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§5.12 Ichimoku indicator

The final indicator that we will explain is the Ichimoku indicator which is becoming more popular in spite of its relative complexity. It must be said that it only seems complex because it looks like an accumulation of lines. Once you have used the Ichimoku indicator for some time then its lines can become your faithful friends and you will no longer confuse them with each other because every line has its function and role. It is possible to master the Ichimoku indicator which exceeds a lot of indicators in accuracy and effectiveness. Like the Japanese candles, the Ichimoku indicator comes from Japan. It is used to understand the overall condition of the market in its current state and for identifying trends and searching for the best opportunities to make winning trades.

So, if you add the Ichimoku indicator (which is created directly on the price chart) to your chart then another five lines, which make up the indicator, appear on it.

What kind of lines they are? What is the right way to use them?

Let’s consider it in order.

  • Tenkan line. This line represents a moving average and shows an average price over a certain period of time.
  • Kijun Line. This represents the same moving average but it shows an average price over another period of time.

These two lines are the same as fast and slow MA (moving averages). When the Tenkan line crosses above the Kijun line it indicates that the price will most likely go up soon. Such a crossing is called a “gold cross”. But when the Tenkan line crosses below the Kijun line this crossing is called a “dead cross” and indicates that the price will go down.

  • Senkou Span A and Senkou Span B. These are the most noticeable lines of the Ichimoku indicator since the space between them is dashed and called a “cloud”. The “cloud” can be different colors depending on the current market trend. As a rule if there is an uptrend then the “cloud” is red; if there is a downtrend, then the “cloud” is blue. It changes its color when the lines intersect each other: if the Senkou Span A is above the Senkou Span B then the “cloud” is red; if it is below then the “cloud” is blue.

The “cloud” itself is very interesting because its location against a price indicates current market conditions. It is easy to guess that if the price is above the “cloud” then there is an uptrend; if it is lower then there is a downtrend. And if the price is in the cloud then there is a “corridor”.

Important notice: when the price is in the “cloud” then most of the Ichimoku indicator’s signals DON’T WORK! In this case it would be recommended to use the signals of indicators such as RSI or Stochastic.

The moments when the price enters and exits the “cloud” are very significant. If, for example, the price exits the “cloud” and goes down, then it signals a strong downtrend. Boundaries of the “cloud” are, in fact, good support and resistance levels which are displayed along with the chart, so they don’t need to be adjusted.

  • Chikou Span. This is an interesting line. To be more precise, it is not even a line but the chart itself displayed backwards (to the left) against the current chart. If the current chart crosses above its copy displayed backwards then the price will most likely rise.

The nice thing about the Ichimoku indicator is

The nice thing about the Ichimoku indicator is that it represents a complete set of signals. Thus, its various lines and their combinations confirm each other, for example:– The Tenkan line crosses above the Kijun line– At that moment the price exits the “cloud” upwards– The chart itself crosses the Chikou Span in the same direction

We can see three signals here at once. If they trigger simultaneously then you should buy the option. Such “self-verifiability” of the Ichimoku indictor is its key benefit while other indicators’ signals need to be verified by other indicators or the same patterns of technical analysis (such as triangles or support lines).

§5.13 Using the idea of a channel when trading in options→