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Ichimoku kinko hyo is a charting system that shows various data to give a trader a comprehensive view of the price movements of a financial asset. The chart was developed by a Japanese newspaper writer by the name of Goichi Hosoda, and its name means "equilibrium chart at a glance." The chart consists of five lines and looks complicated, but it shows essential information such as an asset's support and resistance points, momentum, and trend, so the trader does not have to refer to any other technical indicator to make trading decisions.
After 20 years of testing, Hosoda published a book on ichimoku kinko hyo in 1968. Since then, Asian traders have used the system to analyze various assets, including stocks, currencies, commodities and futures. Ichimoku kinko hyo entered the West in the 1990s but only became popular in the early 21st century.
Five lines make up ichimoku kinko hyo: tenkan sen (turning line), kijun sen (standard line), chikou span (lagging line), senkou span A (first leading line) and senkou span B (second leading line). The chart uses highest, lowest and current closing price to generate the lines. The lines work best with weekly and daily data.
Tenkan sen is a moving average of the asset's price over the past nine periods. The formula to find a point for tenkan sen at any given time is (highest high + lowest low) / 2 using prices from the past nine periods. This line indicates the market trend; if the line goes up or down, it indicates an upward or downward trend. When it is flat, it means that no trend exists.
Kijun sen is a moving average of the asset's price over the past 26 periods. The formula for the line is (highest high + lowest low) / 2 using prices from the past 26 periods. Kijun sen indicates market trend; if the price is higher than kijun sen, it is likely to continue to increase; if the prevailing price is lower than kijun sen, it is likely to continue to drop. Bearish and bullish signals can be read from the movement of the tenkan sen. When this line moves down from above to cross kijun sen, it's bearish; moving up to cross the line up from below is bullish.
Ichimoku kinko hyo highlights the space between senkou span A and B to form the ichimoku cloud. Senkou span A can be calculated using the formula (tenkan sen + kijun sen ) / 2, time-shifted forward by 26 periods, and senkou span B can be calculated using the formula (highest high + lowest low) / 2 for the past 52 periods, time-shifted forward 26 periods. The cloud represents past levels of support and levels of resistance. In a bullish trend, the price is higher than the cloud, and the top of the cloud acts as a support level. In a bearish trend, the price is below the cloud, and the cloud bottom acts as a resistance level.
Chikou span represents the current closing price, moved backwards by 26 periods. When this line is below the bottom of the cloud, it means that there is a bearish signal. If chikou span is above the top of the cloud, then it indicates a bullish signal.