The Ichimoku indicator is a technical indicator that tries to anticipate, based on the evolution of the price of a security, the future behavior of a security. The Ichimoku chart is called in its full form Ichimoku Kinko Hyo, which translates as Balance (kinko) on a bar chart (hyo) At a glance (ichimoku).
How is the Ichimoku chart constructed?
We seek to construct a technical scene formed by the evolutionary state of the price expressed in Japanese candlesticks, together with five additional lines. The first four lines that I define below are consistent with moving averages, but be careful, these averages are made considering not the closing prices of the security, as usual, but the midpoint between the high and low of each session.
- 9-session moving average Tenkan-Sen: Midpoint between the high and low of the last 9 candles, i.e. the arithmetic mean of these two values.
- 26-session moving average. Kijun-Sen. Midpoint between the high and low of the last 26 candles, same as point 1 but with 26 sessions.
- Forward distance A. Senkou Span A. Sum of the two previous moving averages and divided by two, that is, an arithmetic mean of the two averages mentioned in points 1 and 2. Then, move this line 26 days ahead, to the right.
- Distance advanced B. Senkou Span B. Midpoint between the maximum and minimum of the last 52 sessions, i.e., the same as in points 1 and 2. In this case, in addition, the resulting line is shifted a total of 26 sessions to the right.
Interpretation of the Ichimoku chart
If the price is above the Kumo (the cloud), we are facing a generally bullish trend, where the upper part of the Kumo (Senkou Span A) is the first support level for the price and the lower part (Senkou Span B) is the second support level. Similarly, if the Kumo is above the price, we are facing a downtrend where Span A and Span B form the first and second resistance levels for the price.
If the price enters the cloud from above, the trend will be upward. If it enters from below, the trend will be downward. If the price remains inside the cloud, we may be looking at a consolidation of the previous trend, or a change of trend.