun-Sen than in the
Tenkan-Sen due to its longer time period. Thus, the Kijun-Sen can be relied upon
as a significant level of price Support and Resistance. The Kijun Sen can also act
as an indicator of future price movement; if the price is higher than the Kijun-
Sen, it is likely to continue to climb higher. If the price is below the Kijun-Sen it
should continue to drop. Another important use of the Kijun-Sen is that it can be
used as a trailing stop for any active orders.

Kijun Equilibrium

There is a curious tendency that the Kijun-Sen provides; it continuously re-

attracts the price back to itself. The price tends to move alternately away from
and back toward the Kijun-Sen in a cyclical fashion due to its strong expression
of equilibrium or balance. Therefore, when the price momentum is extensive and
the price moves rapidly up or down over a short period of time, the Kijun-Sen
demonstrations an elastic effect by attracting the price back towards itself and
thereby bringing it back to equilibrium.
When the price has moved away from the Kijun-Sen, the status is considered to
be in imbalance and is only back in equilibrium when the price returns to the
Kijun-Sen.

Chart 6 - Kijun-Sen Equilibrium and Imbalance

 he chart above shows some of the areas of Imbalance and others where there is
T
once again Equilibrium as the price respects the Kijun-Sen. This feature of the
Kijun-Sen allows you to use it rather effectively as both a low risk entry point as
well as an excellent Stop Loss level.
Chinkou Span

You will find a number of traders and manuals referring to this as the Chikou
Span (without the ‘n’) – I prefer to use phrase Chinkou Span as this is the name
that MetaTrader uses in the actual indicator; however they all refer to the same
line irrespective of the variations in spelling.

Chart 7 - Chinkou Span

The Chinkou Span is calculated by taking today's closing price and projecting it
back 26 days on the chart.
It is often referred to as the Lagging span and can be used as an excellent
Support or Resistance aid.
The Chinkou Span differs slightly in its indication of Support and Resistance
levels – unlike the previous two lines where their own lines acted as the Support
or Resistance level; with the Chinkou you need to manually draw the horizontal
lines onto the chart from the highs and lows of the Chinkou.
The example below clearly shows these Support and Resistance lines in action.

Chart 8 - Chinkou Support and Resistance

The Chinkou also works well as an entry signal generator; if the Chinkou Span
or the green line, crosses the price in a bottom-up direction, that's a Buy signal.
If the green line crosses the price from the top-down, that's a Sell signal.
The Ichimoku Cloud
There is a tremendous amount of research relating to the Kumo Cloud; there is
also a little confusion to what actually represents the cloud. Some believe that
the two Tenkan–Sen and Kijun-Sen lines also make-up part of the Cloud as they
are part of the calculation of one of the lines. I think not; I, and many others like
me, believe that the Cloud comprises of only two lines – the Senkou Span A and
the Senkou Span B.

Once these are plotted on a chart, the area between the two – usually highlighted
by vertical lines – makes up the Kumo Cloud.

Chart 9 - The Kumo Cloud with Senkou Span lines

The Kumo cloud is made-up of;

Senkou A - the average of the current momentum and trend projected to the
future - the back or top of the cloud.
Senkou B - the average of the current price action projected to the future - the
belly or bottom of the cloud.

Interestingly though, the Kumo Cloud predicts 26 periods ahead of the current
price and protrudes well past the current price.
The Kumo Cloud itself is basically the space between Senkou Span A and the
Senkou Span B lines. The Cloud edges – the two Senkou lines identify both
current and potential future Support and Resistance levels. The Kumo cloud
changes in shape and thickness based on price changes. This height represents
volatility as larger price movements form thicker clouds, which in turn creates
stronger Support and Resistance levels. As thinner clouds tend to offer only
weak Support and Resistance, prices can, and often tend to, break through such
thin clouds.

Generally, the market is considered Bullish when the Senkou Span A is above
Senkou Span B; and vice versa for Bearish markets. Traders often look for
Kumo Twists in future clouds, where the Senkou Span A and the Senkou Span B
exchange positions, some traders believe this to be a signal of a potential trend
reversal. It is important to mention that there is a section of the trading
community that do not believe that the Kumo twist offers any indication at all,
other than the Kumo is really thin at that point. In addition to thickness, the
strength of the cloud can also be ascertained by its angle; upwards for Bullish
and downwards for Bearish.

Senkou Span A

The Senkou Span A is another one of the time-shifted lines that are unique to
Ichimoku Kinko Hyo. In this case, it is shifted forward by 26 periods. Since it
comprises of the average of the Tenkan-Sen and Kijun-Sen, the Senkou Span A
is therefore in itself a measure of equilibrium. Goichi Hosoda knew well that
price tends to respect prior Support and Resistance levels, so by time-shifting
this line forward by 26 periods he allowed you to quickly see "at a glance" where
Support and Resistance from 26 periods ago compares to the current price
action. 26 periods equates to 1 month on a Daily chart – including Saturdays.
Chart 10 - Kumo Cloud projection

While it is possible to trade off of the Senkou Span A and B lines on their own,
their real power comes in their combined dynamics in the Kumo Cloud.

Senkou Span B

The Senkou Span B is best-known for its part, along with the Senkou Span A
line, in forming the Kumo (“Cloud” in Japanese), or the "Ichimoku cloud" which
is the foundation of the Ichimoku Kinko Hyo charting system.
On its own, the Senkou Span B line represents the longest-term view of
equilibrium in the Ichimoku Kinko Hyo system. Rather than considering only
the last 26 periods in its calculation like the Senkou Span A, the Senkou Span B
measures the average of the highest high and lowest low for the past 52 periods.
It then takes that measure and time-shifts it forward by 26 periods, to match the
Senkou Span A.

Kumo

The Kumo is the heart of the Ichimoku Kinko Hyo charting system; it is also
perhaps the most immediately visible component of Ichimoku indicator. The
Kumo Cloud allows you to immediately distinguish the prevailing overall trend
and the price's relationship to that trend. The Kumo is also one of the most
unique aspects of Ichimoku Kinko Hyo as it provides a deep, multi-dimensional
view of Support and Resistance as opposed to just a single, one dimensional
level as provided by other charting systems. This more encompassing view is a
better representation of the way in which the markets truly function; where
Support and Resistance levels are not merely single points on a chart, but rather
areas that expand and contract depending upon the market conditions.

Chart 11 - Kumo Support and Resistance

Rather than providing a single level for Support and Resistance, the Kumo
expands and contracts with historical price action to give a multidimensional
view of Support and Resistance. As shown in the example chart above, this
Support and Resistance indication is far superior to the usual horizontal line.
The first Support level highlighted on the chart, shows how the Kumo curved to
continually Support the price. The other four contact points happen to be
horizontal, nevertheless the price still honoured these points. The thickness of
the Kumo Cloud is an indication of price volatility. Also, the thicker and better
developed the Kumo is, the more accurate its Support and Resistance
capabilities. Another point to note is that the thicker the Kumo, the less likely it
is that prices will manage a sustained break through it. The thinner the Cloud,
the better the chance the price has of a break through.
Kumo Sentiment
In addition to providing a view of sentiment vis-à-vis its relationship with price,
the Kumo itself also has its own internal sentiment or bias. This makes sense
when we consider that the Kumo is made up of essentially two moving averages,
the Senkou Span A and the Senkou Span B. When the Senkou Span A is above
the Senkou Span B, the sentiment is Bullish since the faster moving average is
trading above the slower.

Conversely, when the Senkou Span B is above the Senkou Span A, the sentiment
is Bearish.
Ichimoku Kink Hyo Component Summary
The following table lists the five components of the Ichimoku Kino Hyo and
gives you the Japanese name, the English naming equivalent and its
construction.

JAPANESE ENGLISH CONSTRUCTION

Tenkan-Sen
Kijun-Sen
Chinkou Span Senkou Span A Senkou Span B Conversion Line Base Line
Lagging Span Leading Span A Leading Span B 9 period (H + L)/2
26 period (H + L)/2
-26 period Close
(Kijun + Tenkan)/2 +26 periods

52 period (H + L)/2 + 26 periods

Figure 7 - Ichimoku Kinko Hyo Component Summary
Ichimoku Interpretation Summary
The Tenkan-Sen is used as an indicator of a market trend. If this line increases
or decreases, the trend exists. When it goes horizontal, the Forex market has
come into the channel.

The Kijun-Sen is used as an indicator of movement in the market. If the price is

higher than the Kijun-Sen, the price will most likely rise. When the price
intersects this line, changes in the trend are likely to occur.

A Buy signal is generated when the Tenkan-Sen intersects the Kijun-Sen from
below (Strong if above Kumo, Neutral if within Kumo, weak if below Kumo).

A Sell signal is generated when the Tenkan-Sen intersects the Kijun-Sen from
above (Strong if below Kumo, Neutral if within Kumo, weak if above Kumo).

The Chinkou span can be used to determine the strength of a Buy or Sell signal.
Strength is shown to be with the Sellers if the Chinkou Span is below the current
price. Strength is shown to be with the Buyers when the opposite is true.

Support and Resistance levels are represented by the Kumo cloud. If the price is
entering the Kumo from below, then the price is at a Resistance level. If the price
is falling into the Kumo from above, then there is a potential Support level.

Trends are determined by looking at where the current price is in relation to the
Kumo. If the price is above the Kumo, the trend is said to be up. If the price is
below the Kumo, the prevailing trend is said to be down.

Volatility is determined by looking at the thickness of the Kumo Cloud. A thin

Kumo implies the current volatility is low, while a thick Kumo implies strong
Support or Resistance and increased volatility.
Market Bias
Check the bias on the higher timeframe and then trade on the lower. For
example, check the price in relation to the Kumo on the daily chart and based on
this information, trade on the one hour or the four hour chart;

If price is above the Kumo - the market is Bullish.

If price is below the Kumo - the market is Bearish. If price is contained in the
Kumo, the market is consolidating.
Chapter 3 - Trading with the
Ichimoku
Trading the Kumo Cloud
The Kumo delivers great potential in detecting key reversals using a Breakout
Strategy.

Basically, as long as the Ichimoku Cloud is under the current price, the trend is
up; conversely, if the Cloud is above the current price the trend is on a down
slope. The price will always stay on one side of the Kumo during the trend. The
greater the price is from the Kumo, the stronger the trend but also the more
volatile it could be.
The longer the price action stays above or below the Kumo, the stronger the
trend and the more Support and Resistance the Kumo will deliver.

Chart 12 - Trading the Kumo Cloud

The example chart shows that at the first highlighted point, where the price could
not break through the Kumo. Coincidently the low point inside the Kumo was
also at the 61.8 Fibonacci retracement level – which is not shown – which is also
likely to have contributed to the rebound. However, at the next highlighted point,
the price broke through the Kumo in a single period – a strong indication of a
new potential down trend. On a Kumo break through, there is often a
retracement back to either the Tenkan-Sen or the Kijun-Sen. Whenever this takes
place, it is a strong indication that the breakout is now in play. This happened
with the price tested the Kijun-Sen four periods later; where it rebounded off the
KijunSen. The subsequent strong downtrend, after the Kijun-Sen rebound, is
clearly visible on the chart.
You can also think of the Kumo Cloud as one large Support or Resistance line; a
task that the Kumo performs rather well.

Chart 13 - Kumo Support and Resistance

The example above shows how the prices moved away from the Kumo but
continually returned to test it. The chart has been zoomed out to more clearly
highlight this scenario.

Trend reversals

Basically, it is the thin sections in the Cloud that gives you an idea of when the
market is likely to change its trend. You would need to look ahead and see when,
and at what price, it gets very thin.
Conversely, if the Cloud is getting fatter and fatter, the chance of a reversal in
the trend lessens.

Chart 14 - Kumo Trend Reversal

The example chart above shows the thin Kumo which would have forecasted a
trend reversal – in this case reversing to a rather strong new Bearish trend.

Kumo in Trending markets

Remember that the Ichimoku Kinjo Hyo, and the Kumo component in particular,
is a system primarily for trending markets. When the markets are consolidating,
or moving sideways, their accuracy is significantly reduced.
Chart 15 - Kumo and Consolidating markets
he example above shows, in the center of the chart, how the market was
T
consolidating with the price continuously in, or very close to, the Kumo. A
potential new trend can only be identified once the price had broken through the
Kumo with a confirmed break.
Kumo Twist

The Kumo Cloud twist is when the Senkou Span A crosses with the Senkou
Span B. The first point to note is that the Kumo cloud is at its thinnest at this
point implying an easier breakthrough by the price. However, apart from that
fact there is a lot of conjecture as to whether the Kumo switch offers any real
signal – some traders vehemently believe that the Kumo switch provides no
other relevant information; except of course for its thickness.
I must be honest and state that I am in two minds about this; however what I will
do is to at least look at the twist, and coupled with other indications, see if there
is a potential trade in the offing.
Chart 16 - Kumo Twist

The example chart shows a Kumo twist taking place after a long Kumo Bear run.
Also, the price at the twist is in consolidation, however, it has broken through,
and is above the Kumo, to suggest a possible Bullish entry.
In this example then, the Kumo twist is suggesting the start of a possible Bullish
trend. I would not enter on this trigger alone, but when you consider the rest of
the indications, there is certainly a potential Buy opportunity.
There are too many other indications that confirm the Kumo twist. First, the
price is above the Kumo indicating a Buying opportunity. Second, although in a
weak position, the Tenkan-Sen has crossed with the KijunSen for a possible Buy.
Finally, the Chinkou has crossed the price upwards for a Buy trigger; albeit in a
weak position.
I think though that the outcome, as shown on the chart, clearly indicates that this
would have been a good Buying opportunity.
From this you can make up your own mind and decide how much impetus you
wish to place on the indication from a Kumo twist.

Kumo Trading Overview

Current price action is dictating what is going to happen in the future via the
future Kumo Cloud.
26 periods ago is dictating what is happening now - the current Kumo cloud.
Price in the cloud = consolidation.
Price below the cloud = Bearish.
Price above the cloud = Bullish.
If the cloud is Yellowish - Senkou A is above Senkou B - the cloud is Bullish.
If the cloud is Reddish - Senkou B is above Senkou A - the cloud is Bearish.
A Kumo twist is when Senkou A crosses Senkou B or vice versa.
In a Bullish cloud, Senkou B is at the bottom - often comprising of flat lines –
which are also major Support and Resistance lines.
In a Bearish cloud, the flatter lines are at the top - these continue to represent
major Support and Resistance levels.
The Support or Resistance applies both to when the price is in the cloud or
approaching the cloud.
This impact of the Support and Resistance is strengthened by the length of the
flat Kumo line.
The thicker the cloud the stronger the Support or Resistance; the greater the
breakout when it eventually does break through.
A thicker cloud also implies greater volatility and alternatively less volatility for
a thin cloud.
A Bearish future cloud confirms and strengthens the Sell signal.
A Bullish future cloud confirms and strengthens the Buy signal.
Kijun-Sen – Price Cross
The Kijun-Sen cross is one of the most powerful and reliable trading strategies
within the Ichimoku Kinko Hyo system. It can be used on nearly all time frames
with excellent results, though it will be somewhat less reliable on the lower, day-
trading time frames due to the increased volatility on those time frames.
The Kijun-Sen cross signal is given when price crosses over the Kijun-Sen. If it
crosses the price curve from the bottom up, then it is a Bullish signal. If it
crosses from the top down, it is a Bearish signal. Nevertheless, like all trading
strategies within the Ichimoku Kinko Hyo system, the KijunSen cross signal
needs to be evaluated against the larger Ichimoku picture before committing to
any trade.

Chart 17 - Kijun-Sen Cross

The example shows two potential entries; a Bearish Cross and a Bullish Cross.
In this example, both however are weak Kijun-Sen cross signals.

Kijun-Sen Cross Overview

In general, the Kijun-Sen cross strategy can be
categorised into three major classifications: strong,
neutral and weak.

Chart 18 - Kijun-Sen Cross Strength

Strong Kijun-Sen Cross Signal
 A strong Kijun-Sen cross Buy signal takes place when
a Bullish
cross happens above the Kumo.
 A strong Kijun-Sen cross Sell signal takes place when
a Bearish
cross happens below the Kumo.

Neutral Kijun-Sen Cross Signal
 A neutral Kijun-Sen cross Buy signal takes place
when a Bullish
cross happens within the Kumo.
 A neutral Kijun-Sen cross Sell signal takes place
when a Bearish
cross happens within the Kumo.

Weak Kijun-Sen Cross Signal
A weak Kijun-Sen cross Buy signal takes place when a Bullish cross happens
below the Kumo.
A weak Kijun-Sen cross Sell signal takes place when a Bearish cross happens
above the Kumo.
Chinkou Span – Kijun-Sen Confirmation
As the Ichimoku Kinko Hyo presents a complete picture, you should always try
to use one component to confirm the trigger of another. In this case, you should
always consider the Chinkou Span’s relationship to the price when considering a
Kijun-Sen cross entry.

Each of the three classifications of the Kijun-Sen cross described above can be
further confirmed based on the Chinkou Span's location in relation to the price
curve at the time of the Kijun-Sen cross.
If the cross is a Bullish signal and the Chinkou Span is above the price curve at
that point in time, it adds greater strength to the Buy signal. Conversely, if the
Kijun-Sen cross is a Sell signal and the Chinkou Span is below the price curve at
that point in time, it will provide additional positive confirmation to the signal.

If the Chinkou Span's location in relation to the price curve is the opposite of the
Kijun-Sen cross's sentiment, then that will indicate a weaker signal.

Chart 19 - Kijun-Sen Chinkou Confirmation

The chart shows to possible Kijun-Sen cross entries; the first is a weak Bullish
cross, however the second is a Strong Bearish cross as the KijunSen Price cross
takes place below the Kumo.
More importantly, the Chinkou Span – at the point in time the Kijun-Sen cross
took place – would be below the price. This is a strong confirmation of the
Bearish cross.
You need to remember that the Chinkou Span trails the price by 26 periods or
candles. Therefore the Chinkou Span would have been at the position of the first
arrow on the example chart – which is below the price.
Tenkan-Sen – Kijun-Sen Cross
This strategy bears a strong resemblance to a conventional Moving Average
cross, where the faster MA crosses the slower downwards for a potential Selling
opportunity. Conversely, it would cross upwards for a Buying opportunity.

The Ichimoku Kinko Hyo comprises of a similar strategy. Here the Tenkan-Sen
is considered faster than the Kijun-Sen, therefore when the Tenkan-Sen crosses
the Kijun-Sen downwards you have a Bearish opportunity. The opposite holds
true for a Bullish prospect.

Chart 20 - Tenkan-Sen/Kijun-Sen cross

Tenkan-Sen/Kijun-Sen Trading Overview
The Tenkan Sen must cross the Kijun Sen downwards to signal a Sell.

Weak signal - If the Bearish cross is above the Kumo - the cross is in Bullish
territory
Neutral signal - If the Bearish cross is inside the Kumo - the cross is in
consolidation territory
Strong signal - If the Bearish cross is below the Kumo - the cross is in Bearish
territory
Tenkan Sen must cross the Kijun Sen upwards to signal a Buy.

Weak signal - If the Bullish cross is below the Kumo - the cross is in Bearish
territory.
Neutral signal - If the Bullish cross is inside the Kumo– the cross is in
consolidation territory.
Strong signal - If the Bullish cross is above the Kumo– the cross is in Bullish
territory.
You should confirm all the above with the Kumo – it must also be either Bullish
or Bearish.
A flat Kijun-Sen line indicates a consolidating market with little movement.

The Ideal Set-up

When the Tenkan-Sen (Red) is above the Kijun-Sen (Blue) - the market is
Bullish - and the price should be above the Kijun Sen as well – if not, it is a
conflicting signal.

When the Tenkan Sen (Red) is below the Kijun Sen (Blue) - the market is
Bearish - and the price should be below the Kijun Sen as well – if not, it could
be a conflicting signal.

Bearish signal - price must be below Tenkan Sen which must be below Kijun
Sen and all must be outside and below the Kumo cloud. To confirm; the Chinkou
should also be outside and below the Kumo cloud and below the price.

Bullish signal – price must be above Tenkan Sen which must be above Kijun
Sen and all must be outside and above the Kumo cloud. To confirm; the Chinkou
should also be outside and above the cloud, and below the price.
Chinkou
As mentioned earlier, there seems to be two forms of spelling for the Chinkou –
with the ‘n’ and Chikou without the ‘n’. I prefer the Chinkou version as this is
how MetaTrader refers to it in their indicator, however both forms are acceptable
and are interchangeable.
This component of the Ichimoku Kinko Hyo indicator
is created by plotting recent price movement 26-
periods behind the latest closing price. This is
however, one of the parameters that you can
customise, but you should only consider doing that if
there was a strong compelling argument for you to do
so. Reading the Chinkou Span is reasonably
straightforward; the trend is considered to be upward
when the Chinkou Span is above the closing price and
downward when the line is located below it. You
should watch for the Chinkou Span to cross above the
closing prices as a signal that the price is getting
stronger and is therefore more likely to experience a
Bullish movement. The opposite is true when the
Chinkou crosses below the price for a possible Bear
run.
Chart 21 - Chinkou Span
he example chart, which has the Green Chinkou line slightly thicker than
T
normal, shows how it regularly crosses up and down through the price.

The first highlighted point shows the Chinkou crossing downwards through the
price. This took place virtually as the price started its Bullish run – there is no
lag between the Chinkou and the actual movement in this example.

The second point shows that there is a slight lag of some three to four candles
before the Chinkou catches up the actual price movement. There is however, a
sharp reversal in the price before it started its Bullish trend. Of course this Bull
Run was further confirmed by the Tenkan-Sen - KijunSen cross some fourteen
candles later.
You should also always consider the momentum before placing an order; if the
Chinkou is close to, or touching, the price, the momentum is weak and you
should refrain from placing an order.

Finally, perhaps the most important use of the Chinkou span is its ability to
confirm Kumo breaks and Tenkan-Sen - Kijun-Sen crosses. By not using the
Chinkou to perform this confirmation, you could encounter many false triggers;
to such a degree that you could conclude that using Kumo breaks and Tenkan-
Sen - Kijun-Sen crosses was an unsuccessful way of trading the Ichimoku.
Chinkou Support and Resistance

Chart 22 - Chinkou as Support and Resistance

The example chart above shows the Chinkou highlighting the Support and
Resistance levels. To do this simply draw a horizontal line from the Chinkou’s
highs or lows and wait for the price to rebound off them. This delivers highly
predictive Support and Resistance levels. As the Chinkou is plotted 26 periods
behind the current price, the Support or Resistance line must therefore always
project forward.

The four Support and Resistance lines in the example chart clearly shows how
accurately these lines act as Support or Resistance levels.

Chinkou Trading Overview

The Chinkou is one of the Ichimoku’s most unique features as it gives a clearer
perspective of price action.
If the current price - the end of the Chinkou - is lower than the price where it is
drawn, it is an indication that there is a potential Bearish movement to come.
If the current price - the end of the Chinkou - is higher than the price where it is
drawn, it indicates that there is potential Bullish price action to come.
 The Chinkou highs and lows are also indicators of possible Support and
Resistance

Chart 23 - Chinkou Stop Loss and Exit points

Another excellent use of the Chinkou is as an exit indicator; the example chart
above shows where you could place your Stop Loss and your potential exit
points suing the Chinkou Span.
In this example, the entry was ideal as you had a Tenkan-Sen - Kijun-Sen cross
and the price was below the Kumo Cloud. You could have placed your Stop Loss
a few points above the Kijun-Sen where the dotted line is positioned. However,
if the Kijun-Sen was lower than the price, you would have placed your Stop
Loss above the High of the candle preceding your entry.

A first conservative exit would be when the price reverses to touch the Kijun-
Sen – highlighted by the First Exit label on the chart.

More aggressively, you could wait for the Tenkan-Sen - Kijun-Sen to recross in
the opposite direction. This is highlighted by the Second Exit label on the chart.
Stop Loss

The Stop Loss should be a few points above or below the KijunSen. More
conservatively; the Stop Loss could be a few points above or below the Kumo
cloud.

Take Profit

The Take Profit is triggered by the opposite signal to an entry; such as when the
Tenkan-Sen - Kijun-Sen crosses in the opposite direction.

Alternatively, when price crosses and closes above or below the Kijun Sen, you
should exit the order
Chinkou Span Cross
This technique is basically an extension to the Chinkou Span confirmation which
you would use to basically confirm most of the Ichimoku Kinko Hyo signals.
However, when used with some simple guidelines, you can also use the Chinkou
Span cross as its own standalone trading strategy and with some good successes.
Basically, this trigger is when the Chinkou Span crosses through the price curve
in the direction of the potential trade. If it crosses through the price curve from
the bottom up, then it is a Bullish signal. If it crosses from the top down, you can
considered it a Bearish signal.

Chart 24 - Chinkou Cross Strength

Like many of the Ichimoku Kinko Hyo strategies, the Chinkou Span cross
strategy uses the price's relationship to the Kumo Cloud to classify its signals
into one of three major categories, namely, Strong, Neutral and Weak.
Remember that the Chinkou lags the current price by 26 periods, so as the
example chart indicates, the cross will take place some 26 candles earlier. The
start of the Bearish and Bullish runs are therefore shown 26 periods after the
cross. You should therefore always keep in mind both the location of the
Chinkou Span in relation to the price curve – where the actual cross occurs - and
the current candle and its relation to the Kumo cloud.

STRONG CHINKOU SPAN CROSS SIGNAL

A strong Chinkou Span cross Buy signal takes place when a

Bullish cross takes place and current price is above the Kumo A strong
Chinkou Span cross Sell signal takes place when a
Bearish cross takes place and current price is below the Kumo.

NEUTRAL CHINKOU SPAN CROSS SIGNAL

A neutral Chinkou Span cross Buy signal takes place when a

Bullish cross takes place and current price is within the Kumo A neutral
Chinkou Span cross Sell signal takes place when a
Bearish cross takes place and current price is within the Kumo.

WEAK CHINKOU SPAN CROSS SIGNAL

A weak Chinkou Span cross Buy signal takes place when a Bullish cross takes
place and current price is below the Kumo
A weak Chinkou Span cross Sell signal takes place when a Bearish cross takes
place and current price is above the Kumo
Conclusion
As an initial observation, and because most strategies revolve around trading
bands, trends and timing, the Ichimoku Kinko Hyo encapsulates all these ideas
in a very graphic and direct manner.
This is significant also because it is all encased in a single indicator; there is very
little need to have to learn and adapt to other indicators. The Ichimoku Kinko
Hyo also has a degree of self-fulfilling its prophecies particularly in a Yen based
pair; there are simply too many Japanese traders using the Ichimoku for it to be
inaccurate.

Finally, the myriad of information it delivers makes it one of the most

comprehensive trading tools available – ignore the Ichimoku Kinko Hyo then at
your own peril!
Chapter 4 - Ichimoku Combinations
Ichimoku with MACD Confirmation
Many traders, irrespective of how much they accept and appreciate the Ichimoku
signals, will often use other indicators as confirmation. This is an acceptable
strategy as you are probably more likely familiar with the other indicators than
you are with the Ichimoku. It is therefore reassuring to have a favourite indicator
confirm your Ichimoku signals. In this first example, the indicator I have chosen
to act as confirmation is the Moving Average Convergence Divergence (MACD)
indicator. Of course you could use any of the indicators for your confirmation;
another favourite would be the Stochastic Oscillator.
I am using the MACD in this example as the MACD is an extremely popular
indicator and is considered to be one of the anchor indicators of any trader’s
arsenal. It was invented by Gerald Appel in the 1960s.

Chart 25 - Ichimoku with MACD confirmation

As the example chart above shows, the Ichimoku has indicated the start of a
possible new down trend. It has done this through a Tenkan-Sen Kijun-Sen
cross.
However, this cross signal is considered a weak as it takes place above the Kumo
Cloud. Also, the price has been consolidating for a dozen or so candles before
the cross and there is therefore a degree of uncertainty as to any possible new
direction. Considering all this it is perhaps not a strong indication for a Selling
opportunity.
However, if you now look at the MACD, you can see that there is confirmation
of the start of a downtrend just a few candles after the Tenkan-Sen – Kijun-Sen
cross. With this confirmation, and careful Stop Loss placement, you could enter
here for a Sell with reasonable security. Of course looking at the results now
with hindsight, this would have been an extremely profitable Bear trade.
Ichimoku with Fibonacci Retracement levels
Another excellent combination to use with the Ichimoku Kinko Hyo is the
Fibonacci Retracement indicator.

Generally, the Fibonacci will not assist you too much in deciding on your entry
points although it does give you some guidance. However, it will certainly help
you with your Take Profit and Stop Loss placements. The example chart shows
the same scenario as on the MACD example, but this time with the Fibonacci
Retracement lines added. To make the example completely realistic, the
Fibonacci lines were added to the chart from the Low to the High prior to the
Tenkan-Sen - Kijun-Sen cross; just as you would have done in a live scenario.

Chart 26 - Ichimoku with Fibonacci Retracement levels

Here you have the same Tenkan-Sen – Kijun-Sen cross as before. As this is a
weak signal due to it being above the Kumo Cloud, you should get further
confirmation about entering a possible Sell order.
The price entered the Kumo Cloud shortly after the cross, which is a sign of
consolidation. In this case, you should wait for a Kumo price break through,
either up or down, before making any further decisions. However, you will
notice that it is being bound between the 38.2 Fibonacci Resistance line and the
50.0 Fibonacci Support line. This continual testing of these two lines should
cause you to have further reservations about entering with any sort of trade;
certainly until there was a confirmed breakout.

However, once the price broke the 50.0 Fibonacci level, and quickly thereafter
the 61.8 level, there is a strong case for a Sell entry. This is confirmed by the fact
that the Ichimoku is still indicating a possible Sell; of course this time with the
price below the Kumo Cloud making it a stronger Selling opportunity.

Exit Points

The strength of the Fibonacci Retracement lines is its ability to highlight

possible areas to exit for any orders; either through Stop Loss or Take Profit
points.
In this example, the Stop Loss would be placed just above the top Fibonacci
Retracement line – the 0.0 line. That also just happened to be the swing high for
the period prior to the Tenkan-Sen – Kijun-Sen cross. There are two possible
locations for your Take Profit points. The first would be just above the 100
Fibonacci line. As the Ichimoku was still indicating a strong Sell at this point,
you could have performed only a partial close here. If you were to do this, you
would re-adjust your Stop Loss to a breakeven position to preserve your
winnings.
The next Take Profit position would be at the 161.8 level. Once again in this
example, you can see how the price retraced a few times from this Support level.
You would therefore have placed your Take Profit point a few pips above the
161.8 level – this to cover yourself if the price completely reversed off this level.
Alternatively, you could have performed another partial close and once again
readjusted your Stop Loss to this new breakeven position. The Ichimoku is after
all still indicating a strong Selling opportunity. Finally, as additional assistance,
you could add the Fibonacci Expansion lines – these are the Fibonacci lines
traditionally ranging beyond the 100 Retracement level. Although this is not
shown in the example (it is the next example), it would give you a good
indication of where the price was ultimately headed.
Ichimoku with Fibonacci Expansion Levels
The Fibonacci Expansion Levels are those levels traditionally beyond the 100
line of the normal Fibonacci Retracement lines. As the name implies, the
Retracement lines are looking to indicate where the price will retrace to and the
levels run from 0 to 100. Conversely, the Expansion Levels try to establish
where the price will continue to run to; here the levels start from 61.8 and extend
to 161.8.

As the previous example highlighted, you would first confirm the entry and then
establish the possible Support and Resistance turning points by using the
Fibonacci Retracement. What you could not establish though, was how far the
price was likely to continue on its new Bear trend before striking a Support line
– this is where you would use the Fibonacci Expansion levels.

Chart 27 - Ichimoku with Fibonacci Expansion levels

he example chart shows the same scenario as used in all three of the previous
T
examples.

The first point, the Tenkan-Sen – Kijun-Sen cross could have been your first
entry for your Sell order. However, as you knew it was a weak signal, as
discussed in the second example, you could have used the Fibonacci
Retracement to highlight potential Support and Resistance levels. This would
have pointed out a better second entry point - now a stronger signal as it is below
the Kumo Cloud - where you would have entered into the Sell trade.

The question then would have been – “How far is this likely to run before I
should exit?” Traditionally, you would have waited for the Tenkan-Sen
– Kijun-Sen to re-cross, or alternatively for the price to break the KijunSen line.
Those are all valid exit points however, if the price was to reverse a little earlier
in its run, you could get caught out by waiting for either of those traditional
Ichimoku exit points.

What you could do is to apply the Fibonacci Expansion levels to highlight

potential target Support and Resistance levels. These are the three horizontal
white lines on the example chart.
The Fibonacci Expansion Exit 1 point shows the first area where the price was
likely to reverse; at the 61.8 level. What you could have done, was to do a partial
close at this point and readjust your Stop Loss to a breakeven position. The
reason for not doing a full close – which you could have easily done – is that the
Ichimoku is still indicating a potential Sell at this point. The price did in fact
rebound off this level a few times before eventually breaking through some
fourteen candles later. If you did do a full close, you could now re-enter with
another Sell as all indications are still true.

The second possible exit point was at the 100.0 Fibonacci Expansion level. Here
once again it tested the level six times before breaking through. You could have
applied the same strategy as before; performing a partial close with a Stop Loss
readjustment. The Ichimoku did after all still have all its signs indicating a Sell
opportunity.
The third exit point was at the 161.8 Expansion level. In all likelihood you
would have done a complete close at this point – this because it is the last
Fibonacci Expansion level. However, if you chose to do a partial close with your
Stop Loss readjustment, you would have almost certainly had the Stop Loss
trigger as the price did in fact reverse back to rebound off the 100 Expansion
level before continuing on its downward trend.

If you had applied this strategy of applying Fibonacci Expansion levels, you
would have had a clearer picture of where the trend was likely to stall, or
reverse. Also, by doing partial closes you could have banked your profits at each
level and minimised your future risk.

Just as a point of interest; the total Bear run from the second Retracement entry
point – your most likely entry - to the third Expansion exit point was over 370
pips – an extremely profitable trade.
Probably the only negative to this order was that it run over some 40+ candles,
which if you were on the daily chart, was almost two trading months. The
example chart was however on the H4 timeframe, which was meant that it
actually ran for just over a week.
Chapter 5 - Ichimoku Statistical
Analysis
Overview
The objective of this report is to study the performance and accuracy of the
Ichimoku Kinko Hyo indicator in Forex Trading.

The Ichimoku indicator provides a number of indications, but for this exercise,
the focus is on the Tenkan-Sen/Kijun-Sen cross coupled with a Kumo cloud –
the Senkou Span A and Span B - breakout. The other elements of the indicator
are ignored – the effects of the Chikou Span are not considered at all.

The Indicator
The following diagram highlights the elements of the Ichimoku Kinko Hyo used
in this exercise.

Chart 28 - Sample Ichimoku indicator

In this example, and throughout this document, the default Ichimoku colours
have been changed to make them more visible. These are the only changes made
to the default settings of the standard MT4 Ichimoku indicator.

Sample Size

The approach was to apply the indicator to six selected currency pairs. Ten
readings, going back in time, were taken for each timeframe - the H1, H4 and D1
- for each pair. This produced a total set for the three individual timeframes of 60
samples each and a complete set of 180 samples – the data was duplicated and
accumulated from the three other timeframes but the analysis covered the entire
set.
The Approach
The approach was to apply the indicator to the H1, H4 and D1 timeframes
individually for the six selected currency pairs and then search for a valid
indication, namely a Kumo Breakout with the appropriate Tenkan/Kijun cross.

A valid sample comprises the current candle opening outside the Kumo, either
above or below, and also that the Tenkan-Sen is above the KijunSen for a Buy,
and below for a Sell.
This combination of a Kumo Breakout coupled with a Tenkan – Kijun cross is
one of the more accurate indications that the Ichimoku produces.

Chart 29 - Sample of the Analysis process

In the example above, you can see these criteria being met at point 1 on the left
of the chart. Here the T-K Cross is in the correct direction and the candle has
opened below the cloud. In this exercise, the Peak of the Bullish run was
measured at point 2. The reason that it was not measured further on is that there
was a major reversal just after that. I could have measured the extent of the
Bearish run much lower down but I feel that the reversal at point 2 was an
indication that the run had terminated. The candles at the first X point would not
be considered as a valid indication as the first candle had not opened below the
cloud and the second candle at this point had the T-K Cross in the wrong
direction. At the second X point, the T-K cross was incorrect but then swopped
to a correct indication on the next candle. When the T-K cross had swopped
positions, the candles had moved back into the Kumo cloud. At point 3 there was
another example of the correct conditions taking place. The T-K Cross was
correct and the candle had opened above the cloud – although it took three
candles outside the cloud before the T-K cross was correct. In this example, the
peak was measured at point 4. You could make an argument that you could have
entered point 3 three candles earlier, where the Kijun-Sen and the Tenkan-Sen
were identical. I chose not to and preferred to wait for a definitive T-K cross.
Measurements
Three measurements were taken for each valid indication. These are; Candles
from Last Breakout

This is the number of candles that had elapsed between Breakouts. This is then
averaged for each of the sets and it will give you an indication of the expected
frequency of the breakouts.

Pips to Peak

This is the measurement from the first candle that had opened under the correct
conditions to the high of the last candle before a major reversal was encountered.
The average of these values indicates the expected intensity of the run, and of
course the expected profit.

Duration

This is the number of candles between the initial breakouts to the high of the last
candle at the peak. This average will give you an indication of how long the
breakouts tend to run before you could expect a reversal.

Pairs

Six diverse currency pairs were chosen for the analysis. These are; EURUSD
USDCHF
AUDNZD
GBPJPY
NZDCHF
EURGBP
Calculated Fields
There are a few fields that are derived from the collected data; the following
example shows an extract from the Daily Analysis with all the calculated fields.
These fields are identical for all four data sets. Starting from the left these fields
are;

Figure 8 - Extract of a sample report

Maximum Pips

This is an estimate - a target - of the number of Pips that could be expected from
a Breakout. It is then used to calculate whether a specific Breakout was
profitable or not.
These numbers are arbitrary and I selected them so as to produce a reasonable
number of winning pips but to also get a realistically high success rate.
The lower this value the greater the Win Percentage; conversely, the higher the
Max Pips, the lower the Win Percentage.

Count
This is simply a count of the number of samples in the set. It is used to calculate
the Averages.
Average Candles to Next Cross
This is the number of candles between the start of one valid breakout and the
start of a second valid breakout – measured form each candle opening outside
the cloud.
This will give you an indication of how many candles will lapse before the next
breakout.

Average Peak

This is the average of the number of pips in the run, measured from the start of a
valid breakout up to the highest, or lowest, candlewick before a major reversal.
This is the expected profit from a run.

Percent Wins

This is the percentage of wins against losses for the set. A Win is considered true
if the Pips to Peak value of the sample is greater than the Max Pips. Similarly, a
loss is registered if the Breakout did not achieve the Max Pips value; a loss is
indicated by a 0 and a win is indicated by a 1. In the example report above, the
Max Pips value of 50 was reached 91.67% of the time. Obviously, if you were to
reduce the Max Pips value the Percent Win value would increase and equally, if
you were to increase it, the Percent Win value would decrease. You will also
notice that the first sample in the set was not successful – the Win/Lose is a 0 as
it only achieved 30 pips in the run.
The Results
The following report extract highlights the detailed results which are all the same
for the three timeframes as well as the consolidated set. Reading the columns
The following example is an extract from the H4 Timeframe.

Figure 9 - Sample Analysis report

The top row of figures are the calculated results which are described in the
previous section. In this section we will concentrate on the actual data and the
ratio calculations.
You will notice that the results are grouped into two sets of data, both with the
same detail headings. Apart from the Ratio calculations, the only difference
between the two groups is the sequence in which they are sorted. The first group
is sorted by Duration while the second Group is sorted by Candles from Last
B/Out. All the headings have the same meanings for both groups.
The column headings are as follows;

Candles from Last Breakout

This is the number of candles that have lapsed between two valid breakouts; on
the first open candle outside the Kumo cloud. The first row shows that the
previous breakout occurred 82 candles earlier than the one being measured.

Pips to Peak
This column reflects the number of pips that the Bullish or Bearish breakout
covered. The first row – the first sample – shows that the run generated 11 pips
before there was a major reversal.

Duration

This is the duration, in candles, from the start of a valid breakout to the first
major reversal. The first sample showed that the run only lasted for a single
candle and then reversed.

Win/Lose

This is an indication of whether the particular sample achieved the target Pips or
not – the first sample did not; the Win/Lose entry is 0 as it only achieved 11 pips
and not the estimated 30.
This decision is calculated on whether the Pips to Peak exceeded the Max Pips
value. I arbitrarily set the Max Pips value for the H4 timeframe to 30 pips – in
the first sample the run only achieved 11 pips. The total Win/Lose ratio was 81%
for all the H4 samples when targeting 30 Pips. A value of 30 Pips for the H4
timeframe seems to produce a good Win/Lose ratio combined with a reasonable
profit. For the D1 Timeframe I set the value to 50 pips and it produced a
Win/Lose ratio of 91%. The H1 timeframe has a Max Pips value of 15 pips and
it delivered a Win/Lose ratio of 68% - for the H1, you could probably consider
having a slightly lower max Pips target to get a better Win ratio.

Ratio Calculations There are calculations performed per group of samples.

These fall under the following headings;
Duration Ratio

The values found in this column reflect the percentage that a particular group of
candles can occur during a breakout. The first group is therefore the 1-9 group
and they occur 56.67% of the time on the H4 timeframe. This means that the
number of candles between the breakouts and the reversal occurs 56.67% of the
time within 1 to 9 candles.
In this column, the formulae are always placed at the last value of the range
thereby indicating the degree that a particular range – the range ending in that
number - is likely to occur.

Duration Tot Ratio

The percentages found in this column is the percentage that a Duration between
breakouts occurs in the Total set. As in the previous group, the values are
grouped in tens for the calculation. The first value of 100% indicates that a
Duration of 1 candle will occur 100% of the time. The second value is 43.33%
and that value is in the row adjacent to a Duration of 10 candles. This shows that
the range of 10-19 has a likelihood of occurring 43.33% of all the time – in the
H4 timeframe. In this column, the formulae are always placed at the first value
of the next range.

Last B/Out Ratio

This is the only Ratio calculation in the second group of data. It is similar in
function to the Duration Ratio in the first group, but here it is calculated on the
Breakout Candles. It therefore shows the percentage likelihood that a range of 10
candles will occur since the last Breakout. The first entry is 6.67% and is next to
the last 8 – the last number in the range 1-9 in this set. This states that the range
of 1-9 candles only occurred 6.67% of the time between breakouts – for the H4
timeframe. The second entry is 8.33% and is next to the 18 Breakout value. This
shows that you can expect the range of 10-19 candles between breakouts to
occur only 8.33% of the time.
Detailed Reports
The following reports are the detailed results and analysis of the exercise. There
are four reports; the first is the consolidated report of 180 samples which are
results of all three timeframes combined in one report. The next three reports are
the detailed results for the D1, H4 and H1 timeframes – they comprise of 60
samples each.
The format and calculations in all four reports are identical.

Consolidated Report

D1 Timeframe
Analysis – of the Averages The first analysis compares the averages of the four
reports to each other
– this will establish the expectations across the various timeframes.

Average Candles to next Cross

Consolidated 42.1
D1 39.2
H4 43.6
H1 43.5

What I consider interesting here is that irrespective of the timeframe, on average

the next breakout occurs around 40 candles. This implies that you would only
have to wait around two days for a new breakout on the Hourly timeframe, and
will have to wait almost two months for a breakout on the Daily timeframe. This
assumes a 24 hour trading day over 5 days per week.

Average Peak
Consolidated 101.1
D1 190.1
H4 81.8
H1 31.5

This clearly shows that the average breakout has a significantly longer run for
the Daily timeframe than for any of the other timeframes. It also shows that the
One Hour timeframe averages the shortest runs by a significant margin – around
six times less than on the Daily timeframe.

Average Candles to Peak

Consolidated 9.9
D1 8.9
H4 10.6
H1 10.3

This shows the number of candles that have lapsed between the breakout and the
Peak.

Once again, there are similarities between all the timeframes; you should only
have to wait around 9-10 candles for the peak to be reached. The implication is
that within a week and a half you should reach the peak on the Daily timeframe.
Conversely, you should reach a peak within the day on the Hourly timeframe.
Percent Wins

RATIO TARGET Consolidated 76.67% 25

D1 91.67% 50
H4 81.67% 30
H1 68.33% 15
These results are more subjective than the previous ones as I set the targets that
would produce a reasonably acceptable ratio.

These results show that on average, a target of 50 pips was achieved 91.67% of
the time on the Daily timeframe. Conversely, 15 pips was reached only 68% of
the time on the Daily timeframe.

Obviously, setting a greater target will reduce the Win/Lose percentage while a
smaller target will increase the ratio percentage.

Analysis - Ratios

This section describes the various results embedded in the reports. For all these
reports the data that is being analysed is grouped into ranges of ten, for example,
1-9, 10-19, 20-29 etc.

Duration Ratio

This calculation shows the frequency that a range of candles – the number of
candles from the breakout to the peak - is likely to occur for a particular
timeframe.

Here, I have only shown the first two ratios 1-9 and 10-19 candles. The reason
for this is that, quite interestingly, the majority of the Breakouts run within these
ranges – in fact in the Daily timeframe the longest run is 27 candles, with only
four samples in the 20-29 range.

RANGE RATIO
Consolidated 1- 9 60.00%
Consolidated 10-19 28.89%
D1 1- 9 56.67%
D1 10-19 36.67%
H4 1- 9 56.67%
H4 10-19 28.33%
H1 1- 9 51.67%
H1 10-19 21.67%

These results show that the peak is likely to be reached within 1-9 candles
56.67% of the time for the Daily timeframe – it is only likely to run into the 10-
19 range 36.67% of the time.
For the Hourly timeframe, on average the peak was reached within 9 candles
51.67% of the time but could reach the 10-19 range 21.67% of the time.
The conclusion is that irrespective of the timeframe, the peak was reached within
9 candles in at least half of the results.

Duration Tot Ratio

This calculation shows the frequency that a cumulative range of candles is likely
to occur for a particular timeframe. In this column you will notice that the first
entry is always 100% - the reason is that in all cases the breakout run lasted at
least one candle. Therefore the results are shown from the 10-19 range but only
to the 20-29 range as once again, majority of the results occur in these ranges.
Consolidated 20-29 2.22% D1 10-19 43.33% D1 20-29 6.67% H4 10-19 43.33%
H4 20-29 15.00%

H1 10-19 33.33% H1 20-29 11.67%

The conclusion is that for the Daily timeframe, you should expect the Breakout
to be in the 1-9 range most of the time, and to only get to the 10-19 range 40%
and hardly ever beyond.
On the Hourly timeframe there is a slightly bigger chance of reaching the 10-19
range – but still only 11.67% of the time.

Last B/Out Ratio

This is the only calculated column in the second set of data; the data is a
duplicate of the first set but sorted by the Candles from Last B/Out column.
The calculation is identical to the Duration calculation described earlier, only
performed on this column. This calculation shows the frequency that a range of
candles – the number of candles from one breakout to the next
- is likely to occur for a particular timeframe.

Here, I am showing more candle ranges than before as the more frequent
occurrences tend to occur around the center of the data sets. Unlike the Duration
results, here the range of candles varies from 5 to 115 with the highest
occurrence near the center. I start from the 10-19 range as the number of candles
between breakouts is very seldom below 10 candles; for example in the Daily
Timeframe the occurrence of the length between breakouts is below 9 candles
only once, giving a likelihood ratio of 1.67%. Consolidated 20-29 15.56%

Consolidated 30-39 17.22%

Consolidated 40-49 16.11%
Consolidated 50-59 9.44%

D1 10-19 25.00%
D1 20-29 20.00%
D1 30-39 6.67% D1 40-49 18.33%
H4 10-19 8.33% H4 20-29 15.00%
H4 30-39 20.00%
H4 40-49 10.22%

H1 10-19 15.00%
H1 20-29 10.00%
H1 30-39 25.00%
H1 40-49 20.00%

The distribution in this analysis is much more widespread than with the others.
There is no clear trend as to the likelihood of a new breakout occurring within a
predictable number of candles. You are most likely to find that a new breakout
will occur within 20-50 candles; but nothing more predictable than that.
Conclusion
There are some conclusions that you could gather from this analysis. The
accuracy of a profitable Bullish or Bearish run occurring after a valid breakout is
extremely high, particularly on the Daily timeframe.

You can almost always expect to get at least 50 pips from a single run on the
Daily timeframe.
The Accuracy for the Daily timeframe is so great that this strategy should in
reality, only be considered for use on the D1 chart.
On average, you should only have to wait around 40 candles before a new
breakout appears but it can vary dramatically.
You can expect a major reversal within the run to appear quickly
– usually at within 10 candles from the start of the run. This implies that
generally, you should not let your orders run for much longer. I would only
consider letting the orders run longer if I had an aggressive trailing stop in place
– or regularly moved my Stop Loss to safeguard my profits.
Aftermath
After I had completed this analysis, I was validating the results and I stumbled
across a perfect breakout indication on the AUDNZD pair. I was excited to
assess the results of the analysis in a current scenario and not to work with
historical data as I had been doing to generate this report.

To assess the accuracy of the Ichimoku, I placed two cross hairs on the chart to
indicate my likely entry point; one horizontal and one vertical at the point of the
valid breakout. The results were impressive; the chart below shows these results.

Chart 30 - A live test

In my decision to place the cross hairs at my potential entry point, I used no

extra indication other than an Ichimoku Breakout with a valid T-K cross.
The results of this, at the time of taking the snapshot, was a total of 140 pips. As
it is still current, I have no idea how much further the run will continue. It is
sufficient to state that the target of 50 pips – as set for the D1 chart – was easily
achieved.
Chapter 5 - Table of Captions
Figures
Figure 1 - Market Times
Figure 2 - Average Pips per Hour
Figure 3 - Bar and Candlestick Comparison
Figure 4 - Locating the Ichimoku Kinko Hyo Figure 5 - Ichimoku Kinko Hyo
parameters
Figure 6 - Ichimoku Kinko Hyo colours
Figure 7 - Ichimoku Kinko Hyo Component Summary Figure 8 - Extract of a
sample report
Figure 9 - Sample Analysis report
Charts
Chart 1 - Basic Candlestick chart
Chart 2 - The Ichimoku Kinko Hyo
Chart 3 - The Tenkan-Sen, Kijun-Sen and Chinkou Span lines Chart 4 - Tenkan-
Sen
Chart 5 - Kijun-Sen
Chart 6 - Kijun-Sen Equilibrium and Imbalance
Chart 7 - Chinkou Span
Chart 8 - Chinkou Support and Resistance
Chart 9 - The Kumo Cloud with Senkou Span lines Chart 10 - Kumo Cloud
projection
Chart 11 - Kumo Support and Resistance
Chart 12 - Trading the Kumo Cloud
Chart 13 - Kumo Support and Resistance
Chart 14 - Kumo Trend Reversal
Chart 15 - Kumo and Consolidating markets
Chart 16 - Kumo Twist
Chart 17 - Kijun-Sen Cross
Chart 18 - Kijun-Sen Cross Strength
Chart 19 - Kijun-Sen Chinkou Confirmation
Chart 20 - Tenkan-Sen/Kijun-Sen cross
Chart 21 - Chinkou Span
Chart 22 - Chinkou as Support and Resistance
Chart 23 - Chinkou Stop Loss and Exit points
Chart 24 - Chinkou Cross Strength
Chart 25 - Ichimoku with MACD confirmation Chart 26 - Ichimoku with
Fibonacci Retracement levels Chart 27 - Ichimoku with Fibonacci Expansion
levels Chart 28 - Sample Ichimoku indicator
Chart 29 - Sample of the Analysis process
Chart 30 - A live test
About the Author

Raoul Hunter has been an IT professional for over 40 years. He started trading
Forex over 10 years ago initially with moderate success. Having persevered with
his trading he has achieved a high degree of success in the last few years.
His technical IT background has been extremely valuable in his Forex
endeavours

as he has developed a number of indicators, scripts and Expert Advisors for the
MT4 platform.
Although this book explains some of the basics around the Ichimoku Kinko Hyo,
its primary focus is use this highly regarded indicator in your day-to-day
strategies. The strategies discussed here are tried and tested and produce
excellent results.
He has also published;

Forex Trading with MT4

Forex Trading with Moving Averages
Forex Trading with Support and Resistance
 Forex Trading with Price Action
Forex Trading with Technical Analysis
Forex Trading with Fibonacci