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The Ichimoku indicator is made up of 5 lines: the Tenkan-sen, the Kijun-sen, the Chikou Span, Senkou Span A and Senkou Span B (the two Senkou lines form the Kumo cloud). In today’s lesson we go into the Tenkan-sen in detail.
What is the Tenkan-sen?
The Tenkan-sen, or the conversion line, is the midpoint between the highest price and the lowest price of the last 9 sessions (9 candles). The Tenkan-sen is part of the Ichimoku Kinko Hyo indicator, which shows the trend, the momentum and potential support and resistance zones.
The Tenkan-sen in the Ichimoku indicator.
The Ichimoku indicator was developed by the Japanese journalist Goichi Hosoda before the Second World War, and made widely known through his books in 1969. Ichimoku combines a candlestick chart with five extra lines, one of which is the Tenkan-sen.
What Ichimoku is made up of
Ichimoku has 5 lines, which can act as support and resistance, and the points where they cross can be treated as extra signals (the colors below follow the settings used in the example, and you can change them as you like):
- The Tenkan-sen (the conversion line), in red: (highest price + lowest price) / 2 over 9 sessions, which matches the balance point over 9 sessions.
- The Kijun-sen (the base line), in blue: the same formula as the Tenkan-sen but worked out over 26 sessions, which matches the balance point over 26 sessions.
- Senkou Span A (leading span A): (Tenkan-sen + Kijun-sen) / 2, shifted 26 candles forward, forming one edge of the Kumo cloud.
- Senkou Span B (leading span B): (highest price + lowest price) / 2 over 52 sessions, also shifted 26 candles forward, forming the other edge of the Kumo cloud.
- The Chikou Span (the lagging span), in green: the current closing price shifted 26 sessions back, which lets you compare the current price with the price 26 sessions ago.
Understanding the parts of Ichimoku helps you see how the Tenkan-sen works within the indicator as a whole.
What the Tenkan-sen tells you
The Tenkan-sen shows short-term price momentum. Because it is so very short-term, it is usually not used on its own but together with the other parts of Ichimoku. For example: if the Tenkan-sen crosses above the Kijun-sen (the midpoint of price over 26 sessions), some traders treat that as a buy signal. The other way round, if the Tenkan-sen crosses below the Kijun-sen, it may be treated as a sell signal.
The Tenkan-sen in the Ichimoku indicator is used to work out the trend.
When price sits above the cloud the trend leans upward, and when price sits below the cloud it leans downward. If price is moving inside the cloud, the market is usually hard to trade, or the trend may be reversing. So when price sits above the cloud, traders usually favor the buy signal that comes when the Tenkan-sen crosses above the Kijun-sen; when price sits below the cloud, they usually favor the sell signal that comes when the Tenkan-sen crosses below the Kijun-sen. The stop loss can go on the far side of the Kijun-sen, or beyond the most recent high or low.
The Tenkan-sen also goes into making Senkou Span A, one of the two edges of the Ichimoku cloud. The edges of the cloud are potential support and resistance zones, and the thicker the cloud, the harder that support or resistance zone usually is to break.
What the Ichimoku indicator is for
First of all, the Ichimoku indicator is used to work out the trend: price moving above the cloud shows the market is in an uptrend, price moving below the cloud shows a downtrend, and price moving inside the cloud shows the market is going sideways or has no clear trend yet.
Ichimoku is also used to find support and resistance: in a downtrend, when price rallies, the two edges of the cloud (Senkou Span A and B) are usually the first and the second resistance zones; in an uptrend, the cloud acts as a support zone.
How to set the Ichimoku indicator up
Above we looked at what the Ichimoku indicator is and what it is made up of, so how do you set it up?
To set Ichimoku up, open the MT4 software -> choose Insert -> choose Indicators -> choose Trend -> choose Ichimoku Kinko Hyo, as in the picture below.
Setting the Ichimoku indicator up so that you can see the Tenkan-sen.
Now we set its parts up in detail:
+ Parameters: there are 3 of them. First, the Tenkan-sen is 9 by default, meaning it is worked out from the last 9 candles (on the D1 time frame that is 9 days). Second, the Kijun-sen is 26 by default, worked out from the last 26 candles. Last, Senkou Span B is 52 by default, the midpoint between the highest and the lowest price of the last 52 candles.
- The Colors section: set the colors of the lines so that they are easy to read. In the example: the Tenkan-sen in Red; the Kijun-sen in Blue; the Chikou Span in Lime; the Up Kumo in SandyBrown; the Down Kumo in Black. All the lines are solid and thin, and the inside of the cloud is dashed.
+ The Visualization section: choose the time frames the indicator shows on, depending on which time frame you trade. Here we choose to show it on every time frame, as in the picture below.
Finally, we get a complete Ichimoku indicator showing on MT4.
Does the Tenkan-sen have any limitations?
The Tenkan-sen moves very close to price, so on its own it does not give much information, except to very short-term traders. That is why the Tenkan-sen is usually used together with the other lines of Ichimoku. The crossing signal between the Tenkan-sen and the Kijun-sen usually produces a lot of noise when the market moves sideways.
In practice you need to combine several things (the trend, where price sits relative to the cloud, the Chikou Span, support and resistance) and to practice on a demo account before you apply any of it with real money.
