Ichimoku Kinkō Hyō, often abbreviated to just Ichimoku, is a technical indicator developed by Japanese journalist Goichi Hosoda in the late 1930s. It is used to provide information on trend and momentum as well as support and resistance. Ichimoku is widely used by Japanese traders but is gaining popularity among western traders as well due to the density of information it is able to provide without the use of additional indicators.
Ichimoku is comprised of five lines:
1.Tenkan-sen (usually a red line): 9 period moving average that determines the trend as well as support and resistance levels.
2. Kijun-sen (usually a blue line): 26 period moving average which indicates potential future price action. If price action is trending above this line it may continue to trend upwards. If price action is trending below this line it could continue to trend downwards.
3. Senkou Span A: It averages out the 9 and 26 period moving averages of Tenken-sen and Kijun-sen and plots the results 26 periods ahead.
4. Senkou Span B: 52 period moving average that is plotted 26 periods ahead.
The area between span A and span B is called the Kumo (cloud) and is shaded. Thick clouds represent higher volatility and more robust support/resistance levels. Thinner clouds represent decreased volatility and weak support/resistance. When Span A is above Span B, the underlying market is considered bullish. When Span B is above Span A the underlying market is considered bearish. When Spans A and B cross, it is regarded as a signal of an imminent trend reversal.
5. Chinkou Span (usually a green line): It plots current closing prices 26 periods behind and is used to generate signals as well as support/resistance levels. When Chinkou crosses current price action from bottom up it is considered a signal to go long. When it crosses current price actions from top down it is considered a signal to go short.
The focus on 26 period data in Ichimoku Kinkō Hyō is derived from the typical working month of a Japanese employee in the 1930s being 26 days long.