The binary options’ indicator Ichimoku Kinko Hyo was initially created in Japan. It can be applied in combination with the Japanese candlesticks’ chart. This is primarily because the candles’ analysis method itself turned out to be not objective and independent enough. And traders who have used the candle analysis didn’t have the opportunity to determine levels and points of entry to a market.
Ichimoku Kinko Hyo working principles
Japanese analyst Goichi Hosoda is the developer of this indicator. This indicator was initially developed for trading with the trading index Nikkei. It’s necessary to note that the Ichimoku Kinko Hyo indicator belongs to the category of trend indicators. But it can be also applied in the countertrend strategies. This auxiliary tool for the technical analysis of markets sends signals of a high quality within the development of the unidirectional movement, in other words, it sends signals of a trend, as well as the fair signals within the sideways movement.
This indicator includes three independent lines, as well as two other lines, which form the so-called cloud. On the live chart of binary options this cloud is represented by the shaded area. The lines are called Tenkan Sen, Kidjun Sen, Chinkou Span, as well as two lines, which form a cloud, called Senkou Span A and Senkou Span B. The developer himself offered to use the following periods. If we consider the daily chart, we will find out that the period of 9 means one and a half of a work week, the period of 26 means a number of working days in a month in Japan, and the period 52 means a number of weeks in a year. If we consider the weekly chart, we will find out that 9 weeks turn out to be two months approximately; 26 weeks turn out to be a half year; 52 weeks turn out to be a year.
When we consider this indicator in detail, we can note that it includes five lines (as mentioned above):
- Tenkan Sen line is the short-term trend line which shows the so-called fast trend. In other words, this line of the Ichimoku Kinko Hyo binary options’ trend indicates that there is the short-term direction of movement in the market. This line is calculated within the indicator as the middle value of minimum and maximum for a long time interval. If this line is directed up on a chart, then it shows a formation of the short-term ascending trend. And if it is directed down, a trader receives a signal about the formation of the short-term descending trend. As for the situations, when this line is parallel with a time scale, it is the most likely that there is the sideways movement in the market at this time.
- Kidjun Sen shows the long-term trend in the market. This line of the binary options’ indicator Ichimoku Kinko Hyo is calculated for 26 periods. Interpretation of this line’s standing on a chart is the same as for the Tenkan Sen line. In other words, if the Kidjun Sen is directed up, then the trend is the ascending one. And if it is directed down, then the trend is the descending one. The movement which is parallel with a time scale means the sideways movement or the flat.
- Senkou Span A is the leading indicator, and it shows the middle value between the lines Tenkan Sen and Kidjun Sen. This line of the Ichimoku Kinko Hyo binary options’ indicator is an upper bound of a cloud, and it can act as a resistance or support, depending up the price’s standing in relation to it.
- Senkou Span B is the line which delineates the bottom bound of a cloud on a chart. It is calculated as the middle value between the minimum and the maximum in the third interval of a time. The Senkou Span B can also act as the support or resistance line in the binary options’ indicator, depending up the price’s standing in relation to it.
- Chinkou Span is the chart’s line which displaces for 26 periods of time, in other words, it belongs to the second time interval.
Methods of the Ichimoku indicator’s usage
In the previous part of the Ichimoku Kinko Hyo binary options’ indicator description we have considered the main principles of its work, as well as its components, which are displayed on a chart. Now we will consider main methods of this indicator’s usage, as well as its main trading signals, which can be received.
So, one of the most important signals of this binary options’ indicator is the price’s crossing of the Senkou Span B line. If this crossing occurs from up to down, then a trader can buy the Put options. Otherwise, if a line is crossed from down to up, the signal to buy the Call option will appear. The signal becomes stronger if a price exceeds the bounds of the Ichimoku cloud, which consists of lines Senkou Span A and Senkou Span B. This method is very similar to the classic crossing of the moving average by a price.
The advantage of this indicator consists in the fact that it can be used with both clear trend and sideways movement. Determining the sideways movement is pretty easy. A price usually stays within the Ichimoku’s cloud during this period. The signal to buy the Call binary option appears when the short line Tenkan Sen crosses the long Kidjun Sen from down to up. If the line of Tenkan Sen crosses the Kidjun Sen from up to down, the signal to buy the Put binary option appears.
When a price stays within the Ichimoku’s cloud, you can also use another one signal. When a price touches the bottom bound of a cloud, you can buy the Call option. In this case, a trader expects that the trading tool he uses will not break the support line, but will rebound from it and move towards the resistance level, which, in this case, is the upper bound of a cloud. When a price touches the upper bound, traders may buy the Put option. In this case, they expect that the trading tool will not break the resistance line and will move to the support level, and the lower bound of a cloud acts as the support level in this case.
When the Tenkan Sen and Kidjun Sen lines become parallel with each other and both of them are parallel with the Senkou B, it means that the stable trend appears in the market. And if the trend is the ascending one, then the Tenkan line is located above, the Senkou Span B is located below, and the Kidjun Sen is located between them. If the trend is the descending one, the Senkou Span B line is located above, the Tenkan Sen is located below, and the Kidjun Sen is located between them.
If a price is located within the Ichimoku’s cloud and, at the same time, the Chinkou Span crosses it from down to up, the good signal to buy the Call option will appear. And if in the same circumstances the Chinkou Span crosses a price chart from up to down, the signal to buy the Put option will appear. The lines Senkou Span A and B, as already mentioned, may be the support and resistance lines in the certain circumstances. If a price is located below the Ichimoku’s cloud, then the Senkou B will be the first line of resistance and the Senkou Span B will be the second one. And if a price is located above the Ichimoku’s cloud, then the first level of support will be the Senkou Span A, and the second one will be the Senkou Span B.
The Tenkan Sen is an independent signal line, which helps to determine the direction of the trend. If the Tenkan Sen is directed up, then there is the ascending trend in the market. And if it is directed down the trend is descending.
It is believed that the Ichimoku Kinko Hyo indicator works the best with the time scales from one day and more. Among its benefits we can also call that it is capable of determining when there is the stable movement in the certain direction and when it is a flat in the market. Besides, lines of this indicator react to the appearance of the new maximums and minimums immediately and do not lag, as it happens with the moving averages. However, this indicator has some disadvantages too. For example, it works badly during the sideways movement, especially if this movement is very narrow.