Welcome to part 2 in the series of learning about the Ichimoku cloud indicator. To use the Ichimoku indicator effectively, you need to understand its components. They include 5 separate sections that need to be combined smoothly to get an overview of the market to make the most rational decisions.
In this part, I will describe in detail so that you can understand the components of the Ichimoku Cloud to lay a solid foundation.
Tenkan Sen – Conversion Line of the Ichimoku cloud indicator
Tenkan Sen simulates the short-term movement of the price. Most traders use SMA9 to do that. But with Tenkan Sen, by using the average of the Highest High and Lowest Low, you can also measure the volatility between periods.
Look at the picture below and notice when the trend is up. Tenkan Sen never runs higher than the low of the candles, except for 1 time. Meanwhile, the SMA9 has penetrated the lowest level more than 3 times. Thus, the Tenkan Sen (using the Highest High and the Lowest Low) represents a better short-term movement than the SMA (using only close prices). In fact, you can use Tenkan to set a reasonable stop loss.
There are a few things to keep in mind about Tenkan Sen as follows.
– The trend is bullish if the price is above Tenkan Sen.
– The trend is bearish if the price is below Tenkan Sen.
– Tenkan Sen is in the same direction as the trend. The steeper the slope, the stronger the trend.
– If the Tenkan Sen is moving sideways, it indicates that the price is also moving sideways in the short term. Therefore, the price may soon reverse.
– Tenkan Sen is considered by many investors as a short-term support – resistance level.
What if the price crosses the Tenkan Sen in the opposite direction of the trend?
When the trend is running, if the price cuts Tenkan Sen in the opposite direction of the trend, 3 scenarios will happen.
1. Small and short-term retracement: When the price cuts Tenkan Sen but can’t cut Kijun Sen and will quickly continue the original trend.
2. Strong retracement: The price will cut both Tenkan Sen and Kijun Sen in the opposite direction of the trend. It will then resume the previous trend.
3. Reversal: Similar to a strong retracement scenario, but the price will not continue to trend. The price will either move sideways or create a new trend.
Tenkan Sen is very close to the price. If the price and Tenkan Sen are close, the trend is slow, less noisy. If the price runs away from the Tenkan Sen, it will most likely return to the Tenkan Sen for balance. Sometimes the price runs strong and goes far to the Kijun Sen, making a strong pullback or it can be reversed. So be careful when the price is out of balance with the Tenkan Sen.
Kijun Sen – Base Line of the Ichimoku Cloud indicator
Kijun Sen simulates the price movement in the medium term. Same as Tenkan Sen but instead of using 9 cycles, it uses 26 cycles. With the daily chart, Kijun Sen corresponds to 1 month (26 trading days), and Tenkan Sen corresponds to 1 and a half weeks (9 days). Notes about Kijun Sen.
– Uptrend if the price is above Kijun Sen
– Downtrend if the price is below Kijun Sen
– Kijun Sen is in the same direction as the trend. The steeper the slope, the stronger the trend.
Unlike the Tenkan Sen, the price needs to run a lot before it can affect the Kijun Sen. When using Kijun Sen, we will miss the beginning of the trend because we have to wait for the trend to form on its own. When the Kijun Sen is moving sideways, it reflects the price being compressed.
– Kijun Sen is considered an important support and resistance level.
When the price cuts Kijun Sen, what will happen?
When the price cuts the Kijun Sen, the trend can change (strong retracement or reversal cannot happen if the price has not cut the Kijun Sen). There are 3 scenarios similar to when cutting the Tenkan Sen.
1. The price often tends to move away from and back to the Kijun Sen in a certain cycle because the Kijun Sen is like an equilibrium. When momentum increases and the price moves up or down quickly, the Kijun Sen will pull the price to the equilibrium position like a rubber band.
2. Both Tenkan Sen and Kijun Sen measure short-term trends. Tenkan Sen is faster than Kijun Sen because it uses 9 instead of 26. So its reliability is not as high as other Ichimoku components. However, if the price crosses the Tenkan Sen, it may signal an early trend reversal and needs to be confirmed by other Ichimoku components before trading.
3. If the Tenkan Sen is above the Kijun Sen, it is a bullish sign. On the contrary, it is a bearish sign.
Chikou Span – Lagging Span of the Ichimoku Cloud indicator
Chikou Span represents the inertia or momentum of the price. It’s simply the current price shifting 26 cycles forward but most people can’t understand it. Things to keep in mind:
– Uptrend if the Chikou Span is above the Japanese candlestick chart
– Downtrend if the Chikou Span is below the Japanese candlestick chart
– Go sideways when the Chikou Span is near the Japanese candlestick chart.
– Chikou highs and lows are strong support and resistance levels.
Senkou Span A
Formula: Senkou Span A = (Tenkan-Sen + Kijun-Sen) / 2, drawn forward 26 sessions (candles)
When observing Senkou Span A, you have to pay attention to 2 things. They are the present part and the future part. The present part is the average of Tenkan Sen and Kijun Sen 26 periods forward. The future part is the average of the current Tenkan Sen and Kijun Sen. This is when the current move of the price will affect the future.
Senkou Span B
Formula: Senkou Span B = (Highest Price + Lowest Price) / 2, calculated for 52 sessions
The Senkou Span B represents the longest-term view of price equilibrium. Instead of just considering 26 candlesticks based on the average of Tekan Sen and Kijun Sen ( Senkou Span A ), the Senkou Span B is calculated based on the average of the 52 candlesticks high and low and moves forward by 26 candles. This will help traders get a more holistic view of the price balance.
Similar to Kijun, Senkou Span B also has a flat phenomenon and has a very strong attraction.
When Senkou Span A and Senkou Span B combine to form a “cloud” called Kumo. This cloud is the part between Senkou Span A and Senkou Span B. If Senkou Span A is larger than Senkou Span B, then the green cloud indicates an uptrend. When Senkou Span B is larger than Senkou Span A, there are red clouds representing a downtrend.
Kumo clouds are considered the soul of the Ichimoku indicator. Based on the shape and color of the cloud, we can predict the trend as well as the volatility of the market. The Ichimoku Cloud clearly reflects “Market Sentiment”.
When the cloud is thick, it means that the crowd psychology is strong and stable, hard to break. When the cloud is thin, it shows that the psychology is weak, so it is easy to change and be broken. When the price goes too far from the cloud, it is going too far from the psychological threshold, which shows the exceeding of the allowable limit of psychological resistance.
Above is all information about the 5 components of the Ichimoku cloud – one of the most accurate and powerful technical indicators available today. Hopefully, through this article, you have understood what the Ichimoku structure is and have a solid knowledge base to use the Ichimoku indicator most effectively.
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