The ichimoku kinko hyo charting system, well known in the forex trading markets, consists of a candlestick graph supplemented by five additional lines: kijun-sen, tenkan-sen, chikou span, senkou span A and B, borders of the kumo or colud.

This ichimoku kinko hyo charting system is the work of Goichi Hosoda, who used the pseudonym "Ichimoku Sanjin”. The translation would be something like “what men see in the mountains”. The Ichimoku Kinko Hyo system, would translate as “a balanced way of looking at stock charts”. His work began in 1940, and was developed after World War II, employing tens of thousands of student hours to perform optimum calculations at a time before the invention of personal computers. 

Traditionally, there is still a huge gap between Western technical analysis techniques and Oriental systems basically from Japan. One reason is that in the West, what the graphics program we use does not do, is considered inexistent. In Japan, they are much more likely to maintain systems manually when necessary, some of which are incorporated into day to day Eastern trading. As the Japanese are not particularly interested in 'exporting' their knowledge to the West (although they are not exactly against it), we find that we lack the rich variety of techniques used in Japan. Kagi and Renko charts are virtually unknown here, and only a few understand the Ichimoku technique.

What it tries to do is move on from simple candlestick representation towards much more detailed candlestick chart analysis. It uses daily charts, as the most effective period is half term. However, as with candlestick techniques, other time periods such as week, month or intraday charts can be used, but with important nuances in their conclusions.

The ichimoku chart consists of candlestick graph supplemented by five additional lines.

The first thing to be done is to “soften” (diminish) movements by using two moving averages. Usually of 9 or 26 days, although several time periods can be used. However, the average is plotted using midpoints rather than closing prices, and not daily, but the midpoint between the high and low for the period in question (9 or 26 days). The reason for using 26 days is purely cultural, since at the time the method was developed, the Tokyo stock market opened 26 days a month, as they worked on Saturdays. 9 days was apparently the best period adapted to the 26 days, according to the laborious optimization work carried out by Hosoda’s students. If we change the parameters to 22 days, instead of 26, the optimization of the short period depends on each market, but can be reduced to 7 or 8 sessions.

The use of moving averages is similar to that performed in the West. When the fast moving average crosses the slow, it generates a buy or sell signal, according to whether it crosses upwards or downwards. These are systems such as the MACD (Moving Average Convergence Divergence), based on moving averages, which work well in trend markets, and worse in the sideways markets. In fact, the main problem faced by technical analysis is the systematic use of systems trend (which fails in neutral markets) or sideways systems which fail when trends start (RSI – the Relative Strength Index - can be maintained in an area of overbuying during most of an uptrend, for example).

1 .- Tenkan-sen Line / Conversion Line: Moving average of 9 sessions

2 .- Kijun-sen Line / Basic Line / : Moving average of 26 sessions

Both with the particularities mentioned in the calculation of the moving average above.

The next step is to calculate and map the clouds, without doubt the most representative element of the graph.

The “cloud” is created by shading the area between the two lines that have a similar name but are completely different:

Senkou Span A / Leading Span A / Distance advanced A: Simple to construct, it consists of adding the two aforementioned moving averages and dividing by two. It is mapped 26 days in advance, so as to get ahead of the current price chart. According to how the price of the assets develops, it will interact with the Kumo or “cloud” previously outlined. We therefore see that it coincides with the line connecting the midpoint between the two moving averages, but mapped 26 days ahead.

Senkou Span B / Leading Span B / B Distance advanced: This coincides with a moving average of 52 sessions (calculated, as previously, with the high and low for the entire period). Given the way it is calculated, if there is no influx or outflux of new highs or lows during the period of 52 sessions, the same level will be maintained. This fact normally makes the Senkou Span A “flatter”. If instead of 26 sessions to calculate Kijun-Sen, we use another period. We replace the 52 Senkou Span B sessions for twice the Kijun period and the future will be mapped during the period chosen by Kijun calculus. For example, if you use 22 for the Kijun line, it will be 44 in the Senko span B. In the example, the graph will be projected by 22 sessions, instead of 26.

The way the lines move through time may seem strange. However, it is the same concept which lies behind line extension, both horizontal (fixed supports and resistances, such as a neck line of a leaning shoulder-head-shoulder, rectangles or double and triple highs and lows for floors and ceilings) and, more importantly, those with steep slopes such as uptrend and downtrend guidelines or technical pattern lines, such as a neck line of a leaning shoulder-head-shoulder, floor and ceiling of triangular congestion, the boundaries of floor and ceiling expansive formations, or simple flags and pennants. If we are not surprised by their use in traditional figures, we should not be when using Kumo projection. 

The cloud is easily perceived, so it tends to shaded a different colour (usually red/blue or red/green), according to if the Senkou Span A line is above the Senkou Span B line or vice versa. This is purely aesthetic and has no relevance to analysis. More important than the colour is undoubtedly the thickness of the cloud directly related to the breaking capacity (see Jumo use as support and resistance). Therefore, if the colour is irrelevant, Senkou Span A and B crossing lines is not important from a trend point of view, unlike the crossing of the Tenkan-Sen and Kijun-Sen lines, where indication of lower Kumo thickness and hence a level of support or resistance is particularly relevant. As for the distance between the current price and the Kumo, it is an indicator of the trend speed. Traditionally, a fast movement, i.e. notably steep, can also change rapidly, but it can remain strong with both progress and setbacks. These scenarios are complicated, so that when they refer to bearish vertical movement where a floor is anticipated, we use the expression "to catch knives by their blades as they fall." 

First use: If the current price is above the Ichimoku kumo, the trend is bullish, while below the Ichimoku Kumo is bearish. Prices within the Kumo are a sign of indecision or transit. Second use: If the price is above the Kumo, the top line of the cloud acts as the first support, while the bottom line acts as the second reference support. When the price is below the Kumo, the bottom line of the cloud appears as nearest resistance, while the top line is the second resistance. As the price moves into the Kumo reversal signals must be sought, candlestick patterns such as the hammer, stars, piercing or engulfing, breaking guidelines divergent indicators, lower rank than the previous candle or small real body and even Doji in Heiken Ashi graphs, confirmation of traditional chart patterns or any other technique known to be effective.  Chikou Span – The last line The fifth line added to the graphs is also of the span type (distance), but delayed. The mapping is simple, it does not require additional calculation, it merely delays the closing price by 26 sessions (if the period of Kijun-Sen is different, the delay of the Chikou Span is amended to suit the period. As with the price today, the price formed by the Chikou Span finds support and resistance in the Kumo and in the candlestick prices. Case study As the currency market is where this type of analysis is mainly used, and the Euro Dollar is one of the cross rates par excellence, let us note the information we can extract from the graph. 

Note this important point. The strong bullish escape session does not start from the previous highs, but from somewhat lower levels, coinciding exactly, with the crossing of the bottom line of the Kumo. Five days before this, where the moving averages cross, the possibility of resistance attack is foreseen. Note that this signal is, by itself, weak (below the Kumo the buying signal is considered weak, the same as with a sign of sales above the Kumo, unlike the purchasing signal above the Kumo or sale below, which are considered strong). The Senkou Span B line generates a resistance level of $ 1.36 / Euro, while at levels slightly above $ 1.38, we find the resistance in the Chinkou advance, consistent with a correction of 61.8% of the last bearish (earlier) subsection, an example of how different technical approaches can be combined to find convergence and divergence in the same.