Trading With the Cloud: Using the Ichimoku Kinko Hyo Indicator in MetaTrader 4
Reading time: 10 minutes
Japanese candlesticks are extremely well known in the world of technical analysis. A slightly less popular innovation from the same country is the Ichimoku Kinko Hyo indicator.
This trend-following tool allows you to identify price action at a glance, even from large amounts of data, via multiple graphical elements. This article will explain the basics of the Ichimoku indicator and how to use it in MetaTrader 4 to augment trading Forex. Let's first look at the various elements that make up the tool.
Construction of the Ichimoku Kinko Hyo Indicator
The Ichimoku Kinko Hyo indicator consists of a number of different graphical elements plotted on a single chart. The different elements are intended to help us identify where the support and resistance lies. They also allow us to work out if the market is trending, or if it's under consolidation. Here are the components that make up the Ichimoku indicator:
- Tenkan-sen – calculated as (highest high + lowest low)/2, averaged over the last nine periods
- Kijun-sen – calculated the same way as Tenkan-sen, but over the last 22 periods
- Senkou span A – calculated as (Tenkan-sen + Kijun-sen)/2, plotted 26 periods ahead
- Senkou span B – calculated the same way as Tenkan-sen, but over the last 52 periods and plotted 26 periods ahead
- Chikou span – plots the current closing price, 26 periods back
- Komo – the cloud which occupies the space between Senkou span A and Senkou span B
Although all of the constructions on one single chart may seem a little daunting, the ultimate aim of the indicator is simplicity. You also don't have to worry about specific calculations, as MetaTrader 4 will perform them for you. It's more important to understand the basics of what each line represents.
Using Ichimoku Kinko Hyo Indicator in MT4
It's very easy to find and launch the Ichimoku Kinko Hyo indicator in MT4. You don't need to download the Ichimoku indicator separately, as it comes bundled with the core tools of the platform. All you need to do is look at the list of Indicators within the 'Navigator' tab. The image below shows that there are four subfolders of indicators with the MT4 Ichimoku indicator, contained within the 'Trend' subfolder:
Source: MetaTrader 4 - USD/JPY 1 Hour - Setting the colors for the Ichimoku Kinko Hyo indicator
Clicking on 'Ichimoku Kinko Hyo' opens a dialogue window, which lists the various graphical elements for the indicator. The default colours are shown in the image above. You can also easily configure other visual aspects via the dropdowns (e.g. line thickness, dotting, etc.) If you wish to set the periods, click on the 'Parameters' tab. The default values are as follows:
- Tenkan-sen: 9
- Kijun-sen: 26
- Senkou span B: 52
The image below shows the Ichimoku indicator with default values added to an hourly USD/JPY chart:
Source: MetaTrader 4 - USD/JPY 1 Hour Chart with a Ichimoku indicator applied - Data Range: May 15, 2017 - May 22, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
The different components of the Forex Ichimoku indicator
Tenkan-sen (red line) represents short-term price movement. It is similar to a fast moving average. If the market price is above the Tenkan-sen line, it is a short-term bullish sign. If the price is below Tenkan-sen, it is a short-term bearish sign. One function of Tenkan-sen is to clue us in with regards to the character of the market.
This is because the direction of the Tenkan-sen line can suggest if the market is trending or not. A rising Tenkan-sen suggests an upward trend, and a falling line represents a downward one. As the line is calculated from price extremes, it will tend to flatten out when the market is not trending. Therefore, if Tenkan-sen is moving sideways, it suggests that the market is range-bound.
As Ichimoku is primarily a trend-following system, you should only trade using Ichimoku when you are in a trending market. Kijun-sen (dark orange line) represents medium-term price movement. Think of it as being a little like a slower moving average in comparison to Tenkan-sen. Once again, it can clue us into the trend, but over a longer time-frame.
The interaction of Tenkan-sen to Kijun-sen can give us trading signals, in a similar fashion to a moving average crossover. That is to say, if the fast-moving Tenkan-sen crosses above the slower-moving Kijun-sen, it can be a signal to buy. A crossover of Tenkan-sen below Kijun-sen can be a signal to sell.
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Whether we follow these crossover signals is governed by the Chikou span (lime green line) that helps us see the big-picture trend of the market. Remember, the Chikou span plots the current closing price 26 periods back on the chart. If it is above the chart of price, it means that current prices are higher than previous ones.
This is bullish. When the price is above the Chikou span, the current prices are lower than previously, suggesting a bearish tenor. You should use the Chikou span as a trade filter, only placing trades that agree with the overall trend. For example, if the Tenkan-sen crosses below the Kijun-sen, you would only sell if the Chikou span indicated a bearish overall trend.
The komo, or cloud, is the space bounded between the Senkou span A and the Senkou span B. If the price is above the cloud, it is a bullish sign. The top of the cloud acts as a first line of support, and the bottom of the cloud, as a second line. If the price is below the cloud, the reverse is true.
It is a bearish sign, and the bottom of the cloud acts as the first level of resistance. Logically, the top of the cloud is the second level of resistance. The wider the cloud, the stronger the expected support, or resistance. A thin cloud represents only weak support/resistance.
Ichimoku in Combination with Other Indicators
It's a general truism that using more than one indicator tends to yield more reliable results. Even the Ichimoku indicator can benefit from some backup help. Ideally, you would aim to use indicators that perform the same function, but arrive at that result via different methods. For example, you could compare the support and resistance levels indicated by the cloud with the levels shown by the Center of Gravity Indicator.
Similarly, you could compare the trend indications of the Chikou span with the information about the trend strength provided by the Momentum Indicator. Obviously, the wider the selection of tools available to you, the better positioned you will be to make these kinds of comparisons.
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Forex Ichimoku Kinko Hyo in Summary
The Ichimoku trading system is an advanced indicator in that it plots more information compared to your average technical analysis tool. With a bit of practice, you can learn to readily absorb the data at a glance. After a while, you should be able to make better trading decisions on the back of its graphical summation of price action. Of course, the best place to practise is a demo trading account, where you can polish your skills without risking any money.
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