The Ichimoku Indicator
The Ichimoku Kinko Hyo, or simply the Ichimoku indicator, is a popular indicator that is gaining traction among technical traders. It is motivated by the need for just one all-encompassing indicator with very high information content. It also has the benefit of being forward looking unlike most indicators which have a delay. With it, traders can get a feel for momentum and support and resistance.
This indicator is composed of five lines or spans: the lagging span, the conversion line, the base line, and two lines that together form the 'cloud'.
The base line averages the highest high and the lowest low for the past 26 periods. It can be thought of as an indicator of trend and predictor of future price action. It is a bullish sign if the current price is higher than this line, a bearish sign if it is below it.
The conversion line averages the highest high and the lowest low for the past 9 periods. This is another trend indicator. It is a bullish sign if this indicator is increasing, a bearish sign if it is decreasing. If the asset is ranging, the indicator will flat-line.
The lagging line is simply the price offset backwards by 26 periods. Crossovers with the price chart confirm trends. It is considered bearish if the price crosses below this span. On the other hand, it is considered bullish if the price crosses above the line.
The last aspect of the Ichimoku indicator is the cloud, which is composed of two lines. The first averages the base and conversion lines and plots them 26 periods ahead. The second line averages the highest high and the lowest low for the past 52 periods. This is also plotted 26 periods ahead. Because these values are plotted ahead, the indicator is forward looking.
The cloud itself represents support and resistance. When the price is below the cloud, it will provide resistance. It will give support when the price is above the cloud. Most support and resistance lines are simply solid numbers with little or no depth. However in this case, the thickness of the cloud tells us the relative strength of the level. So thicker clouds are harder to punch through than where the cloud thins out. As such, the asset spends very little time in the cloud and often rejections are swift in regions where the cloud is thick. The forward looking nature of the cloud is very useful for anticipating levels in the near future.