Ichimoku is a complete trading system. Understanding ichimoku will reduce a lot of work a trader generally does. One glance of charts with ichimoku will tell you what the instrument is doing and going to do in short to long term. So it is advisable for all budding traders to understand this one powerful tool and strengthen your trading skills.
To understand Ichimoku, we will need to understand its components in-depth. So let us start with Tenkan-sen.
Formula to calculate Tenkan-sen
Tenkan-sen=(Last 9 period high + Last 9 period low)/2. Look at the chart below for more clarity.
What does Tenkan-sen tell us:
- A trending tenkan-sen means that a 9 period low or high is broken
- A flat tenkan-sen denotes that market is in a consolidation phase
Role of Tenkan-sen in Ichimoku trading system:
- Tenkan-sen is the first one to move along with price as compared to other components
- Tenkan-sen acts as the first level of resistance and support. During a strong trend, look for a pull-back trade from Tenkan-sen
- Tenkan-sen is used for deriving the value of Span -A which is one of the two lines that form Kumo
Tenkan-sen acts as strong resistance for the price when it is below kumo and Kijun. Look at the chart below for visual confirmation.
Tenkan-sen acts as strong support for the price when it is above kumo and Kijun. Look at the chart below for visual confirmation.
Tenkan-sen & RSI
Trader need not plot RSI indicator on its chart. The space between Tenkan-sen and price will let you know if the instrument has got into the overbought/sold zone. If price, tenkan-sen and kijun-sen are above Kumo then whenever price moves far away from tenkan-sen, most of the times it will be in over bought zone. Look at the chart below for visual confirmation
Strategies Possible with Tenkan-sen:
- Tenkan-sen and Kijun-sen crossover
This is the most used ichimoku strategy. Location of crossover is very important when we take trade according to this strategy. Using a momentum indicator along with this strategy can reduce the number of whipsaws.
Limitations of Tenkan-sen:
- It is useful for a short term movement only
- Independently Tenkan-sen has no strategy