How To Use Ichimoku Charts in Forex Trading

1/5/2020 How to Use Ichimoku Charts in Forex Trading
FOREX & CURRENCIES TRADING FOREX TRADING STRATEGY & EDUCATION
Ichimoku Charts in Forex Trading
By NICK K. LIOUDIS | Updated Mar 23, 2018
The Ichimoku Kinko Hyo, or equilibrium chart, isolates higher probability trades in the forex
market. It is new to the mainstream, but has been rising in popularity among novice and
experienced traders. Known for its applications in futures and equities, the Ichimoku shows
more data points, which provide a more reliable price action. The application offers multiple
tests and combines three indicators into one chart, allowing a trader to make the most
informed decision. Learn how the Ichimoku works and how it can be applied to a trading
strategy.
https://www.investopedia.com/articles/forex/06/ichimoku.asp 1/14
Getting to Know the Ichimoku Chart

A basic understanding of the components that make up the equilibrium chart need to be
established before a trader can execute effectively on the chart. The Ichimoku was created
and revealed in 1968 in a manner unlike most other technical indicators and chart
applications. While applications were usually formulated by statisticians or mathematicians
in the industry, the indicator was constructed by a Tokyo newspaper writer named Goichi
Hosoda and a handful of assistants running multiple calculations. This indicator is now used
by many Japanese trading rooms because it offers multiple tests on the price action,
creating higher probability trades. Although many traders are intimidated by the abundance
of lines drawn when the chart is actually applied, the components can be easily translated
into more commonly accepted indicators.
The application is made up of four major components and offers the trader key insights into
FX market price action. First, we'll take a look at the Tenkan and Kijun Sens lines. The lines
are used as a moving average crossover and can be applied as simple translations of the 20-
and 50-day moving averages, although with slightly different timeframes.
1. The Tenkan Sen: calculated as the sum of the highest high and the lowest low divided by
two. The Tenkan is calculated over the previous seven-to-eight time periods.
2. The Kijun Sen: calculated as the sum of the highest high and the lowest low divided by
two. Although the calculation is similar, the Kijun takes the past 22 time periods into
account.
What the trader will want to do here is use the crossover to initiate the position – similar to a
moving average crossover. Looking at our example in Figure 1, we see a clear crossover of
the Tenkan Sen (black line) and the Kijun Sen (red line) at point X. This decline simply means
that near-term prices are dipping below the longer term price trend, signaling a
downtrending move lower.
Figure 1 - A crossover in similar Western branded fashion
Now let's take a look at the most important component, the Ichimoku "cloud," which
represents current and historical price action. It behaves in much the same way as simple
support and resistance by creating formative barriers. The last two components of the
Ichimoku application are:
3. Senkou Span A: the sum of the Tenkan Sen and the Kijun Sen divided by two. The
calculation is then plotted 26 time periods ahead of the current price action.
4. Senkou Span B: the sum of the highest high and the lowest low divided by two. This
calculation is taken over the past 52 time periods and is plotted 26 periods ahead.
Once plotted on the chart, the area between the two lines is referred to as the Kumo, or
cloud. Comparatively thicker than typical support and resistance lines, the cloud offers the
trader a thorough filter. The thicker cloud will tend to take the volatility of the currency
markets into account instead of giving the trader a visually thin price level for support and
resistance. A break through the cloud and a subsequent move above or below it will suggest
a better and more probable trade. Let's take a look at the comparison in Figure 2.
Taking our USD/CAD example, we see a comparable difference between the two currencies.
Although we see a clear support at 1.1522 in our standard chart (Figure 2), we subsequently
see a retest of the level. At this point, some trades probably will be stopped out as the price
action comes back against the level, which is somewhat concerning for even the most
advanced trader. However, in our Ichimoku example (Figure 3), the cloud serves as an
excellent filter. The cloud suggests a better trade opportunity on a break of the 1.1450 figure
by taking the volatility and apparent take back into account. Here, the price action does not
trade back, keeping the trade in the overall downtrend momentum.
Figure 2 – Classic support and resistance break
Figure 3 – Ichimoku creates a better break opportunity
The last piece of the Ichimoku is the Chikou Span. Seen as simple market sentiment, the
Chikou is calculated using the most recent closing price and is plotted 22 periods behind the
price action. This feature suggests the market's sentiment by showing the prevailing trend as
it relates to current price momentum. The interpretation is simple: as sellers dominate the
market, the Chikou span will hover below the price trend while the opposite occurs on the
buy side. When a pair remains attractive in the market or is bought up, the span will rise and
hover above the price action.
Figure 4 – Chikou helps to sort out market sentiment
Putting the Ichimoku Chart All Together

There's no better substitute for learning how to trade the Ichimoku chart than application.
Let's break down the best method of trading the Ichimoku cloud technique.
Figure 5 – Lines that tell a complete story
Trading the Ichimoku Cloud

Taking our U.S. dollar/Japanese yen example in Figure 4, the scenario in Figure 5 will focus
on the currency pair fluctuating in a range between 116 and 119 figures. Here, the cloud is a
product of the range-bound scenario over the first four months and stands as a significant
support/resistance barrier. With that established, we look to the Tenkan and Kijun Sen.
As mentioned above, these two indicators act as a moving average crossover, with the
Tenkan representing a short-term moving average and the Kijun acting as the baseline. As a
result, the Tenkan dips below the Kijun, signaling a decline in price action. However, with the
crossover occurring within the cloud at Point A in Figure 5, the signal remains unclear and
will need to be clear of the cloud before an entry can be considered.
We can also confirm the bearish sentiment through the Chikou Span, which at this point
remains below the price action. If the Chikou was above the price action, it would confirm
bullish sentiment. Putting it all together, we are now looking for a short position in our U.S.
dollar/Japanese yen currency pair.
Figure 6 – Place the entry ever so slightly in the cloud barrier.
We will want to see a close of the session below the cloud before initiating any type of short
sell position because we are equating the cloud to a support/resistance barrier. As a result,
we will be entering at Point B on our chart. Here, we have a confirmed break of the cloud as
the price action stalls on a support level at 114.56. The trader can now either opt to place the
entry at the support figure of 114.56 or place the order one point below the low of the
session. Placing the order one point below would act as confirmation that the momentum is
still in place for another move lower.
Subsequently, we place the stop just above the high of the candle within the cloud
formation. In this example, it would be at Point C or 116.65. The price action should not trade
above this price if the momentum remains. Therefore, we have an entry at 114.22 and a
corresponding stop at 116.65, leaving our risk out at 243 pips. In keeping with sound money
management, the trade will require a minimum of a 1:1 risk/reward ratio with a preferable
2:1 risk/reward for legitimate opportunities. In our example, we will maintain a 2:1
risk/reward ratio as the price moves lower to hit a low of 108.96 before pulling back. This
equates to roughly 500 pips and a 2:1 risk to reward – a profitable opportunity.
One key note to remember: notice how the Ichimoku is applied to longer timeframes, as this
instance shows daily figures. The application will not work as well with many technical
indicators since the volatility is in shorter timeframes.
To Recap the Ichimoku Chart:

1. Refer to the Kijun/Tenkan Cross. The potential crossover in both lines will act in a similar
fashion to the moving average crossover. This technical occurrence is great for isolating
moves in the price action.
2. Confirm Down/Uptrend With Chikou. The probability of the trade will increase by

confirming that the market sentiment is in line with the crossover, as it acts in similar fashion
with a momentum oscillator.
3. Price Action Should Break Through the Cloud. The impending down/uptrend should make
a clear break through of the "cloud" of resistance/support. This decision will increase the
probability of the trade working in the trader's favor.
4. Follow SoundAdvertisement
Money Management When Placing Entries. The trader will be able to
balance risk/reward ratios and control the position by adhering to strict money management
rules.
The Bottom Line

The Ichimoku chart indicator is intimidating at first, but once broken down, every trader will
find the application helpful. The chart meshes three indicators into one and offers a filtered
approach to the price action for the currency trader. Additionally, this approach will not only
increase the probability of the trade in the FX markets, but assist in isolating the true
momentum plays. The Ichimoku provides an alternative to riskier trades, where the position
has a chance of trading back former profits.
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Related Terms
Tenkan-Sen (Conversion Line) Definition and Uses
The Tenkan-Sen, or Conversion Line, measures short-term price movements by looking at the price
mid-point over nine periods. It is used in the calculation of other Ichimoku Cloud indicator lines. more
Chikou Span (Lagging Span) Definition and Uses

The Chikou span is a component of the Ichimoku Kinko Hyo indicator. It is created by plotting closing
prices 26 periods in the past. It helps highlight the trend and indicate potential trend reversals. more
Kijun Line (Base Line) Definition and Tactics

The Kijun Line, or Base Line, is a component of the Ichimoku Cloud indicator, and is the mid-point
price of the last 26-periods. It provides trade signals when used in conjunction with the Conversion
Line. more
Ichimoku Kinko Hyo

The Ichimoku Kinko Hyo, or Ichimoku for short, is a technical indicator that is used to gauge
momentum along with future areas of support and resistance. more
Ichimoku Cloud Definition and Uses

The Ichimoku cloud is a technical analysis indicator, which includes multiple lines, that help define
the support, resistance, momentum, and trend direction of an asset. more
Kijun-Sen (Base Line) Definition and Uses

The Kijun-sen, or base line, is one of the components of the Ichimoku Kinko Hyo indicator or Ichimoku
cloud. The Kijun-sen provides trade signals when combined with the other components. more
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1/5/2020 How to Use Ichimoku Charts in Forex Trading

FOREX & CURRENCIES TRADING FOREX TRADING STRATEGY & EDUCATION

Ichimoku Charts in Forex Trading

By NICK K. LIOUDIS | Updated Mar 23, 2018

Getting to Know the Ichimoku Chart

Figure 1 - A crossover in similar Western branded fashion

Figure 2 – Classic support and resistance break

Figure 3 – Ichimoku creates a better break opportunity

Figure 4 – Chikou helps to sort out market sentiment

Putting the Ichimoku Chart All Together

Figure 5 – Lines that tell a complete story

Trading the Ichimoku Cloud

Figure 6 – Place the entry ever so slightly in the cloud barrier.

To Recap the Ichimoku Chart:

2. Confirm Down/Uptrend With Chikou. The probability of the trade will increase by

The Bottom Line

FOREX TRADING STRATEGY & EDUCATION

FOREX TRADING STRATEGY & EDUCATION

TECHNICAL ANALYSIS BASIC EDUCATION

TECHNICAL ANALYSIS BASIC EDUCATION

FOREX TRADING STRATEGY & EDUCATION

Chikou Span (Lagging Span) Definition and Uses

Kijun Line (Base Line) Definition and Tactics

Ichimoku Kinko Hyo

Ichimoku Cloud Definition and Uses

Kijun-Sen (Base Line) Definition and Uses

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