Ichimoku Kinko Hyo: Simple yet Effective
In the late 1930’s a Japanese journalist named Goichi Hosoda began to devise a market strategy using moving averages to identify and assess trend. He didn’t complete his project until three decades later in the late 1960’s, after painstakingly perfecting his idea. Hosoda, also known as Ichimoku Sanjin (what a man in the mountains sees) left behind nothing in English, and his manual for the Ichimoku still has yet to be translated; however the system itself is so simple and intuitive it needs no such references to use it with success.
Here, I hope to make a concise, simple, and yet entirely sufficient guide to the ways of the Ichi when it comes to the fast paced 24/7 cryptocurrency markets. I’ll be using the ‘blue chip’ of this sector, Bitcoin; to act as an example. To better suit the fast paced and volatile nature of this market, switching the settings to [20, 60, 120, 30] instead of [9, 26, 52, 26] can help capture the action more accurately (shoutout #SatoshiMoku — CarpeNoctom for introducing these ‘doubled’ settings).
As well, for faster signals the aforementioned settings can be halved [10, 30, 60, 30] to detect more subtle changes in market conditions. The original settings were based on traditional markets that, at the time, didn’t trade on weekends or overnight. Nonetheless, people still get results from those OG settings and continue to do so; experiment and try them all out for yourself.
The Ichimoku is a highly refined system, and this comes through in the inherent simplicity of the signals it generates. Essentially the Ichi has four components: The Kumo or Cloud formed between Senkou Span A & B, the Tenken (faster MA), the Kijun (slower MA), and the Lagging Span; a simple price line projected backwards the amount of periods in the last setting.
These four basic components combine to create a probability machine that generates a range of signals and setups, all the while being an excellent fractal. Getting granular on the 5m or 3m timeframe for scalping follows the same principles as using it on a weekly or daily basis.
Tenken & Kijun
This dynamic duo generates signals concerning trend, support and resistance, as well as oversold and overbought conditions. First, let’s start with trend.
The Tenken-Kijun cross (TK cross) is a signal of a trend reversal, the degree of which depends on your timeframe. Not every TK cross leads to a change in trend however, but in those cases it’s just as informative: Notice the two TK’s on the right side of the image, it crossed and then recrossed as it failed to take ground in the Kumo, leading to a downright violent continuation of the prior trend. A TK recross is a strong indicator of the trend it ultimately signals because for this to occur there has to be a substantial trend reversing force, which ultimately reaches exhaustion, giving the trend even more ammunition to continue. From a supply and demand perspective, the attempt to reverse the trend instead is just giving the other side liquidity until it runs out. The Kumo is often a good thing to pay attention to as a TK cross develops, since it indicates the ground price action must cover to complete its reversal.
In this snapshot we’ve zoomed in to the 30m timeframe, often seen as the threshold timeframe between scalp trading and swing trading. Here we’re going to look at the function of the Tenken and Kijun as dynamic support and resistance. In a bear trend, the Tenken is the first resistance, and the Kijun is one above that with the Kumo providing a final barrier, and vice versa for a bullish trend.
In the first box, the TK gap is narrow and the price is in slight decline, leaning heavily on the Kijun before falling beneath both. The second box shows an attempt to hold a level as the price slides just over the Tenken before succumbing to resistance. Moving to the third box we can see a trend reversal begin to take shape as a gentle TK cross leaves the Tenken to act a support. The trend then takes off with strong bullish action leading us into the fourth box, where the trend is practically forced to take a breather; not how heavily price is leaning on its support before it finally gives way. Finally, in the last box we see the resolution of the bullish push as price again leans on the Tenken until it falls through and bounces off the Kijun…only to again find itself exhausted on the ropes of the Tenken. As the saga continues toward the edge of the image price thrusts through the TK complex onto the bottom of the Kumo before taking another weak attempt to use the Tenken as support.
While the price is often away from either line, its contact with them gives a trader a decision point to assess the strength of the current trend as well as the likelihood of a trend reversal. By judging the strength of price action as it interacts with the TK complex a trader can often catch the extremes of moves, whether it results in a profit or a loss. In the case of a trade turning sour, just as easily as the TK can provide entries it can provide stop loss suggestions and boundaries that invalidate wrong hypotheses.
The TK complex has another lucrative aspect to it as well: The ‘C-clamp’. This is the event of the price going from Tenken to Kijun, or vice versa. If price can strongly approach let alone cross either one of the lines, a C-clamp is likely to ensue. The farther apart the TK complex is, the more oversold/overbought the asset is, which also increases the likelihood of a C-clamp occurring. In addition, since we already know the TK complex often acts as dynamic support and resistance a C-clamp can at times be played by the savvy margin trading as a long which flips short on the initial take profit or vice versa.
Merely playing the range of the TK complex can be a profitable strategy in itself, even in the event of failure as shown in the red ‘C’ on the left side of the example. With even half-decent risk management, a trader playing that failed C-clamp could exit with a solid profit. This brings me to a major edge the C-clamp has for traders: Since this move is defined by the TK complex, profit taking and stop loss can easily be as well.
When the price action enters a C-clamp zone, one thing is guaranteed, it won’t stay there for very long which makes assessing the quality of your trade relatively easy, since the price action within the zone is all that requires attention with this tactic. Taking note of Lagging Span position and the Kumo make assessing the strength of price action within the C-clamp zone even easier.
The Kumo or Cloud is simply the space defined between two moving averages (Senkou Span A & B) that is either red or green depending on which is on top. A red Cloud is bearish, and green Cloud bullish. Cloud thickness indicates the strength of the cloud, Cloud/Kumo twists signal a change in momentum. Price is typically above or below the Kumo, which either ‘presses’ down or ‘pushes’ up on it, thus contact with the Kumo itself is a sign of a trend fighting to change, often providing lucrative probabilities for a trade.
So what are we gonna do now? Edge-to-edge. This move is essentially the same as the C-clamp mentioned earlier: Price develops the gumption to cross a significant boundary into a structure, leading to it often running to the other end of that structure. Edge-to-edge plays are almost always preceded by a crossing of the TK complex, a move which in itself bears a lot of information about market conditions. Sometimes it happens simultaneously as can be seen in the fourth Edge-to-edge in the example, which C-clamps twice during the Edge-to-edges moves.
Edge-to-edges are very lucrative simply because typically when the price enters the Kumo it’s making a reasonably strong move against the momentum it represents. Because of this, even a failed Edge-to-edge can provide a great opportunity for the trader to flip their bias and ready up for trend continuance, or for the margin maniacs; to flip their order. Even with participating in this tactic, the act of price action entering the Cloud shows the trend is weakening if not ending. The area of the Cloud is like a no-mans land for price action, and much like the TK complex; once price enters the cloud it may bounce but it won’t linger.
This brings us to the last, and often least utilized component of the Ichimoku: The Lagging Span. The Lagging Span as mentioned in the beginning is only a line chart of the price that lags behind the actual price. So what’s the point? Can’t I already just see the price action, why do I need a duplicate chart following 30 or 26 periods behind?
The Lagging Span is utilized by judging it’s position relative to two things: The Kumo, and the current price. If the LS is above a bullish Kumo, that is an additional bullish signal, and vice versa. If the LS is above the price that is a slightly lesser bullish signal (and vice versa) in itself.
In general the LS is not regarded as a strong signal unless its position relative to the Kumo and price are in unison….but usually by then the resulting trend is well under way. Thus, the LS is more a subtle indicator of the direction of the price which is more useful for anticipating events yet to possibly unfold, or confirming events underway. For example if the price action penetrates the Cloud and the LS isn’t in agreement, the move underway may not have the strength it needs to continue. Make no mistake though, unlike the Kumo or the TK complex, price action at the LS is not significant. If price happens to bounce off the LS or seems to treat it as support or resistance; look to the other components instead as this is likely just coincidence.
Essentially, the Ichimoku Kinko Hyo provides layers of dynamic support and resistance, as well as zones in between them that allow for a trader to better assess market conditions such as trend and momentum. These ‘zones’ themselves can be quite profitable to use as price enters them and decides what to do, while also providing targets for stop losses and profit taking.
The Ichi is also a strong fractal, making it applicable to any timeframe with the same techniques applicable across the whole range of chronologic detail. While the Ichi lends itself well to specific tactics such as the C-clamp, it also provides a detailed image of market conditions for the price action based strategy being that it’s simple and intuitive to interpret given a basic understanding of its pieces.
All in all the short lifetime Ichimoku Sanjin spent earning his nickname and developing this timeless system was time very well spent. His contribution to the world of trading is an efficient, universal multitool with immense value to anyone who takes the time to gain skill in its use. The Ichimoku is an ample substitute for the MACD, RSI, ADX/DMI, and a host of other similar oscillators, allowing for the overstimulated trader to obtain more compact alternative to a suite of diverse indicators. It leaves little to guessing, and is constantly providing signals and informing on market conditions, making it essential for the novice and master trader alike.
Thanks for reading!