Ichimoku Kinko Hyo: The Cloud, Tenkan-sen and Kijun-sen in Trading

What Is Ichimoku Kinko Hyo?

Ichimoku Kinko Hyo, Ichimoku for short, is an indicator system of five lines developed by the Japanese journalist Goichi Hosoda. The name roughly means "equilibrium chart at a glance". The system is meant to show in one picture where the trend is heading, where support and resistance lie and how strong a move is.

The most striking part is the cloud (kumo), an area between two lines that is shifted into the future. If the price is above the cloud, the trend counts as upward, below it as downward, and within the cloud as undecided. In addition there are two lines that show short- and medium-term equilibrium levels, and a fifth that shifts the closing price into the past.

How Do You Calculate Ichimoku?

Ichimoku does not work with averages of closing prices but with the midpoint between the highest high and the lowest low of a period. The standard setting is 9, 26 and 52 candles; it dates from the time when Japan traded six days a week.

Because the cloud is shifted forward, it shows the values from 26 candles ago below the current candle. To the right of the current price, the cloud is already drawn for the next 26 candles. If Span A is above Span B, the cloud is usually shown in green, otherwise in red.

What Does Ichimoku Show About the Market?

Ichimoku shows direction, strength and important price zones in one picture. The position of the price relative to the cloud indicates the trend, the thickness of the cloud shows how strong support or resistance is there, and the position of the Tenkan-sen relative to the Kijun-sen shows short-term momentum.

A thick cloud forms when the range of the last 52 candles was large; it offers strong resistance or strong support. A thin cloud forms in quiet sideways phases and is easy to break through. If the Tenkan-sen and Kijun-sen run flat and close together, the market has no direction.

Which Settings Are Common?

The standard setting of 9, 26 and 52 applies to all markets and timeframes. In forex and crypto trading, with seven trading days a week, some traders use longer values, such as 10, 30 and 60 or 20, 60 and 120. Longer values smooth the lines and make signals rarer, shorter ones make them more frequent and choppier.

There is no setting that is best for all markets. Most charting programs and many traders stay with the standard because most market participants orient themselves by it.

Which Signals Does Ichimoku Give?

Ichimoku gives several kinds of signals, which the textbook weights by their position relative to the cloud. The two most important appear as triggers at FinScans: the breakout from the cloud and the cross of Tenkan-sen and Kijun-sen.

Breakout from the Cloud (Kumo Breakout)

If the price closes above the cloud after being in or below it, that argues for a beginning uptrend. A close below the cloud argues for a beginning downtrend. The thicker the cloud, the more weight the breakout carries; the price breaks easily through a thin cloud, and just as easily returns.

Cross of Tenkan-sen and Kijun-sen (TK Cross)

If the Tenkan-sen crosses the Kijun-sen upwards, that counts as a bullish sign, downwards as a bearish one. In the textbook its weight depends on the position relative to the cloud: an upward cross above the cloud counts as strong, within the cloud as neutral, below the cloud as weak. A cross against the cloud is often just a countermove within the trend.

Further Signals

The colour of the cloud ahead shows whether the trend of recent weeks points up or down; a change of colour (kumo twist) can announce a reversal. The Chikou Span confirms a trend when it lies above (or below) the price of 26 candles ago. Many traders use the Kijun-sen as a stop or as a target for pullbacks.

When Does a Cloud Breakout Confirm, and When Does It Not?

A breakout is confirmed when the price stays above the cloud over the following candles and the Tenkan-sen and Kijun-sen rise. It fails when the price falls back into or below the cloud after a few candles. This happens above all with thin clouds in sideways phases.

On the chart the price first falls sharply and then moves sideways over many candles. The Tenkan-sen and Kijun-sen lie flat at 102.25, and the cloud above is only 0.37 thick, from 103.04 to 103.41. The breakout candle opens at 102.66 and closes at 103.93 above the cloud, with its high at 104.17. Already the next candle closes at 101.51 below the lower edge of the cloud at 102.84, and the decline continues to the close of 96.00 at the right edge.

How do you spot the failure early? The cloud was thin, and the Tenkan-sen and Kijun-sen lay flat on top of each other, so the market had no direction. A breakout through a thin cloud out of a sideways phase is weakly supported. Anyone trading it places the stop below the cloud and keeps the position small.

Example of Entry, Stop, and Target

The following example shows a breakout above the cloud after a decline. It is a teaching example, not a recommendation for a particular market.

The price falls from the swing high at 112.34 well below the cloud and forms a bottom. Then the Tenkan-sen and Kijun-sen rise again, and the price runs into the cloud. The breakout candle opens at 106.23 within the cloud and closes at 107.60 above its upper edge at 107.41. At this point the cloud reaches from 104.77 to 107.41, and the Tenkan-sen and Kijun-sen lie at 104.80 and 104.23.

The entry is the close of the breakout candle at 107.60. The stop lies 0.10 below the lower edge of the cloud at 104.67, so the risk is 2.93 points. The target is the swing high at 112.34; the distance is 4.74 points, and the reward-to-risk ratio is about 1.6 to 1. The price reaches the target 20 candles after the entry. By then the Kijun-sen has risen to 107.56, and anyone using it as a trailing stop secures part of the profit.

How Do You Use Ichimoku Across Multiple Timeframes?

Ichimoku is well suited to comparing several timeframes, because the position relative to the cloud can be read at once on each level. If the price is above the cloud on the 1d and 4h charts, a breakout above the cloud on the 1h chart is an entry in the direction of the trend. If it is below the cloud on the higher levels, the same breakout is rather a countermove.

On short timeframes the cloud is often thin and is crossed frequently. On the higher timeframes it is thicker and holds longer. Many traders therefore use the cloud of a higher level as a zone of support and resistance and the shorter level only for the entry. On the signal page and in the cockpit you can see the trend on all eight timeframes.

How Do News and Scheduled Events Affect Ichimoku?

Because Ichimoku calculates with highs and lows, a single large candle after a piece of news shifts the Tenkan-sen and Kijun-sen abruptly and changes the cloud for the next 26 candles. A breakout that arises only from a price jump after a figure is therefore weakly supported, even if it looks clear on the chart.

Check in the economic calendar whether a breakout formed at the time of a release. The news situation in the cockpit also shows whether the reports support the new direction. A breakout that fits the news situation carries more weight than one against it.

How Do You Use Ichimoku in the Four Trading Styles?

The same basic rule applies in all styles: trade with the cloud, not against it. How much weight the individual signals get depends on the timeframe.

Ichimoku in Scalping

In scalping on the 15m and 30m charts, the cloud is often thin, and the Tenkan-sen and Kijun-sen cross frequently. Many of these crosses and breakouts are noise, especially in quiet phases such as the Asian session. It makes more sense to use the direction of the cloud on the 1h or 4h chart as a filter.

An entry then follows a TK cross or a pullback to the Kijun-sen in the direction of the higher cloud. The stop sits beyond the Kijun-sen or the nearby edge of the cloud, and spread and fees make up a noticeable part of the risk at these tight distances. The London and New York opens bring most of the moves that hold. Anyone working this way trades fewer signals, but with the larger trend behind them.

Positions are held for minutes to a few hours. Around high-impact releases many scalpers pause, because a large candle shifts the lines. Cryptocurrencies have no session boundaries, but thin weekend trading. The time commitment is high; the style suits traders who decide quickly.

Ichimoku in Day Trading

In day trading on the 1h and 2h charts, Ichimoku is a good frame for the trading day. If the price is above the cloud in the morning and the 4h chart also points up, the day trader looks for entries after pullbacks to the Kijun-sen or to the upper edge of the cloud.

The stop sits below the Kijun-sen or below the cloud, and the target at the next zone. Positions are closed before the end of the session, so overnight gaps play no role. A TK cross against the cloud is mostly a signal to secure profits at this level, not one for a counter-position. If the price is inside the cloud, the day trader waits until one side prevails; a pullback to the Kijun-sen is often a calmer entry than the breakout itself.

Releases in the calendar are the most common reason for breakouts that do not hold. In the quiet midday period before the New York open, the price often moves sideways within the cloud. The style suits traders who can follow the market attentively for a few hours a day.

Ichimoku in Swing Trading

In swing trading on the 4h and 8h charts, Ichimoku plays to its strengths. A breakout above a thick cloud, accompanied by rising Tenkan and Kijun lines and a green cloud ahead, is a classic entry for a swing over several days.

The stop sits below the cloud or below the Kijun-sen, and the position is sized so that a pullback into the cloud remains bearable. The target is a zone of the 1d chart or an earlier high. Positions are held for days to a few weeks; overnight financing and weekend gaps are part of it. Anyone who misses the breakout waits for the first pullback to the upper edge of the cloud or to the Kijun-sen.

The comparison with the 1d chart is important: if the price is below the cloud there, a breakout on the 4h chart is often just a countermove. If a central bank meeting falls within the holding period, a smaller position can make sense. The style suits traders with little time during the day who want a clear frame.

Ichimoku in Position Trading

In position trading on the 12h and 1d charts, Ichimoku shows the large trends. A price that stays above a green cloud for weeks describes a stable uptrend; a breakout below a thick cloud on the 1d chart is a clear warning sign.

The stop is wide, below the cloud or the next large structure, and the position is correspondingly small. Many position traders use the Kijun-sen as a trailing stop and exit when the price closes below it. Positions are held for weeks to months.

At this level the news situation counts for more than in short-term trading. A breakout that coincides with a turn in monetary policy carries more weight than one without a fundamental background. The time commitment is low; the style suits traders who can tolerate large pullbacks.

Ichimoku or Moving Averages?

Both show the trend and serve as dynamic support and resistance. The difference lies in the calculation and in the scope. A moving average averages closing prices, while the Ichimoku lines take the midpoint of high and low and therefore react in steps. In addition, Ichimoku provides a zone instead of a line with the cloud, and a look ahead with the shift.

The Supertrend is another alternative when only direction and stop are needed.

What Mistakes Are Common with Ichimoku?

• Trading against the cloud: an upward TK cross below a thick cloud is usually just a countermove.
• Overrating thin clouds: a breakout through a thin cloud out of a sideways phase often does not hold.
• Forgetting the shift: the cloud below the current candle comes from data of 26 candles ago, and the cloud to the right of it shows the future only as an extrapolation.
• Interpreting too many lines at once: anyone weighting all five lines equally finds an argument for every direction. The cloud gives the frame, the other lines the finer details.
• Overlooking releases: a large candle after a figure shifts the lines for weeks.
• Forgetting the position size: a stop below a thick cloud is far away, see risk management.

How Ichimoku Triggers Are Named in FinScans Signals

On the signal page, these triggers appear in the trigger table, each with an arrow: ▲ means FinScans counts the trigger on the bullish side, ▼ on the bearish side. Four names belong to this page:

• “ICHIMOKU Cloud Bullish” (▲) and “ICHIMOKU Cloud Bearish” (▼): The price closes above or below the cloud. In the signals the trigger mostly stands on the candle with which the price leaves the cloud.
• “ICHIMOKU TK Cross Up” (▲) and “ICHIMOKU TK Cross Down” (▼): The Tenkan-sen crosses the Kijun-sen upwards or downwards.

For the TK cross, the name does not say whether the cross lies above, within or below the cloud; you check that on the chart. The cloud triggers almost always appear in signals of their own direction, the TK crosses considerably more often also in signals of the opposite direction. Occasionally both kinds appear in one signal, also in opposite directions.

The signal page shows no class for indicators. Such a trigger never stands alone: FinScans combines it with the other triggers of the same signal into an overall direction. Whether the signal runs with or against the larger move is shown by the trend across the eight timeframes and the overall assessment.

The following block shows current data on these triggers. The hit rate should always be read relative to the average: if it is above, the trigger has a statistical edge; if it is below, it is better used as a hint than as the sole reason to enter. The rates can vary considerably by trading style, because there is more noise on short timeframes. The distances to target and stop also play a role: a tight stop is hit more often than a wide one, a distant target less often than a near one.

What the Machine Reports, What You Check Yourself

On the signal page, these triggers appear for forex and crypto pairs; their name describes the event at the cloud or at the lines, not the position in the larger picture. Whether a breakout or cross offers a viable setup is something you decide yourself in hybrid trading.

• The machine reports, for example, "ICHIMOKU Cloud Bullish"; you check on the chart whether the cloud is thick or thin and whether the price comes out of a sideways phase.
• With "ICHIMOKU TK Cross Up" you check whether the cross lies above, within or below the cloud.
• The machine provides the trend across eight timeframes; you check whether the cloud of the higher timeframe points in the same direction.
• The data block shows the hit rate so far; you check in the economic calendar whether the breakout arose from a price jump after a release.
• The signal page shows target and stop; you measure the distance to beyond the cloud or the Kijun-sen and check whether the reward-to-risk ratio fits your risk management.
• You check whether the cloud ahead supports the new direction or contradicts it.

Frequently asked questions

How Do You Read the Ichimoku Cloud?

Above the cloud the position of the price argues for an uptrend, below it for a downtrend, and within it the market is undecided. The edges of the cloud act as support or resistance, a thick cloud more strongly than a thin one. The colour of the cloud ahead shows whether the equilibrium lines most recently pointed up or down.

What Does a TK Cross Mean?

In a TK cross, the Tenkan-sen, the midpoint of the last 9 candles, crosses the Kijun-sen, the midpoint of the last 26 candles. Upwards it counts as bullish, downwards as bearish. In the textbook its weight depends on the position relative to the cloud: strong above the cloud, neutral within the cloud, weak below the cloud. At FinScans the name does not distinguish these positions.

Which Setting Is Common for Ichimoku?

The standard is 9, 26 and 52 candles. These values date from the time of the six-day week in Japan. For markets that trade on every day of the week, some traders use longer values such as 10, 30 and 60 or 20, 60 and 120. Many stay with the standard because most market participants orient themselves by it.

Does Ichimoku Work in Forex and Crypto Trading?

Yes, Ichimoku is widely used in both markets, because they often form long trends. In sideways phases the cloud is thin, and crosses and breakouts pile up without holding. A filter using the cloud of a higher timeframe helps to trade only signals in the direction of the larger trend.

Sources

• Patel, Manesh: Trading with Ichimoku Clouds: The Essential Guide to Ichimoku Kinko Hyo Technical Analysis, John Wiley & Sons, 2010.
• Elliott, Nicole: Ichimoku Charts: An Introduction to Ichimoku Kinko Clouds, Harriman House, 2007.