Ichimoku’s design is intended to deliver an instant visual snapshot of a price’s trendedness — up or down, strong or weak, nearing or at a turning point, and other aspects of the price move. Ichimoku means “at a glance” in Japanese, and that seems like an impossibly tall order. But with a little practice, you can find ichimoku does work to deliver the goods.
When you first see an ichimoku chart, you’ll be tempted to say “at a glance” must be ironic and you’re being the butt of a joke. As Nicole Elliott says in her YouTube video, at first ichimoku seems like spaghetti. But stick with it. With a little practice, the “glance” aspect will turn out to be true, and very useful. That’s because the raw price lines will fall above or below the clouds, and the clouds form a range of prices that are an estimate of the equilibrium price.
In a nutshell, ichimoku places a series of specific fixed-number moving averages on the chart, and the crossover delivers the buy/sell signal, as in conventional technical analysis. Ichimoku also projects an arithmetic manipulation of the moving averages into the future to create an area of support/resistance (named a cloud) that is self-adjusting because it’s based on the moving averages.
Ichimoku’s differences with conventional technical analysis
Ichimoku doesn’t offer anything conceptually different from conventional technical analysis, and all the techniques will be familiar to you. Ichimoku, for example, uses the midpoint of the high-low range in its moving averages. See the following table for some of these differences.| Ichimoku | Conventional technical analysis |
| Uses only candlestick notation. | Uses several varieties of bar notation. |
| Always uses standard time on x-axis. | Has the option of looking at price action regardless of time (point-and-figure, other methods). |
| Uses midpoint of high-low range. | Uses high and low separately in indicators. |
| Uses moving average of the midpoints with one using the close. | Uses the moving average of the close. |
| Delivers self-adjusting areas of support and resistance. | User needs to add support and resistance. |
| Midpoint methodology entails display of self-adjusting 50 percent retracement. | Fifty percent retracement can be added; not self-adjusting. |
| Moving averages have stair-step appearance. | Moving average are smooth. |
| Momentum is implicit. | Momentum can be explicit. |
| Projects moving averages forward and backward in time. | Doesn’t project moving averages. |
| Self-contained and self-sufficient. | Can be added to endlessly. |
The new core concepts of ichimoku
To start grasping ichimoku, you have to abandon a few of the core concepts you probably have accepted and buy into some new ones. For example, in conventional analysis, analysts consider the relationship of the close to the high. If the close is at the high, the market is wildly bullish. If the close is at the low, sentiment is seriously bearish, and both of those judgments inform your decision on your next trade. But the ichimoku mindset considers the high and low as extremes when what you’re seeking is the best expression of sentiment — the average.In addition, conventional technical analysis uses the close to calculate moving averages (as well as other indicators). Not so in ichimoku, which uses a slew of moving averages calculated on the average of the high and low over the period, not the close alone. This makes a great deal of sense if you consider that what you’re aiming for in a moving average is the essence of the price change. So, a conventional moving average built on the close will incorporate some of those wildly bullish or bearish price extremes, while the ichimoku technique waters them down by using the midpoint. Think of ichimoku as using moving midpoints rather than moving averages based on the close.
A third difference is that ichimoku calculates averages based on past data but then projects some of those lines out into the future. This is such a problem for software designers that it took several years for them to catch up. You may have to buy an add-on to your software program, although many have it built-in by now.
Finally, non-Japanese ichimoku users didn’t rename the components but kept their Japanese names, including some that aren’t normal usage in English. This is a form of respect for the techniques. Take a deep breath and just master the names. There are only seven.
The ichimoku open-close averaging arithmetic makes for smoother, less choppy moving averages than averages constructed using just the close. This process delays the crossover signal. This is only one of the reasons ichimoku is an excellent way to avoid whipsaws, something all trend-following suffer from.
Building a cloud: Starting with the five moving averages
The ichimoku chart consists of a series of moving averages and their attendant crossovers, just as in conventional technical analysis, but by also shifting some of the moving averages forward, the ichimoku chart offers a new feature, an area of support and resistance named a cloud.Moving averages are the workhouse of technical analysis, but in ichimoku, they have a twist. Not only does the ichimoku calculation methodology apply plain-vanilla moving averages, it also projects two of them into the future to form a cloud and one of them backward in time to nail down perspective, as the following list shows:
- Tankan-sen: This is the highest high plus the lowest low over the past 9 periods divided by 2. Sen means line in this context.
- Kijun-sen: This is the highest high plus the lowest low over the past 26 periods divided by 2.
The tankan and kijun.- Senkou span: To most English speakers, the word “span” means the amount of space something covers, like a bridge span or an arch span. A span is the distance of something from end to end not interrupted by anything else. It’s an uncommon usage to apply the word span to a chart line, but you can get used to it. The senkou-span has two parts:
- Part A: The tankan + kijun divided by two projected out 26 days. So, Part A is an average of shorter-term plus longer-term prices projected into the future.
- Part B: The highest + lowest price over the past 52 periods divided by 2 and also projected out 26 periods. So, Part B is the average of a full year of the high and low and thus ultra-long-term.
Parts A and B together form the cloud or kumo, as the following figure shows.
Parts A and B of senkou-span form the kumo.- Chikou span: Today’s close projected 26 periods back in time. This is the only calculation in ichimoku that doesn’t use the midpoint but rather the close directly.
Ichimoku series.Ichimoku’s embedded momentum
Ichimoku uses moving averages, but the end result is different from a conventional moving average crossover system in the following ways:- Ichimoku uses three numbers in its moving averages — 9 periods, 26 periods, and 52 periods.
The ichimoku moving average uses 26 days because in Japan at the time the technique was invented, trading took place on Saturdays, making 26 days an accurate count for a month. Weirdly, nobody adjusts the ichimoku moving average to match the Western week, presumably because it works well the way it is. And oddly — very oddly — when Gerald Appel devised the MACD in the late 1970s, he also used 26 days as one of the parameters, long before ichimoku became known in the West. He selected 26 days because it was the optimum number over a gazillion trials. Elliott notes that when Hosoda wrote down the ichimoku methodology in 1969, computers weren’t available to all, and he used dozens of students to do the backtesting work — and validated the 26-day parameter.
- The MACD isn’t only a directional indicator, but also a momentum indicator. To the degree ichimoku contains momentum, it’s more a suggestion and inference than a direct calculation. Another difference between Appel’s MACD and ichimoku — Appel uses a 12-day as the second moving average whereas ichimoku uses nine days.