Free Forex Trading Strategy from eSignal
What are they?
Ichimoku charts are trend-following indicators that identify support and resistance levels and generate trading signals in a way similar to moving averages. A key difference between moving averages and Ichimoku charts is that Ichimoku chart lines are shifted forward in time. This creates wider support and resistance zones and decreases the risk of trading false breakouts.
How are they calculated?
The Ichimoku study conveys a great deal of information on trend existence, direction, support and resistance. It comprises four main lines:
Turning Line = (Highest High + Lowest Low) / 2, for the past 9 days
Standard Line = (Highest High + Lowest Low) / 2, for the past 26 days
Leading Span 1 = (Standard Line + Turning Line) / 2, plotted 26 days ahead of today
Leading Span 2 = (Highest High + Lowest Low) / 2, for the past 52 days, plotted 26 days ahead of today
How are they used?
Much like a moving average crossover strategy, Ichimoku charts generate a buy signal when the Turning Line crosses the Standard Line from below. They generate a sell signal when the Turning Line crosses the Standard Line from above.
Additionally, the shaded area that is formed between Leading Spans 1 and 2 is known as a cloud and defines support or resistance. Clouds not only act as support or resistance, they also help to identify trend direction. When prices are above the cloud, the trend is up. Similarly, when prices are below the cloud, the trend is likely down. Below is an example of an Ichimoku chart: