Bitcoin Trader in the Land of the Rising Sun – The Ichimoku Kinko Hyo is a technical indicator that is gaining popularity among traders and retail investors. Taking an important place in the chart, it is not so complex contrary to popular belief. On the other hand, a period of adaptation is necessary to master its subtleties. Let’s get our hands dirty to explore this technical indicator from Japan, in order to use it effectively whatever your investment horizon.
Throughout this article, we will take Bitcoin as an example to illustrate the full arsenal offered by the Japanese technical indicator. Moreover, we will often favor the term Ichimoku instead of Ichimoku Kinko Kyo to facilitate the reading of the article.
Ichimoku Kinko Hyo: origins and definition
Ichimoku Kinko Hyo was developed by Japanese journalist Goishi Hosoda in the 1930s to effectively study price movements and identify market entry and exit points. It was made public in 1968.
The meaning of the three Japanese words reflects the philosophical meaning that this indicator brings. Ichimoku means ‘peek’, Kinko ‘balance’ and Hyo ‘bend’. The five curves that compose it, make it possible to define the zones of equilibrium prices and alert on possible breaks to initiate a position on the market.
The settings designed by Goishi Hosoda are 9-26-52. The founder did not set them at random. Indeed, they symbolize what was happening at the time in Japanese society where Saturday was a working day in its own right.
9 represents a week and a half. 26 corresponds to the number of sessions in the Japanese month. 52, two months.
If these settings are custom made in Japan, they would not conform in Europe and North America because the week is five days and the Western month is 20 days. However, modifying the original settings discredits the technical indicator of the country of the Rising Sun which is famous for its accuracy. And whatever the unit of time, we will refrain from doing so under penalty of producing a distorted analysis.
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Presentation of the five curves of Ichimoku
The Ichimoku indicator is made up of five curves:
- the Tenkan (in blue),
- the Kijun (in orange),
- clear span A (SSA)
- the Senkou Span B (SSB) which forms the Kumo which means “Cloud”,
- and the Chikou Span (in green).
It corresponds to the average of the prices of the high and low points of the last 9 sessions. We add the highest point and the lowest point of the session, then we divide them by two. Of the five curves, it is the most fragile because of its method of calculation over a short period.
It corresponds to the average of the prices of the high and low points of the last 26 sessions. The calculation is done in the same way as the Tenkan except that its graphic evolution is smoother. She is considered as a balance curve. Its weight could be crucial if it is near a major support or resistance.
The Kumo, which is translated as “cloud”, is formed by two curves projected towards the future, the SSA and SSB.
The SSA is calculated by taking the average between the Tenkan and the Kijun over a projection of 26 future sessions. The SSB corresponds to the average of the prices of the high and low points of the last 52 sessions, on a projection over 26 sessions.
The thickness of the cloud depends on the movements of the SSA because its average is based on the most reactive curves, the Tenkan and the Kijun. The SSB weighted over a long period, is the least reactive curve of the five and can be valuable if near major support or resistance.
The level of cloud thickness should not be taken lightly. If it is relatively large, it will complicate the price crossing to consider a trend reversal.
If prices are inside the cloud, the trend is neutral or uncertain. Above and below, the trend is respectively bullish or bearish.
In the eyes of analysts, the Kumo represents the heart of the Japanese technical indicator. It allows you to guess at a glance the general trend of the market.
The Chikou Span
This is the curve that replicates the same variations in market prices with a lag of 26 sessions. Its specificity is to bring up to date the signals and levels that were major in the past.
The Chikou Span invites us to remain cautious. It behaves similarly to current market prices, near support, resistance or a trend line (bullish or bearish). To definitively validate recent price movements, the Chikou Span must not encounter any technical constraints. This is why it represents the ultimate key to Ichimoku. For all the signals to be green in one direction or another, it would be necessary that:
- The Chikou Span sits above the Kumo and prices to consider entering the market.
- Or the Chikou Span is below the Kumo and prices to initiate a short position or stay away.
Practical case with Bitcoin in weekly units
Since its ATH on November 10, Bitcoin prices have continued to fall. After successively breaking the Tenkan and the uptrend line of the last bull run, they are struggling to stabilize on the support zone around $48,000-49,000. In weekly units, the Kijun is on this level and will play a key role in the sessions to come.
In the same movement, the Chikou Span falls, but manages to stay above BTC prices and build on the Kijun, which, moreover, is in the same situation as in real time despite the 26 sessions late.
Despite this downward momentum of the last few weeks, the weekly chart does not call into question the long-term uptrend. Although not far from the SSA, Bitcoin remains above Kumo. And the same for the Chikou Span.
In case of failure on the 48,000-49,000 dollars, the next target would be support around $41,000. Fortunately, this gloomy outlook is far from opening the debate of a bear market, because the Chikou Span would remain at a good distance from the Kumo.
Practical case with Bitcoin in daily units
In daily units, the bearish momentum remains valid. However, we highlight a few points for improvement. First, Bitcoin broke its downtrend line that it had been trailing since its November 10 ATH. Second, the $46,000 support appears to have held for several days.
The fact that BTC prices and the Chikou Span remain below the Kumo, would alert us to further consolidation if the $46,000 were to be pushed down. But if the buyers regain the upper hand over the sellers, there are many major technical obstacles to foresee a reversal of the trend. In the same line, the Chikou Span would still be below the Kumo. In short, if we want return to a bullish scenario, it should a jump in Bitcoin prices above $55,000 which are at the level of the SSB in daily units and the Tenkan in weekly units.
Despite its bulk on the graph, the Ichimoku has a complete arsenal to effectively analyze the market trend. It applies to all asset classes provided that the quotation history is large enough.
Well exploited with efficiency, it has the gift of doing the work of the most common technical indicators (moving average, RSI, Stochastic, etc). This avoids having too many elements to take into account at the risk of making your trade or investment uncertain.
The only downside to complain about the Ichimoku is the constraint of the Chikou Span. It can force us to renounce important gains upstream without the conditions not being strictly respected. But on the other hand, the Chikou Span and the Kumo are pillars to be respected in the Ichimoku system whatever the investment horizon.
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