Part II. Technical Analysis / Chapter 22. Ichimoku Kinko Hyo Indicator: Generating Trading Signals

In the previous chapter, we extensively covered the construction principles of the Ichimoku indicator. In this chapter, we will explore the trading signals provided by the indicator lines and their key characteristics. All Ichimoku indicator signals can be categorized into three major groups:

• Crossings between the indicator lines (specifically the Tenkan, Kijun, and Senkou Span lines);
• Price bounces off or breakouts through the indicator lines;
• Breakouts of the Chinkou Span line through the price chart or bounces of this line from the price chart (although the standard teachings of the theory by Hosoda do not explicitly cover breakouts, they also generate reliable signals in practice).

The first signal we will discuss is the crossover signal between the Tenkan and Kijun lines. When the Tenkan line crosses below the Kijun line, a bearish signal called the "dead cross" is generated. Conversely, when the Tenkan line crosses above the Kijun line, a bullish signal known as the "golden cross" is formed. According to the teachings of the Ichimoku indicator's creator, a more reliable bullish signal occurs when the price chart is near the lower boundary of the cloud formed by the Senkou Span lines. Similarly, a more reliable bearish signal occurs when the price chart is near the upper boundary of the cloud. The following two charts illustrate the crossover signal between the Tenkan and Kijun lines, confirmed (in the first case) and unconfirmed (in the second case) by the cloud.

The next Ichimoku signal we will examine is the crossover between the Senkou Span A and Senkou Span B lines. The names of these lines, translated from Japanese, literally mean "leading, moving ahead of the carriage." The point where the A line crosses below the B line is an indicator of a potential shift in the long-term trend to a bearish trend (or at least a future correction). In such cases, opportunities for selling should be sought either immediately after the crossover or in the near future, after confirmation from other Ichimoku indicator lines. Conversely, when the A line crosses above the B line, it indicates the potential formation of a long-term bullish trend, suggesting opportunities for opening long positions (buying). The following chart demonstrates the crossover signal between the Senkou Span lines. Note that both lines are shifted by the value of the indicator's second parameter (defaulted to 26), causing them to lead the price chart in time.

The next signal we will discuss is the price chart bouncing off the Tenkan line. The Tenkan line itself represents the short-term trend curve. If it is rising, it indicates a short-term bullish trend, and if it is falling, it indicates a short-term bearish trend. A bounce off the Tenkan line signals the end of a corrective move and the continuation of the existing short-term trend, in the direction of which a position should be opened. However, since the period of constructing the Tenkan line is relatively short (Hosoda uses a default value of 9), it generates many false signals (as it passes very close to the price chart). Therefore, Hosoda, the creator of the Ichimoku indicator, suggested seeking confirmation of signals in candlestick patterns or on the Kagi chart (a unique equivalent of tic-tac-toe chart). Naturally, the aforementioned applies primarily to the stock market, as candlestick analysis is not as effective in the Forex market. The daily candle, as such, loses its psychological significance (the opening and closing of trading on the exchange). Confirmation of signals can also be sought from other Ichimoku lines or using other technical analysis indicators. The bounce of the price chart off the Tenkan line is shown in the following chart.

In conclusion, we have covered the main signals of the Ichimoku indicator. It is important to remember that the Ichimoku indicator was originally developed for analyzing weekly charts of the Nikkei 225 index in the Japanese stock market. Therefore, for a long time, this indicator was primarily used by long-term investors. With the growing popularity of Forex trading, attempts were made to adapt the Ichimoku indicator for analyzing currency price behavior. However, analysts encountered several difficulties along the way. Firstly, most traders prefer to use daily and hourly charts in Forex trading to obtain an acceptable number of signals. In such conditions, the default parameter values of the Ichimoku indicator lose their economic significance as they no longer reflect the cyclical nature of market processes. Therefore, for effective use of the Ichimoku indicator in Forex trading, further research is necessary, and each trader conducts it in their own way. Additionally, understanding the principles of the Ichimoku indicator can serve as a good starting point for creating custom technical analysis indicators.

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