One of the most often used, and robust systems for the Ichimoku Kinko Hyo is the Tenkan-Kijun Cross Setup, or what I refer to as the TKx setup. It is simple, efficient, and great at picking up trends and trend reversals. It is best for the traders interested in trading trends or momentum type moves.
What are the Tenkan and Kijun Lines?
The Tenkan Line (TL) is also known as the conversion line or turning line. It is similar to a 9SMA but very different in reality. A simple moving average (SMA) flattens out all the data and makes it equal while the TL takes the highest high and the lowest low over the last 9 periods.
Hosada (inventor of the Ichimoku Kinko Hyo) regarded price action and its extremes as more important than the smoothing data given by 9SMA. This is because price action will mark the key highs and lows, but also turning points where they put a lot of money on the line, or essentially key points where traders entered and exited the market.
The chart below shows clearly how the Tenkan Line is quite different from the 9SMA. Since the TL uses price instead of an averaging or closing prices, it is able to mirror price better and represents it further. This is clearly exhibited when the TL smoothens if small portions to move with price and its moments of ranging.
Additionally, we have the angle of the Tenkan Line which can show subtle differences in comparison to moving averages. The sharper the angle, the stronger the trend while the flatter the Tenkan line, the slower the momentum of the move.
However, the Tenkan line is preferred for gauging the momentum of the move as opposed to gauging the trend. But, it can be the first line of defense in a trend; a breaking of the TL in the reverse direction of the move often indicates the weakening of the trend.
The Kijun Line, also known as the datum line or trend line, is intended to show the overall trend for the instrument. The design behind it is the similar to that of the TL using price action and the highest high +lowest low. The only difference is in the periods since the Kijuin Line does it over the last 26 periods.
In essence, the Kijun Line was designed to measure the highest high and the lowest low for the last month of price action. If the Kijun is climbing sharply, then the price has been gaining ground for the last month while if it is flat, then it is the midpoint of the range of price (price equilibrium) for the last month.
Similarly, the angle of the Kijun mirrors the general trend for the instrument. Price breaking the Kijun after being in an up/down trend, generally marks a serious change for that trend, possibly reversal.
Moreover, since it uses a longer period of time to gauge price action, it is a more reliable technique for defining the direction of the trend than the TL. And since the price is akin to this line during a strong trend, it can act as a stop loss for traders already in the correct direction of the trend. Hence, the trend ends when the price breaks or closes below it by a substantial quantity.
Applications of the Tenkan and Kijun
The most common application of the Tenkan and Kijun lines are the ‘cross’ referred to as the Tenkan-Kijun Cross (TKx). The Ichimoku Cloud uses the TKx the same way a MACD uses a cross of its two lines.
One of the key indicators for Ichimoku traders offered by the TKx is when a trend is about to begin. This occurs via forming a cross where;
-an upward cross means a possible upward trend while a downward cross implies a possible downtrend. A generic upward cross can be used as a generic bullish signal and a generic downward cross can be used as a generic bearish signal.
Goichi Hosada went even further to give another definition of the cross based upon its position in relationship to the cloud.
Weak Cross: It is considered a weak signal if the cross is below the Kumo; since the cross is below resistance.
Medium Cross: It is a medium signal when it happens inside the Kumo; the cross occurs within the field of support/resistance.
Strong Cross: The strongest signal is when the cross occurs above the Kumo for a bullish cross, or a bearish cross below the Kumo. This is because the cross is occurring after the price action has cleared the support or resistance – that being the Kumo.
The vice versa is true for the bearish signals. |
Exhibit A – Tenkan/ Kijun Crosses
See how the USD/INX formed 3 strong downward crosses with each move selling off nicely, and the price action never penetrated the Kumo – emphasizing the downtrend.
In the example below, the AUDUSD gives a nice upward cross in an uptrend already in progress. First, it made a shallow penetration into the Kumo at the beginning of the chart, with the cross resulting in a strong upmove – over 1300pips from the Tenkan/Kijun cross.
When trading the TKx, there are various important factors such as time frame, kumo shape/configuration, previous moves-series of crosses, and angle/shape of the cross that need be considered. To learn more about how to trade the Tenkan-Kijun cross in a high probability fashion, make sure to visit the Advanced Ichimoku Course page to get access to proprietary quantitative data, and learn how to trade the Ichimoku using rule based systems discussing daily trade setups.