Focus on – Ichimoku Charting

Song ChaeEun
chaeeun.song@reuters.com
Last updated on 26 Feb 2008

1 Ichimoku Charting

Objectives

• To appreciate the meaning and origin of Ichimoku charting.

• To understand the principles of Ichimoku indicators.
• To be able to generate buy/sell signals.
• To be able to interpret Candlesticks charting and apply it
to Ichimoku charting.
• To be able to predict whether price movement can be
impulsive

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Agenda
1. Background
2. 6 Elements/Indicators of Ichimoku chart
3. Formula
4. Buy Signal Example
5. Sell Signal Example
6. Candlestick charting
7. Impulsiveness of Price Movement

3 Ichimoku Charting

Background

z Developed by Goichi Hosoda

z Outlined the theory in his book Ichimoku Charting in 1969
z Ichimoku – at a glance, Kinko – balance, Hyo - charts
z Widely used in Japan
z Can be applied to any market or time frame

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6 Elements of Ichimoku
This is a technical analysis approach where time is primary and price is
secondary.

1.Conversion Line Tenkan-sen

2. Base Line Kijun-sen

3. Lagging Span Chikou Span

4. Leading Span 1 Senkou Span 1

6. Cloud
5. Leading Span 2 Senkou Span 2

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6 Elements of Ichimoku

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Formula
Major periods:
• 9 corresponds to 1.5 weeks. Can change to 7 or 8 periods.
• 26 corresponds to 1 month. Can change to 22 periods.
• 52 corresponds to 2 months. Can change to 44 periods.

1. Conversion Line = (Highest High[9] + Lowest Low[9])/2

2. Base Line = (Highest High[26] + Lowest Low[26])/2
3. Lagging Span
Simply line chart of the price, but it is shifted 26 days backwards, hence the time
lags.
4. Leading Span 1 = (Base Line + Conversion Line)/2
It is shifted 26 days forwards.
5. Leading Span 2 = (Highest High[52] + Lowest Low[52])/2
Past 52 periods are used for calculation. It is shifted 26 days forwards.
6. Cloud is the shaded area between Leading Span 1 and Leading Span 2.

7 Ichimoku Charting

Buy/Sell Signals
1. Crossover between Conversion Line & Base Line

2. Position of Lagging Span

3. Closing price position relative to Cloud

4. Cloud composition

The more these signals happen together, the greater the probability of
catching the indicated trend, either bull or bear.

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Crossover Conversion Line – Base Line
Buy Signal: When Conversion Line crosses Base Line from below to above
Sell Signal: When Conversion Line crosses Base Line from above to below

If crossover has already occurred,

Buy Signal: When Conversion Line is above Base Line
Sell Signal: When Conversion Line is below Base Line.

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General Rule of Crossover between 2 charts

1. More noisy (fluctuating) chart
2. Less noisy (fluctuating) chart

Buy signal will be given

when more noisy chart crosses less noisy chart from below to above

Sell signal will be given

when more noisy chart crosses less noisy chart from above to below

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Lagging Span (Mountain)
Buy Signal: When Lagging Span crosses above Closing Price
Sell Signal: When Lagging Span crosses below Closing Price

If Lagging Span is already above or below Closing Price,

Buy Signal: When Lagging Span is above Closing Price
Sell Signal: When Lagging Span is below Closing Price.

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Closing Price Position relative to Cloud

Bullish: Closing Price is above Cloud and has little downward fluctuation.
Bearish: Closing Price is below Cloud and has little upward fluctuation.
Neutral: Closing Price is within Cloud and fluctuates little.

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Cloud Composition
Buy Signal: When Leading Span 1 is above Leading Span 2. (Bull Cloud)
Sell Signal: When Leading Span 1 is below Leading Span 2. (Bear Cloud)

Cloud itself is a measure of support and resistance.

If today’s price > Cloud, the implication is higher prices. Top of Cloud
represents first level of support while bottom of Cloud is the secondary
support.
If today’s price < Cloud, the implication is lower prices. Bottom of Cloud
should then offer initial resistance while top of Cloud provides secondary
resistance.
The thicker Cloud, the greater the strength of the support or resistance,
which means the probability that price will break through the secondary
level is less likely. Breakout is more likely when Cloud is very thin.

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Example 1

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 Buy Signal Example
Indicator Interpretation
Crossover Conversion
Bullish
Line - Base Line
Lagging Span Bearish
Closing Price relative to
Bullish
Cloud
Cloud Composition Bullish
CL-BL crossover has heavier weighting than Lagging Span.
Conclusion from indicators is that we should buy at this point.

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Example 2

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 Sell Signal Example
Indicator Interpretation
Crossover Conversion
Bearish
Line - Base Line
Lagging Span Bearish
Closing Price relative to
Bearish
Cloud
Cloud Composition Bullish
CL-BL crossover has heavier weighting followed by Lagging Span.
Closing Price and Cloud Composition cancel each other out. => Sell

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Candlesticks

Doji

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Bullish Reversal Candlesticks

Bullish Doji Bullish Engulfing Harami

Piercing
Pattern

Hammer Inversed Hammer Morning Star Tweezer Bottom

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Bearish Reversal Candlesticks

Bearish Doji Bearish Engulfing Harami Dark Cloud

Cover

Hanging Man Shooting Star Evening Star Tweezer Top

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Continuation Candlesticks

Rising/Falling Upside Tasuki Gap

Window (Gap)

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Candlesticks Diagram

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Back to Example 2

23 Ichimoku Charting

Back to Example 2
Indicator Interpretation
Crossover Conversion Line -
Bearish
Base Line
Candle Analysis Bearish (Falling Window)
Lagging Span Bearish
Closing Price relative to
Bearish
Cloud
Cloud Composition Bullish
CL-BL crossover has heavier weighting along with Candle Analysis.
Closing Price and Cloud Composition cancel each other out. => Sell
Signal Confirmed

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Impulsiveness of Price Movement
1. Breakout of Price and Lagging Span through Cloud
2. Thickness of Cloud
3. Distance of Price and Lagging Span from Cloud

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Impulsiveness of Price Movement

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Impulsiveness of Price Movement

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