A technical indicator rather than a complete system that is used to identify with “one look” at the chart, the direction of the market, entries (buy and sell) and support and resistance levels. It consists of 5 lines:
- Tenkan-sen : (Highest High + Lowest Low)/2 for the last 9 periods
- Kijun-sen : (Highest High + Lowest Low)/2 for the last 26 periods
- When Tenkan-sen and Kijun-sen are combined together they provide buy/sell signals
- When Tenka-sen crosses above (from below) Kijun-sen, a buy signal is generated
- When Tenkan-sen crosses below (from above) Kijun-sen, a sell signal is generated
- A buy signal above the Kumo is considered a strong buy signal
- A buy signal below the Kumo is considered a weak buy signal (take profit opportunity)
- A buy signal in the Kumo is considered a normal buy signal
- A sell signal below the Kumo is considered a strong sell signal
- A sell signal above the Kumo is considered a weak sell signal (take profit opportunity)
- A sell signal in the Kumo is considered a normal sell signal
- Senkou Span A : (Tenkan-sen + Kijun-sen)/2 plotted 26 periods ahead
- Senkou Span B : (Highest High + Lowest Low)/2 for the past 52 periods, plotted 26 periods ahead
- When Senkou Span A and Senkou Span B are combined together they form the Kumo that acts as support and resistance
- Prices above the Kumo find support at the Kumo
- Prices below the Kumo find resistance at the Kumo
- A thick Kumo implies high volatility and strong support/resistance
- A thin Kumo implies low volatility
- Prices above the Kumo identify an uptrend
- Prices below the Kumo identify a downtrend
- A very thin Kumo implies a reversal may be imminent
- Chikou Span : Current closing price plotted 26 periods behind
- A buy signal is generated when Chikou Span crosses above the close price 26 periods back from the current price
- A sell signal is generated when Chikou Span crosses below the close price 26 periods back from the current price
- Uptrend is confirmed when Chikou Span crosses above the Kumo
- Downtrend is confirmed when Chikou Span crosses below the Kumo
