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Ichimoku Charting

An Introduction

Jason Perl
Global Head: Fixed Income, Rates & Currencies Technical Strategy Group
UBS Investment Bank

Telephone : +44 20 7567 2447


E-mail : jason.perl@ubs.com
ICHIMOKU KINKO HYO : INTRODUCTION

• Developed by Goichi Hasoda

• Outlined the theory in his book Ichimoku Charting in 1969

• Ichimoku - at a glance, Kinko - balance, Hyo - charts

• Widely used in Japan

• Can be applied to any market or time frame

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ICHIMOKU : THE LINES

• CONVERSION LINE Tenkan-sen

• BASE LINE Kijun-sen

• LAGGING SPAN Chikou Span

• LEADING SPAN 1 Senkou Span 1

• LEADING SPAN 2 Senkou Span 2

• OPEN, HIGH, LOW, CLOSE

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ICHIMOKU : DERIVING THE LINES

• CONVERSION LINE (Highest high [9] + Lowest low [9]) / 2


• BASE LINE (Highest high [26] + Lowest low [26]) / 2
• LAGGING SPAN Current price shifted back 26 periods
• LEADING SPAN 1 (Base Line + Conversion Line) / 2)
Shifted forward 26 periods
• LEADING SPAN 2 (Highest high [52] + Lowest low [52]) / 2
Shifted forward 26 periods
• CLOUD Shaded area between Leading Span1
and Leading Span2
• OPEN, HIGH, LOW, CLOSE

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ICHIMOKU : INTERPRETING THE LINES
• BASE / CONVERSION LINES give buy and sell signals as with
regular moving averages.
• CLOUD 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 should provide secondary
resistance.
• CLOUD DENSITY the thicker the cloud, i.e. the greater
the distance between Senkou Span
1 and Senkou Span 2, the less likely
the probability that price will break
through the secondary level.
Breakouts are more likely when the
Cloud is very thin.

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ICHIMOKU : INTERPRETING THE LINES

• LAGGING SPAN is used in conjunction with the


current bar. If the Lagging Span is
trading above the bar of 26 periods
ago, the market is in a bullish phase.
If the Lagging Span is trading below
the bar of 26 periods ago, the market
is in a bearish phase.
The position of the Lagging Span
relative to the corresponding Cloud is
also important as it will help define
the current support / resistance levels
depending on whether it is above /
below or inside the Cloud.
In a bull market, the Cloud offers
strong support, while providing solid
resistance in a bear market.

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ICHIMOKU : EUR/USD DAILY CHART - EXAMPLE

Leading Span 2

Conversion
Line

Lagging Span
Current
O, H, L, C

Leading Span 1

Base Line

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ICHIMOKU : USD/JPY DAILY CHART - EXAMPLE

Cloud starts to fall away sharply -


highlighting the first point where an
upside break is most likely to occur

Cloud is very thick relative to


Lagging Span, thereby reducing
Price has broken Cloud but Lagging
likelihood of near-term upside
Span corresponding to Cloud is still
breakout.
very thick, which reduces likelihood
upside break will be sustained

Simultaneous
Simultaneous break of Cloud
break of Cloud support by both
support by both price and
price and Lagging Span
Lagging Span initiates sharp
initiates sharp sell-off
sell-off

In the example above, it’s interesting that although price was above all of the lines at one stage, an impulsive upside breakout was unlikely
because the Cloud relative to the corresponding Lagging Span was very thick. Any bullish strategy initiated at that point would therefore
have to take into account the length of time before the Cloud relative to the Lagging Span dropped away sharply to the downside. This is
particularly important for cash trades where negative carry needs to be taken into consideration or options trades where time decay is an
important factor.

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ICHIMOKU : USD/JPY DAILY CHART - EXAMPLE

Price breaks through the Cloud but corresponding


Lagging Span fails to do so - ensuing failure highlights Lagging Span violates Cloud
the importance of waiting for confirmation from both. support first but break becomes
impulsive to the downside once
the price breaks below its Cloud
support.

Price violates Cloud support first


but break only becomes impulsive
to the downside once the Lagging
Span breaks below its Cloud
support.

Both of the examples above emphasise the need for both the Lagging Span and current price to break their respective Cloud supports to
reduce the short-term whipsaw risk. In the first example, price moved lower first and the ensuing bounce prior to the break by the Lagging
Span was fairly minimal. However, in the second example, where price closes above the top of the Cloud, the corresponding Lagging Span
doesn’t manage to do so resulting in a sharp pullback. the Lagging Span broke Cloud support first.

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ICHIMOKU : USD/JPY - INTRA-DAY CHART

Note how Cloud relative to Lagging Span starts to


fall away sharply, thereby increasing prospect of a
near-term break to the upside. The fact that Leading
Span 1 crosses above Leading Span 2 going forwards
adds credence to this scenario.

Breakdown becomes
impulsive once price and
Lagging Span break below
Cloud Support. Note how the
Base Line subsequently
becomes resistance going
forwards.

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ICHIMOKU : EUR/USD - DAILY CHART

In the first two instances below (September-02 and April-03, market


sentiment towards the Euro became quite negative. However, the
Cloud relative to the Lagging Span at that point in time was relatively
thick and suggested that an impulsive breakdown was unlikely unless
/ until the Lagging Span also broke below its corresponding Cloud
support on a closing basis. Waiting for this additional evidence would
have avoided selling ahead of a resumption of the up-trend. Finally,
downtrend accelerated when both broke simultaneously.

Both price and Chikou finally


break Cloud support
simultaneously

Again, price spikes below Cloud support but the


Lagging Span needs to close below its Cloud support
to initiate an impulsive breakdown. Since Cloud
relative to Lagging Span at that point is fairly thick, it
reduces the probability of a sharp move lower at that
point in time.

Note, price breaks through Cloud but Lagging Span


(which is approaching thick Cloud support fails to do so
on a closing basis. Waiting for confirmation rather
before establishing strategic short positions would have
avoided subsequent sharp rebound.

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ICHIMOKU : DXY (CASH) - MONTHLY CHART

NOTE: At the end of November 2003, both the


price and Lagging Span closed below their
respective Cloud supports, suggesting further
weakening of the USD over the medium-term.

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ICHIMOKU : GBP/USD - MONTHLY CHART

While price had broken Cloud resistance on


several occasions, it was in September 2003 that
both price and Lagging Span broke their respective
monthly Cloud resistances. NOTE: price and
Lagging Span had not been above their Clouds
since 1992.

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ICHIMOKU : GBP/USD - DAILY CHART

Daily price and Lagging Span break of


Cloud resistance provide early signal ahead
of monthly break at end of November.

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ICHIMOKU : AUD/USD - DAILY CHART

NOTE: Although price broke through Cloud


support, the Lagging Span held its
corresponding Cloud support, suggesting
price sell-off was most likely a false break.

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ICHIMOKU : EUR/JPY - DAILY CHART

Price above Cloud resistance, waiting for


confirmation from Lagging Span relative to
its Cloud resistance.

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ICHIMOKU : NIKKEI 225 (CASH) - DAILY CHART

Note: At the end of May 2003, both the current price and Chikou
broke above their respective Cloud resistance levels simultaneously
for the first time since February 2002, thereby signalling a significant
breakout to the upside. Upside breaks up until that point were false
breaks as price had broken without confirmation from Chikou.

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ICHIMOKU : S&P (FUTURE) CONTINUATION CHART

Note how critical Cloud support has been


for last 4 significant sell-offs in S&P.

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