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Ichimoku Kinko Hyo Trading Theory
The Ichimoku Kinko Hyo is a comprehensive trading system that provides an integrated view of trend, momentum, and support/resistance levels. Below is a detailed explanation of its components and strategies.
Components of Ichimoku
1. Tenkan-sen (Conversion Line)
Formula: (Highest High + Lowest Low) / 2 over the last 9 periods
Represents the short-term trend and momentum.
2. Kijun-sen (Base Line)
Formula: (Highest High + Lowest Low) / 2 over the last 26 periods
Represents the intermediate trend and acts as a dynamic support/resistance level.
3. Senkou Span A (Leading Span A)
Formula: (Tenkan-sen + Kijun-sen) / 2 (Plotted 26 periods ahead)
Forms the first boundary of the cloud (Kumo).
4. Senkou Span B (Leading Span B)
Formula: (Highest High + Lowest Low) / 2 over the last 52 periods (Plotted 26 periods ahead)
Forms the second boundary of the cloud (Kumo).
5. Chikou Span (Lagging Line)
Formula: Current closing price, plotted 26 periods behind
Provides a visual representation of historical price action.
The Cloud (Kumo)
The space between Senkou Span A and Senkou Span B is known as the Kumo. It acts as a dynamic area of support and resistance.
- Thick Kumo: Strong support/resistance.
- Thin Kumo: Weak trend.
Trading Signals
1. Line Crossovers
- Bullish Signal: Tenkan-sen crosses above Kijun-sen.
- Bearish Signal: Tenkan-sen crosses below Kijun-sen.
2. Price and Kumo Relationship
- Above Kumo: Bullish trend.
- Below Kumo: Bearish trend.
- Inside Kumo: Consolidation or indecision.
3. Chikou Span Confirmation
- Above price: Bullish confirmation.
- Below price: Bearish confirmation.
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Trading Strategies
1. Trend Following
- Conditions: Price above Kumo, Tenkan-sen above Kijun-sen, Chikou Span above price.
- Entry: Buy on confirmation of bullish breakout.
2. Reversal Strategy
- Conditions: Tenkan-sen crosses below Kijun-sen below the Kumo, Chikou Span below price.
- Entry: Short on confirmation of bearish reversal.
3. Kumo Breakout
- Trade in the direction of the breakout.
- Use the edges of the Kumo as dynamic stop-loss levels.
Advantages
- Combines multiple indicators into a single system.
- Offers dynamic support/resistance levels.
- Effective in trending markets.
Limitations
- Can produce false signals in ranging markets.
- Complex for beginners to interpret initially.
Conclusion
The Ichimoku Kinko Hyo is a powerful tool for traders seeking a comprehensive view of the market. Mastery of its components and their interplay can significantly enhance trading decisions.

