It has several peculiarities that make it very different from other types of indicators and oscillators. Bollinger band difference indicator forex time theory and Ichimoku wave theory. In this post I’ll take a simplified look at this indicator and show how you can make use of it. The Indicator Lines Ichimoku can be a bit bewildering to start with because of the various outputs it produces.
Once you get to know the meaning of each part it is quite straightforward. It isn’t necessary to memorise what each and every line means but it does help to understand the basic properties. I’m not going to explain the formulae or ideas behind each line. As for the Japanese names, I won’t even go there. Figure 1 shows a typical example of Ichimoku output.
This is on a 4-hour GBPUSD chart. When you split the indicator up into separate parts it becomes much easier to understand. So let’s look at each of these three components. Equilibrium lines The two main lines are what I’ll call the equilibrium lines. I find it easiest to think of these together and refer to them as the fast line and slow line.
They are derived in the same way but are at a different scale. These two lines are comparable to the fast and slow moving average but they do have some important differences. Traders see the interplay between these two lines as a gauge of things like momentum, pivot, support and resistance. The chart in Figure 2 shows the equilibrium lines with everything else removed.
The fast line is red and the slow line is blue. As you can probably see from the chart, these two lines look much like a fast and slow moving average. But actually these aren’t simple average lines. Each line is the average between the peak and trough over a certain span. This might seem like splitting hairs but actually it gives the lines some unique properties.
Figure 3 shows how this works. In this example, I’ve used a span of 30 bars. Between points 1 and 2 the peak and trough over the span stays the same. The price is ranging between the high water mark and the low water mark. At point 2, the price touches a new low. Thus only at this point will the line change.
It moves down a notch because the new low water mark is lower than the previous one. Compare this to the orange line which is the 30 bar moving average. This line is smooth and continuous. This difference is a deliberate part of the indicator’s design.
The idea is that using the price extremes creates a more stable measure of price equilibrium. Users of Ichimoku say this gives a stronger indication of support and resistance. This gives the Ichimoku its distinctive appearance. As with the equilibrium, you can think of one of these as a fast line, and the other a slow. The way to think of the cloud is as a reflection of where the average price band has been in the past.
Traders use this to try to figure out where it is likely to go next. This idea is based on retracement and on the idea that market patterns tend to repeat themselves. The price tends to retrace to former levels and these are often revisited several times before a breakout occurs. This is explained later in the example. Lag line The final line is a bit obscure. You might look at this line and think it looks like a wonderful signal to trade on.