The Chikou span is a component of the Ichimoku Kinko Hyo which can be used to pick out bearish and bullish signals. It is given a default green colour on the MT4 chart, and is derived from the close of the current price candle plotted 26 periods backwards. It is a therefore a perfect mirror of price action on a typical trading month.
The key to trading with the Chikou span is to look for its position in relation to the position of the price action, traced back to 26 candles previously. If the Chikou span is above the price action, then this is a bullish signal. If it is found below the price action, then the sentiment in the market is bearish. If the Chikou is found where the candlesticks are, then this is a signal for a market in consolidation.
Once you have been able to identify the position of the Chikou span relative to the price, then the next thing to do is to look for the momentum of the price action. In essence, the trader aims to answer the question on whether the momentum is strong, weak or neutral.
In order to do this, the trader must first bear in mind that the best Chikou span trading signal occurs when the Chikou does not touch the candles. If the Chikou touches any of the candles, then this is a sign of lesser momentum.
As a trader, you want the Chikou to be located far from the price (either to the upside or downside), providing the maximum momentum that the asset has to offer. With this in mind, the trader can proceed to use the Chikou span in the following ways.
As a Support/Resistance Indicator
The Chikou is a trailing indicator and thus can be used to confirm for instance, support and resistance areas. Some commonly used indicators in forex that are used to detect areas of support and resistance are pivot points (for which you need a custom pivot point indicator), the 20ema (dynamic support and resistance) or Fibonacci retracement levels.
If the trader wants to know if a particular area that the price is at is a support or resistance, or neither of the two, all the trader needs to do is to go back 26 periods and study what the Chikou span is doing.
Perhaps the most important use of the Chikou span is in confirming Kumo breaks and TK crosses. Without this confirmation, there would be so many fakeouts that traders would think that using Kumo breaks and Tenkan-Kijun crosses is a bad way of trading the Ichimoku. If only such traders had used the Chikou span for confirmation, they would have avoided plenty of bad trades.
How is this confirmation used?
- For the Kumo break, the Chikou must break the appropriate senkou span line for any price break of the Kumo to be real. Therefore, a bullish Kumo break must be confirmed by a corresponding break of the Senkou span A line by the Chikou span line for us to have real breakout. A bearish Kumo break must also be confirmed by a break of the Senkou span B line to the downside. The chart below shows a true break and a fakeout.
For the fakey example which is clearly seen on the left side of the chart, the price broke through the Kumo to the upside, but the Chikou span (shown as the yellow line for clarity) was still trapped in the cloud. Sure enough, the price remembered that its confirmation partner was not following it up and turned back the way it came (shown as blue and then red arrow).
Now see what happens when the Kumo is broken by the Chikou span and the price action. This was solid confirmation of the bullish movement and we see the price of the asset skyrocketing.
So if you must trade support and resistance or the Kumo break, always use the Chikou span for confirmation.