Ichimoku indicator – Introduction, Meaning, Setup (Part 1)

Have you ever thought that you would use a standalone indicator to trade? In almost all the articles about technical indicators on this blog, if you look closely, you will see that I always recommend combining indicators together. Or you have to use other tools and methods when trading with the indicator. Because most of them can’t form a complete trading system by themselves.

However, there is still an indicator capable of doing that. It can act as an independent and almost complete trading system. And that is Ichimoku, a “divine” indicator created by the land of the rising sun.

In this article, I will introduce the Ichimoku indicator in detail and how to set it up.

What is Ichimoku?

Ichimoku is the short name for the Ichimoku Kinko Hyo indicator. In technical analysis, Ichimoku works best as a trend indicator. Most of the components of this indicator are calculated using average formulas.

Besides identifying a good trend, Ichimoku can also be effective in showing support, resistance, and momentum levels of a trend and providing accurate entry signals. It is for that reason that Ichimoku is considered a complete trading system. You will not need to use any other tools.

History of the Ichimoku indicator

The creator of the Ichimoku trading system is a Japanese journalist, Mr. Goichi Hosoda. He had a great passion for Japanese candlestick charts from a very young age. With constant efforts, he became the General Director of Miyako newspaper (now Tokyo newspaper), the largest economic and financial newspaper in Japan at that time.

After establishing his research center, he was determined to create an “all-in-one” indicator with the hope that it could identify market trends more deeply in a shorter time. His idea is to use moving averages on the Japanese candlestick chart to find the most complete trading system.

He and his colleagues have backtested thousands of different formulas day and night. And the result was that after 4 years, in 1935 to be exact, they created the Ichimoku trading system that we still use today.

How to set up the Ichimoku indicator

Nowadays, almost all trading brokers have Ichimoku indicator on their platforms. First, go to your trading platform. Then, select the indicator and click on “Ichimoku Cloud”.

The Ichimoku Kinko Hyo system consists of 5 components (lines). These 5 lines combine to create an overall Ichimoku picture.

Tekan sen is called the reversal line.

Formula: (Highest High + Lowest Low)/2 with a period of 9.

Kijun Sen is called the standard line.

Formula: (Highest High + Lowest Low)/2 with a period of 26.

Chikou Span is the slow line. It’s the current price line shifts back 26 periods.

Senkou A is called the leading span A.

Formula: (Tenkan Sen + Kijun Sen)/2 and is shifted backward 26 periods.

Senkou B is the leading span B.

Formula: (Highest High + Lowest Low)/2 with a period, for example, 52.

The Ichimoku 5-Component system is believed to tell the story behind the chart. Many people have tried using only 2 or 3 ingredients for real trading but failed. The key here is to understand each component individually and understand how and why they work together.

What is the best timeframe to use the Ichimoku indicator?

To familiarize yourself with the Ichimoku indicator, I recommend using D1 or higher time frame. That’s not to say Ichimoku only works well on D1. But the D1 frame will slow everything down so that you can see clearly and capture the best before using it in small frames like 1 minute, 5 minutes, 10 minutes… Remember before you want to trade on the 5-minute chart, you need to master the D1 chart.

We will have 3 basic types of trade when using the Ichimoku indicator as follows:

1 – Trend trading: The price moves in one direction for a long time. During the trend period, large time frames affect small time frames and small time frames support large time frames.

2 – Countertrend: The price has been moving in one direction for a long time. Now traders believe that the trend is over and want to trade against it. This is when small time frames do not support large time frames.

3 – Sideways: the price is not moving in any direction. It just oscillates up and down between support and resistance levels.

We will dive into each of those trading styles in the following parts.

Conclusion

The important thing that you need to understand in this article is that Ichimoku is not invincible. Nor is any indicator or trading method the holy grail. However, you can completely create your holy grail with your own experience.

Ichimoku is a complete trading system when it outperforms most other indicators. There have been many successful traders using the Ichimoku indicator. You can also be one of them if you find the secret from this very special indicator.

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