The Ichimoku Kinko Hyo or equilibrium chart isolates higher probability trades in the forex market. It is new to the mainstream, but has been rising incrementally in popularity among novice and experienced traders. More known for its applications in the futures and equities forums, the Ichimoku displays a clearer picture because it shows more data points, which provide a more reliable price action. The application offers multiple tests and combines three indicators into one chart, allowing the trader to make the most informed decision. Learn how the Ichimoku works and how to add it to your own trading routine. Getting to Know Ichimoku Before a trader can trade effectively on the chart, a basic understanding of the components that make up the equilibrium chart need to be established. Created and revealed inthe Ichimoku was developed in a manner unlike most other technical indicators and chart applications. Although many traders are intimidated by the abundance of lines drawn when the chart is actually applied, the components can be easily translated into more commonly accepted indicators. For related reading, see A Glance At An Equilibrium Chart Essentially made up of four major components, the application offers the trader key insight into FX market price action. Used as a moving average crossoverboth lines clouds simple translations of the and 50-day moving averagesalthough with slightly different time frames The Tenkan Sen Calculated as the sum of the highest high and the lowest low divided by two. The Tenkan is calculated over the previous seven to eight time periods T he Kijun Sen Calculated as the sum of the highest high and the lowest low divided by two. Although the calculation is similar, the Kijun takes the past 22 time periods into account. What the trader will want to do here is use the crossover to initiate the position - this is similar to a moving average crossover. Looking at our example in Figure 1, we see a clouds crossover of the Tenkan Sen black line and the Kijun Sen red line at point X. This decline simply means that near-term prices are dipping below the longer term price trend, signaling a forex move lower. It behaves in much the same way as simple gap and resistance by creating formative barriers. The last two components of the Ichimoku application are Senkou Span A The sum of the Tenkan Sen and the Kijun Sen divided by two. The calculation is then plotted 26 time periods ahead of the current price action Senkou Span B The sum of the gap high and the lowest low divided by two. This calculation is taken over the past 52 time periods and is plotted 26 periods ahead. Once plotted on the chart, the area between the two lines is referred to as the Kumo, or cloud. Comparatively thicker than your run-of-the-mill support and resistance lines, the cloud offers the forex a thorough filter. Instead of giving the trader a visually thin price level for support forex resistance, the thicker cloud will tend to take the volatility of the currency markets into account. A break through the cloud and a subsequent move above or below it will suggest a better and more probable trade. Although we see a clear support at in our more standard chart Figure 2we subsequently see a retest of the level. At this point, some trades probably will be stopped out as the price action comes back against the level, which is somewhat concerning for even the most advanced trader. However, gap our Ichimoku example Figure 3the cloud serves as an excellent filter. Taking the volatility and apparent take back into account, the cloud suggests a better trade opportunity on a break of the figure. Here, the price action does not trade back, keeping the trade in the overall downtrend momentum. Last is the Chikou Span. Seen as simple market sentimentthe Chikou is calculated using the most recent closing price and is plotted 22 periods behind the price action. The interpretation is simple: as sellers dominate the market, the Chikou span will hover below the price trend while the opposite occurs on the buy side. When a pair remains bid in the market or is bought up, the span will rise and hover above the price action. Trading The Cloud… Taking our U. With the currency pair fluctuating in a range between and figures for the beginning of the year, traders were anxious to see a break out of the persistent range. With that established, we look to the Tenkan and Kijun Sen. As mentioned before, these two act as a moving average crossover with the Tenkan representing a more short-term moving average and the Kijun acting as the base line. As a result, the Tenkan dips below the Kijun, signaling a decline in price action. However, with the crossover occurring within the cloud at The A in Figure 5, the signal remains unclear and will need to be clear of the cloud before an entry can be considered. We can also confirm the bearish sentiment through the Chikou Span, which at this point remains below the price action. Conversely, if the Chikou was above the price action, it would confirm bullish sentiment. Putting it all together, we are now looking for a short position in our U. As a result, we will be entering at Point B on our chart. The, we have a confirmed break of the cloud as the price action stalls on a support level at The trader, at this point, can opt to place the entry at the support figure of or place the order one point below the low of the session. Placing the order one point below would act as confirmation that the momentum is still in place for another move lower. Subsequently, we place the stop just above the high of the candle within the cloud formation. In this example, it would be at Point C or The price action should not trade above this price if the momentum remains. Therefore, we have an entry at and a corresponding stop atleaving our risk out at pips. This equates to roughly pips and a risk to reward - a profitable opportunity. One key note to remember: notice how the Ichimoku is applied to longer time frames, in this instance the daily. The Round Up This indicator is intimidating at first, but once the Ichimoku chart is broken down, every trader from novice to advanced will find the application helpful. Not only does it mesh three indicators into one, but it also offers a more filtered approach to the price action for the currency trader. Additionally, this approach will not only increase the probability of the trade in the FX markets, but will assist in isolating only the true momentum plays. This is opposed to riskier trades where the position has a chance of trading back former profits. Here, the price action does not trade back, keeping the trade in the overall downtrend momentum Figure 2 — Classic support and resistance break Figure 3 — Ichimoku creates a better break opportunity Last is the Chikou Span. The easy-to-use Ichimoku chart can tell you quite a bit in just one glance. This technical indicator is underused in the currency markets, but it can help you isolate profitable opportunities. For traders who want a mix of technical analysis with their own control in decisions, price action trading offers the perfect fit. Discover a framework that will help clouds build your own profitable forex trading strategy. Price action trading allows you to customize your own trading strategy. A method of identity theft carried out through the creation of a website that seems to represent a legitimate company.