The equilibrium chart also known as the Ichimoku Kinko Hyo is an extraordinary trading technique that will certainly enhance your trading. This technique isolates higher probability trades by illustrating where the prices are more likely to go and when to enter the trades. This is possible because the Ichimoku chart displays a clearer picture by showing more data points, thus providing a more reliable price action. Once you master this chart and technique, it will certainly become an integral part of your trading toolbox.
Understanding the Ichimoku chart
In the most basic of explanations, the chart consists of three lines that are usually color coded for easier readability and what the developers call a “cloud”. All this lines create multiple tests on the price action and show higher probability trades.
How are these lines and the “cloud” plotted
Conversion line or Tenkan-Sen (apply first color here) – is calculated as follow: highest high plus lowest low divided by 2. Calculate this formula over the past 7 to 8 time periods.
Base line or Kijun-Sen (second color) – Calculated by adding the highest high to the lowest low and dividing it by 2. The difference from the Tenkan-Sen is that the Kijun-Sen uses the past 22 time periods as base of calculation.
Lagging span or Chikou Span (third color)- Calculated by using the most recent closing price and plotting it 22 time periods behind.
Senkou Span A (fourth color)- Is calculated by adding the Tenkan-Sen and the Kijun-Sen and dividing them by 2. Plot the resulting value 26 time periods ahead.
Senkou Span B – (fifth color, although I prefer to use the same color as Senkou Span A for clarity) Calculated by adding the highest high and lowest low and dividing the result by 2 over the past 44 time periods. You should plot this 22 periods ahead.
The space between the Senkou Span A and the Senkou Span B creates what is known as the “cloud” or Kumo. Tip: Although days is the preferred time period measurement, you can modify this to be any time period as long as it is consistent throughout all calculations.
How do you use the resulting 3 lines and “cloud”
1. Look for the Kijun / Tenkan Cross – The crossover of these 2 lines are similar to the more commonly used moving average crossover. This crossover intends to isolate moves in the price action.
2. Use the Chikou to confirm a Down or Uptrend – The Chikou helps confirm that the market sentiment is in agreement with the crossover. This confirmation greatly increases the probability for profits. Look at the Chikou is as if it was a momentum oscillator.
3.Wait for the price action to break through the cloud – When the price makes a clear break through of the cloud which shows your resistance and support levels, the probability of a profitable trade increases dramatically.
As you can see, This technique will help you to determine when to buy and sell, which are the support and resistance levels, where are the trends moving, and how strong is the signal. Although not one single chart is without flaws, this technique is often used by traders worldwide and can prove to be an asset to you.
Always remember to make sure that you follow your money management strategy and you will see success implementing this technique.