Ichimoku Kinko Hyo: Checking the Effectiveness of Its Signals

The Ichimoku Kinko Hyo is one of the instruments which is a complex trading strategy. 

Ichimoku was developed by the Japanese analyst Goichi Hosoda who used to be known as Ichimoku Sanjin for his analysis of stock markets in the 1930s. With the passage of time, it started to be used in other markets. The indicator is used to determine market trends, levels of support and resistance, and for generation of buy and sell signals.

Ichimoku is included in the base set of popular trading platforms and consists of five lines on the chart. 

To determine the sizes of parameters, four time intervals of different lengths are used. These intervals are used in determining values for distinct lines comprising this indicator:

• Tenkan-Sen characterizes the short-term price movement or a “small trend/reversal”. It is calculated as the first median interval with the following formula: (High+Low)/2.

By default, 9 calculation periods are used. The greater the tilt angle, the stronger the short-term trend. Thus, it works the same as a strong level of support/resistance.

• Kijun-Sen indicates the direction of a “long” trend and is the main element of Ichimoku. If the market moves above the line, the probability of a continuation of the uptrend is high. And it is necessary to seek a confirmation of a buy signal and, respectively, a continuation of the downtrend will lie below it and only sells (SELL) have to be considered. It is the moving average with Period 26.
• Senkou Span A (Kumo Up) is the first leading line of Ichimoku which is the average of the range between Tenkan-Sen and Kijun-Sen moved forward by its period.
• Senkou Span B (Kumo Down) is the second leading line viewed as the middle line moved forward by the period of Kijun-Sen (52 by default). Ichimoku displays the hatched area between Senkou Span A and B called «Cloud» (Kumo). If the price moves inside, that means that there is a period of consolidation, boundaries are viewed as a strong resistance.
• Chinkou Span. The last 5^th line is the price chart for closing prices moved forward by the period of Kijun-Sen.

The method of event determination

1.   The crossing of the Tenkan and Kijun lines

• when Tenkan crosses Kijun bottom-up, this indicates a bearish signal (the cloud must be above the price).
• when Tenkan crosses Kijun top-down, this indicates a bullish signal (the cloud must be below the price).

2. The price exit from Cloud 

3. The crossing of Senkou A and Senkou B

4. The bounce from the Tenkan line (the blue line)

5. The bounce from the Kijun line (the red line)

6. The bounce from Senkou A (the lilac line) and Senkou B (the orange dotted line)

7. The bounce of the line of Senkou B (The orange dotted line)

8. Three lines signal 

9. The crossing of the price and the Chinkou Span line (the green line)

The conditions for opening and closing trading positions

Once the signal has been formed, appropriate positions open at the opening of the next candlestick.

Closing a position is set in 3 time options:

• At the close of the 5^th candlestick after the market entry;
• At the close of the 10^th candlestick after the market entry;
• At the close of the 15^th candlestick after the market entry.

Having determined all the conditions and set all the necessary parameters, we can start testing!

Analysis of the results

Let us assess the results with the sample size.

The total number of candlesticks and events with two timeframes together:

Then we will see the share of events in the total number of initial candlesticks in % jointly with two timeframes:

According to the results of grouping we can conclude that, irrespective of the market segment, the distribution of signals is almost the same. 

It should be noted that among the 100 candlesticks on the chart, around 4 times the following signals of Ichimoku are present: «The crossing of the price and the line of Chinkou Span», «The bounce of the price from the cloud boundaries of Senkou A and Senkou B», «The bounce of the price from the line of Tenkan». The rest of signals are met more rarely.

Now we will look at the results of the performance of Ichimoku signals.

We will assess the results with the two following criteria:

• Momentum (m) reflects the average change in quotes of financial instruments at the moment of the closing of positions, in %. A positive value of momentum indicates the profitability of signal performance, a negative value indicates loss-making.
• SPP, the share of profitable positions, %.

We take the following notations:

«H1 / 5» is closing a position at the 5^th candlestick over the 1-hour timeframe;

«H1 / 10» is closing a position at the 10^th candlestick over the 1-hour timeframe;

«H1 / 15» is closing a position at the 15^th candlestick over the 1-hour timeframe;

«D1 / 5» is closing a position at the 5^th candlestick over the 1-day timeframe;

«D1 / 10» is closing a position at the 10^th candlestick over the 1-day timeframe;

«D1 / 15» is closing a position at the 15^th candlestick over the 1-day timeframe;

Volatility coefficient:

• Over the daily timeframe: the ratio of the average volatility of 5 candlesticks after opening a position to the average volatility of 20 candlesticks preceding to the closing opening a position.
• Over the 1-hour timeframe: the ratio of the average volatility of 5 candlesticks after opening a position to the average volatility of the same hours during the 4 preceding days.

Values of the volatility coefficient greater than 1 indicate a greater volatility following the signal in comparison with volatility before the signal; values less than 1 imply the opposite.

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (the breakdown of Senkou B)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (the crossing of Senkou A and Senkou B)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (the crossing of Tenkan and Kijun)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (the crossing of the price and Chinkou Span)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (the exit from cloud)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (The bounce from Kijun)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (The bounce from Senkou A / Senkou B)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (The bounce from Тenkan)

The Number of signals, the Momentum, the Share of profitable positions and Volatility coefficient on a term-to-term basis of the hold of positions and timeframes (Three lines signal)

Let us summarize the obtained results with the following diagrams:

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