From the March 01, 2011 issue of Futures Magazine • Subscribe!

Forex trading from the cloud

Using Ichimoku Kinkou-Hyo

As markets become more crowded and the competition more sophisticated, the quest for the next trading signal increasingly becomes challenging. So, our trend analysis must go beyond trendlines, moving averages and standard Fibonacci retracements.

One interesting method that does just that, and as such should always grace the precious real estate of trading screens, is the Ichimoku Kinkou-Hyo. Although this technique has seen its popularity ebb and flow, it remains a well-kept secret in trend-following. The “cloud,” as this technique is known informally, is a useful method of gauging the health of trends and support and resistance levels.

The Ichimoku Kinkou-Hyo was designed by Tokyo newspaper writer Goichi Hosoda before World War II as a comprehensive forecasting method for all financial markets. American culture likes to abbreviate names, so it comes as no surprise that it popularly became known simply as Ichimoku in U.S. shorthand. In translation, the study means “one look at the equilibrium prices.” To produce support and resistance areas and directional changes, the Ichimoku combines midpoints of historical highs and lows at different lengths of time with a time cycle.

Five lines

The Ichimoku system consists of five lines: trend (or kijun in Japanese), signal (tenkan), lagging (chiku) and the cloud, which consists of two leading lines. “Trend signs” (below) shows an example of the Ichimoku on the weekly EUR/USD chart. In it, the Ichimoku forecasts the health and directional changes of three trends. It’s helpful to look at these five lines individually.

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