Ichimoku explained simply

Ichimoku Kinko Hyo roughly means equilibrium chart at a glance. Japanese journalist Goichi Hosoda developed it in the 1930s and published it in 1969. At first glance it looks cluttered, but at its core it answers a simple question: is the market in balance or in a trend?

What it's about

You see two lines close to the price, Tenkan and Kijun, and a shaded area, the cloud. When the price is above the cloud, the trend counts as up. Inside it, the market is undecided. Below it, the trend counts as down.

An example: a stock rises out of a long sideways phase and closes above the cloud for the first time. Many Ichimoku users see that as the start of an uptrend. A thick cloud below the price counts as strong support.

How it's calculated

All the lines use the same idea: the midpoint between the highest high and the lowest low of a period. Tenkan uses 9 days, Kijun 26 days. The first edge of the cloud is the midpoint of Tenkan and Kijun, the second is the midpoint of the high and low of the last 52 days. Both are shifted 26 days into the future.

With numbers: over the last 9 days the high was €58 and the low €52. Tenkan is then at €55. The fifth line, Chikou, is simply today's close shifted 26 days back.

What signals traders read from it

• Price and cloud: Above the cloud mostly an uptrend, below it mostly a downtrend, inside it no clear direction.
• Tenkan crosses Kijun: When the fast line crosses above the slow one, many read it as a buy signal, especially above the cloud.
• Colour of the cloud: When the first edge is above the second, the cloud counts as rising, otherwise as falling.

Where it misleads you

Ichimoku is built for trends. In sideways phases the price keeps moving through the cloud and the lines cross back and forth. Because all lines are based on past highs and lows, the signals come late, sometimes very late.

The system was also developed for Japanese stocks with six trading days a week. Whether the periods 9, 26 and 52 fit cryptocurrencies with seven trading days is an open question. Many use them unchanged anyway.

An example trade with made up numbers

Clara has €10,000 in her account and risks at most €150 per trade. A stock closes at €70 above a thick, rising cloud for the first time. Clara buys and sets her stop loss below the cloud, at €67. With €3 of risk per share, she buys 50 shares for €3,500. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.

If it works: The trend continues and Clara sells at €76. She's €300 ahead. After €2 in fees and €2 in spread, €296 is left.

If it goes wrong: The price falls back into the cloud and through it. The stop fills at €66.80. That's a €160 loss, €164 with costs.

The cloud showed Clara a natural place for her stop. It couldn't promise her that the breakout would hold.