The cute name ICHIMOKU KINKO HYO INDICATOR is a Japanese method of applying its set of five lines to the historical charts so as to attempt to find not only the direction of the pair but also the right time to enter and exit the markets. I will be nasty if I were to comment on this indicator as this might be the first ever Japanese creation that has come my way without having any real logic behind it but in this article, we will understand what this indicator is and then we will go to my arguments as to why I feel that the whole existence of this much-hyped Indicator is rather ridiculous.
Ichimoku Kinko Hyo Indicator works on the principle that the pair price is always at a dis-balance and is always moving to equilibrium. Imagine if you could just find the last high and last low, take their average and believe that the pair is heading straight to this average price. Will it not make your trading a little too easy? This precisely is the basic reasoning of Ichimoku Kinko Hyo Indicator with the only difference that it tends to take the average of not just the last high and last low, but also of certain predefined time period slabs having ‘many highs and many lows’. The average of all these high and lows clubbed together makes a moving line (going up and down, very much like moving average) which as per this indicator is believed to be the key support and resistance levels. It is the same way that many lines are drawn using these averages for different time periods and then each line gets a Japanese name. Let’s understand these lines and the rules behind their formation.
1) Tenkan-Sen = Conversion Line = (Highest High + Lowest Low) / 2, for the past 9 periods
2) Kijun-Sen = Base Line = (Highest High + Lowest Low) / 2, for the past 26 periods
3) Chikou Span = Lagging Span = Today’s closing price plotted 26 periods behind
4) Senkan Span A = Leading Span A = (Tenkan-Sen + Kijun-Sen) / 2, plotted 26 periods ahead
5) Senkou Span B = Leading Span B = (Highest High + Lowest Low) / 2, for the past 52 periods, plotted 26 periods ahead
While the first three lines i.e. Tanken sen, Kijun sen and chikou sen are used only as the key support and resistance levels, the real trend is identified using Senkan and Senkou spans which give you an area called a ‘ Cloud’ or ‘Kumo’. The application of Ichimoku Kinko Hyo Indicator suggests that the price above the cloud or ‘KUMO’ is an indication of an uptrend and of course the opposite for a downtrend. Now once it has been established that the pair is moving in a certain direction, the indicator asks you to go with the trend at the crossovers of these sen-sen lines. This is very much like pivot points where you are expected to buy at the breakout of the first Pivot point and go along with the trend. An active trader will know already where to put his stop-loss which can very well be the Kijun or chikou line, below the cloud. Of course, if the price was trading under the cloud, then you would prefer going short and thus your stop-loss also will move to Tankan sen or Kijun sen whichever one comes earlier, above Kumo, the cloud.
So a well-defined indicator and nicely-named lines too, but then, that’s it. The only good thing that I can think of in this Ichimoku Kinko Hyo Indicator is that its lines are colorful. Of course, you are free to use this indicator if you find it really fancy to read a chart with those orange, blue and the green color lines but my question is where the logic behind using nine or the twenty six periods lies? Why nine and not nineteen and why twenty-two not twenty- eight? If even after doing all this hoo-ha, the result is only an ‘uncertain’ trade, then why to even analyze anything beyond last high and last low? Why can’t we just trade on last High and last low as the key entries and trade for the average or trade from the average to either of the peaks? Why any sen-sen line and kumo-kumo cloud? Find the peaks, draw lines, give them your own name- your own colors and there you have, your very own, Michael- Julia kinko-pinko high-profit zone.
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