Chikou Span
tl;dr
The Chikou Span is the lagging line in the Ichimoku Kinko Hyo indicator, plotted 26 periods behind the price. It helps confirm trends and identify potential reversals. If the Chikou Span is above the price, the trend is bullish; if it’s below, the trend is bearish. Traders use the Chikou Span to spot entry points, confirm trend direction, and identify support or resistance levels.
Definition.
Part of the Ichimoku Kinko Hyo system, representing the closing price plotted 26 periods behind, used to confirm trend direction.
Real-World Example.
The Chikou Span is one of the key components of the Ichimoku Kinko Hyo indicator, which is a popular technical analysis tool used by traders to analyze trends, momentum, and support/resistance levels. The Chikou Span is the lagging line and is plotted 26 periods behind the price, making it an essential indicator for determining trend direction and potential price reversals.
For example, if you’re analyzing a stock using the Ichimoku Cloud, and the Chikou Span is above the price and above the Ichimoku Cloud, this indicates a bullish trend. On the other hand, if the Chikou Span is below the price and the Ichimoku Cloud, it suggests a bearish trend. Traders often use the Chikou Span to confirm the trend and potential entry or exit points.
How the Chikou Span Works.
The Chikou Span is calculated by taking the closing price of the asset from 26 periods ago and plotting it on the current chart. It’s referred to as the lagging line because it reflects historical price data, showing how the price has been moving in relation to past trends.
- Chikou Span Above Price: When the Chikou Span is above the current price, it signals that the trend is bullish.
- Chikou Span Below Price: When the Chikou Span is below the current price, it indicates that the trend is bearish.
Since the Chikou Span is lagging, it’s often used to confirm the trend rather than predict future price movement. However, a cross of the Chikou Span above or below the price can signal a trend reversal.
How to Use the Chikou Span in Trading.
- Confirming Trend Direction:
- Bullish Confirmation: When the Chikou Span is above the price and the Ichimoku Cloud, it confirms that the current trend is bullish. You can consider entering a long position when this condition is met.
- Bearish Confirmation: When the Chikou Span is below the price and the Ichimoku Cloud, it confirms that the trend is bearish. This could be a signal to enter a short position or avoid buying.
- Spotting Trend Reversals:
- A cross of the Chikou Span above the price (when the price is below the Chikou Span) can signal the beginning of an uptrend.
- A cross of the Chikou Span below the price (when the price is above the Chikou Span) can indicate the beginning of a downtrend.
- Identifying Support and Resistance Levels:
- The Chikou Span can also help identify potential support or resistance levels. If the Chikou Span is above the price, it may indicate that the price could find support at a previous high. Conversely, if it’s below the price, it could point to resistance at a previous low.
- Combining with Other Ichimoku Components:
- The Chikou Span works best when used in conjunction with other parts of the Ichimoku Cloud, such as the Tenkan-sen (conversion line), Kijun-sen (base line), and the Senkou Span (leading spans). For example, a bullish crossover of the Tenkan-sen and Kijun-sen, combined with the Chikou Span above the price and the Cloud, can offer a strong buy signal.
- Avoiding False Signals:
- Since the Chikou Span is a lagging indicator, traders must be careful not to act too quickly on a crossover or other signals. Always wait for confirmation from other indicators or price action to avoid false breakouts or reversals.
