Trading strategy: Ichimoku TKC

Description of the Ichimoku strategy

The Ichimoku Tenkan Sen Kijun Sen Cross (TKC) strategy is one of the most traditional strategies within the Ichimoku system developed by Goichi Hosoda. It is used extensively in Asian trading but only started to appear in the West in the 1990s.

The Ichimoku system is a finely-tuned, integrated charting system where 5 lines all work in concert to produce buy and sell signals. Several strategies are derived from the Ichimoku system. Ichimoku TKC is one of them.

Designed for	: Market indices (DAX, DOW, S&P 500 ...) : Forex (EUR/USD ...) : Commodities (oil, gold ...) : Stocks
Instruments	: Stocks, CFDs, Forex and Futures
Trading type	: Swing trading (Video)
Trading tempo	: Low - Depending on the time frame
Using NanoTrader Full	: Manual and (semi-)automated
Budget	: FREE trading strategy in NanoTrader

The Ichimoku system

The Ichimoku charting system consists of 5 separate indicators (lines). Four of the five lines are based on different time frames:

The CMO (the turning line)

The CMO line is an average of the highest highs and lowest lows over the last 9 periods. This line represents a price equilibrium level over the last 9 periods. Tenkan Sen measures short-term momentum and can be interpreted in the same manner as a moving average.

The Kijun Sen (the standard line)

The Kijun Sen line is an average of the highest highs and lowest lows over the last 26 periods. This line represents a price equilibrium level over the last 26 periods. Because of its longer period, Kijun Sen is more a measure of momentum than Tenkan Sen. A flat Kijun Sen indicates a range bound price. A sloped Kijun Sen indicates a trend, with the slope of the line indicating the trend’s momentum.

In this illustration the Tenkan Sen (red) is a support for the downtrend from A to B and for the uptrend from B to C. The flat Kijun Sen (blue) indicates a trading range. A sloped Kijun Sen indicates momentum.

Trading strategy: Ichimoku TKC.

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The 1st leading line

The Senkou Span A (1st leading line) is an average of Tenkan Sen and Kijun Sen, plotted 26 periods ahead. The average of Tenkan Sen and Kijun Sen indicates medium term price equilibrium level with support and resistance levels. Time-shifting this line forward makes it easy to compare prices today with prior support and resistance levels.

The 2nd leading line

The Senkou Span B (2nd leading line) is an average of the highest highs and the lowest lows over the last 52 periods, i.e. the mid-point of the range of prices over the last 52 periods, plotted 26 periods ahead. Senkou Span B measures the price’s long-term momentum.

The area between Senkou Span A and Senkou Span B is called Kumo, the cloud. The cloud is colored in red when the trend is bearish (Senkou Span A is below Senkou Span B). The cloud is colored in green when the trend is bullish (Senkou Span A is above Senkou Span B).

In this illustration both a bullish and bearish cloud (Kumo) are visible.

The Kumo cloud in the Ichimoku system.

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The lagging line

The Chikou Span (lagging line) represents the current closing price time-shifted backwards by 26 periods. While the rationale behind this may at first appear confusing, it becomes very clear once we consider that it allows traders to quickly see how today’s price action compares to the price action of 26 periods ago.

Several publications give different descriptions of the various strategies that can be derived from the exploitation of the Ichimoku charting system. The Ichimoku TKC strategy that is detailed in this text is based on crosses between Tenkan Sen and Kijun Sen as well as the position of this cross relative to the cloud. The text shows the strategy applied in a 1-day time frame. The strategy can also be used in a 1-week time frame.

When to open a position

Buy signals

A buy signal is generated if 2 conditions are met:

1. Tenkan Sen (red line) crosses above Kijun Sen (blue line).

2. The market closes above the cloud within 4 periods since condition 1 occurred.

This example shows a bullish cross. Four periods after the cross between Tenkan Sen and Kijun Sen a candle closes above the cloud. This is a buy signal.

As a visual aid the chart background turns to a dark green when a bullish cross occurs. Similarly it will turn to a dark red when a bearish cross occurs.

Trading strategy: Ichimoku TKC.

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Short sell signals

A short sell signal is generated if 2 conditions are met:

1. Tenkan Sen (red line) crosses below Kijun Sen (blue line).

2. The market closes below the cloud within 4 periods after condition 1 occurred.

This example shows a bearish cross. The market, however, does not close below the cloud within four days. Hence no short sell signal is given. Later the same month there is a valid buy signal.

Trading strategy Ichimoku TKC generates free trading signals.

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When to close a position

The Ichimoku TKC strategy uses a stop. In the case of a long position the stop is placed at the bottom of the cloud. In the case of a short position the stop is placed at the top of the cloud. The stop is not very tight. This is intentional. The stop is solely present to protect against large losses.

If the stop is not touched the strategy dictates that an open position is closed when the opposite cross between Tenkan Sen (red line) and Kijun Sen (blue line) occurs. A long position is closed when the Tenkan Sen crosses below the Kijun Sen. A short position is closed when the Tenkan Sen crosses above the Kijun Sen.

This example illustrates that the Ichimoku TKC strategy can keep positions open for a long time. A buy signal (bullish cross) occurs in September. A long position is opened. The position is only closed in January after a bearish cross occurs. The position was closed with a profit. The stop, based on the lower edge of the cloud, was not touched.

When to close a long position in the Ichimoku TKC system.

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This example show a buy signal after a bullish cross. The market, however, changes direction and the position is stopped out after seven days. The stop is based on the lower edge of the cloud.

A bullish cross in the Ichimoku TKC system.

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Conclusion

Ichimoku TKC is a trend following strategy based on five special trend lines. These trend lines and the "clouds" they form give the trader a deeper view into the price action allowing him to identify higher probability trading setups. Ichimoku TKC is used in many of the world's financial centers. Information about the system can be found in numerous publications. It is nevertheless important to carefully analyze the historic results of the strategy on the instrument(s) you wish to trade before putting it into practice. The strategy can be used for market indices, forex, commodities, individual shares, etc. Large time frames such as days and weeks tend to give the better results.