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Ichimoku Kinko Hyo is a purpose-built trend trading
charting system that has been successfully used in nearly every tradeablemarket. It is unique in many ways, but its primary strength is its use of multiple data points to give the trader a deeper, more comprehensive view into price action. This deeper view, and the fact that Ichimoku is a very visual system, enables the traderto quickly discern and filter "at a glance" the low-probability trading setups from those of higher probability.
The charting system of Ichimoku Kinko Hyo was developed by a Japanese newspaper man named Goichi Hosoda. He begandeveloping this system before World War II with the help of numerous students that he hired to run through the optimum formulasand scenarios - analogous to how we would use computer simulated backtesting today to test a trading system. The system itselfwas finally released to the public in 1968, after more than twenty years of testing, when Mr. Hosoda published his book which includedthe final version of the system.Ichimoku Kinko Hyo has been used extensively in Asian trading rooms since Hosoda published his book and has been used successfully to trade currencies, commodities, futures, and stocks. Even with such wild popularity in Asia, Ichimoku did not make its appearance in the West until the 1990s and then, due to the utter lack of information in English on how to use it, it was mostly relegated to the category of another "exotic" indicator by the general trading public. Only now, in the early 21st century, are western traders really beginning to understand the power of this charting system.
Equilibrium At a Glance
The name Ichimoku Kinko Hyo, which translates to "Equilibrium chart at a glance" aptly describes the system and how it is to be used, as described below:
While Ichimoku utilizes five separate lines or components, they are not to be used individually, in isolation, when making trading decisions, but rather used together to form an integrated "whole" picture of price action that can be gleaned "at a glance". Thus, a simple look at an Ichimoku chart should provide the Ichimoku practitioner with a nearly immediate understanding of sentiment, momentum and strength of trend.
Price action is constantly measured or gauged from the perspective of whether it is in relative equilibrium or disequilibrium. Hosoda strongly believed that the market was a direct reflection of human group dynamics or behavior. He felt that human behavior could be described in terms of a constant cyclical movement both away from and back towards equilibrium in their lives and interactions. Each of the five components that make up Ichimoku provide its own reflection of this equilibrium or balance.
The Ichimoku chart is composed of five (5) separate indicator lines. These lines work together to form the complete "Ichimoku picture". A summary of how each line is calculated is outlined below:
- TENKAN SEN ("turning line") =
(HIGHEST HIGH + LOWEST LOW)/2
for the past 9 periods
- KIJUN SEN ("standard line") =
(HIGHEST HIGH + LOWEST LOW)/2
for the past 26 periods
- CHIKOU SPAN ("lagging line") =
CURRENT CLOSING PRICE time-shifted backwards 26 periods
- SENKOU SPAN A ("1st leading line") =
(TENKAN SEN + KIJUN SEN)/2 time-shifted forwards (into the future ) 26 periods
- SENKOU SPAN B ("2nd leading line") =
(HIGHEST HIGH + LOWEST LOW)/2
for the past 52 periods time-shifted forwards
The senkou span A and B deserve special mention here as they, together, form the Ichimoku "kumo" or cloud. We cover the kumo and its myriad functions in more detail in the section "The kumo".
As you can see in the Ichimoku Components section above, each line calculation has one and sometimes two different settings based on the number of periods considered. After much research and backtesting, Goichi Hosoda finally determined that the settings of 9, 26 and 52 were the ideal settings for obtaining optimum results with Ichimoku. He derived the number 26 from what was then the standard Japanese business month (which included Saturdays). The number 9 represents a week and a half and the number 52 represents two months. The standard settings for an Ichimoku Kinko Hyo chart are 9,26,52.
There is some debate around whether or not these settings of 9,26,52 are still valid given that the standard work month here in the West does not include Saturdays. In addition, in non-centralized markets that do not keep standard business hours like the Forex (which trades around the clock) some have posited that there may be more appropriate settings. Nevertheless, we at Boersma & Hunt, as well as most other professional Ichimoku traders, agree that the standard settings of 9,26,52 work extremely well and do not need to be altered. The argument could be made that, since Ichimoku Kinko Hyo functions as a finely-tuned, integrated whole, changing the settings to something other than the standard could throw the system out of balance and introduce invalid signals.
Thus, for the purposes of describing Ichimoku Kinko Hyo within this wiki, it will be assumed that the standard settings are being used.
| ||Renko Mechanical System || |
|Renko Chart Definition:A Renko style chart is a type of chart, developed by the Japanese, that is only concerned with price movement; time and volume are not included. It is thought to be named for the Japanese word for bricks, "renga". A renko chart is constructed by placing a brick in the next column once the price surpasses the top or bottom of the previous brick by a predefined amount. White bricks are used when the direction of the trend is up, while black bricks are used when the trend is down. This type of chart is very effective for traders to identify key support/resistance levels. Transaction signals are generated when the direction of the trend changes and the bricks alternate colors. Renko charts work in a similar way as Point & Figure charts, however they are easier to read and follow.Example chart: |
Renko Mechanical Trading System:One of the most difficult things about trading (if not the most difficult) is controlling one's emotion. There are a vast number of books written on technical analysis and the study of chart patterns, and these are important, however it is emotion that is often the most difficult to control or master for many traders. Mechanical systems that have hard-set rules for buy/sell signals, take away the emotion that makes trading so difficult.
Renko System Overview:
Renko charts are very effective at defining support/resistance clearly and they ignore a lot of 'noise' that often occampanies normal candlestick charts. However Renko charts can be subject to noise, and in order to mitigate this noise, I have a serious of indicators that I employ in order to generate reliable mechanical buy/sell signals.Buy/sell signals:
1.) 7 day EMA - you need to see the candles close either above or below this MA, this is a guide, not a buy/sell in itself unless combined with other indicators2.) The 14,3 period Stochastics works very well via crossovers. Buy/Sell signals generally need to be confirmed via the Stochastics crossing below 80% or above 20%3.) Buy/Sell signals MUST have a Parabolic Sar buy/sell signal. I use a PSAR setting of (0.09,0.2).4.) I like to use a MACD Histogram with a 5 EMA to look for divergences.
5.) Putting it all together: Buy/Sell signals must be confirmed via a PSAR siganl, Stochastics crossover, and a crossover of the 7 EMA - this combination eliminates many whipsaws.The Renko systems seems to be very good at keeping you in the majority of a major trend and at the same time keeping your losses small. Yes the system will produce whipsaws, however the whipsaws are generally more than made up when you catch a strong trend.Below are chart examples along with a video:
***VIDEO - Click here for a Video Overview of system and charts below**
Below are examples of charts using the Renko style of charts along with my indicators; buy and sell signals are noted via the blue arrows. You can also see that I indicator the net gain and loss with each signal, as you can see, the Renko charts work pretty well...
|Disclaimer - please note:One last thing that I must point out before you get too excited: This system, while it looks impressive, IS NOT the end all magic system. I've noticed that it works great on some charts and stocks, especially when thy trend, however sometimes it doesn't work very well depending on the stock or market index. Therefore check to see if the stock or index you want to trade has been working with with the Renko chart. And always, remember that you are looking at past data and just because it worked well in past for a particular stock/index, doesn't mean that it will continue to. Again the Renko charts are not magic, however they appear to be a useful tool to have in one's arsenal. The nice thing about the system is that it has its own built in stop loss i.e. your stop loss is basically the next signal.Use Money Management & Common Sense!One more thing, you must use proper money management just you do for your normal trading. For example, don't 'back up the truck' and go out full margin, use common sense. If you normally put 5% - 10% of your money in a particular stock, then do the same with a mechanical system.Have fun!! |
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