Chikou Span: Lagging Span Used for Confirmation

Comprehensive overview of Chikou Span, a component of the Ichimoku Kinko Hyo trading system, used for confirming trend strength and market momentum.

The Chikou Span is a crucial component of the Ichimoku Kinko Hyo, a comprehensive trading system developed by Goichi Hosoda in Japan. The Chikou Span, often referred to as the “lagging span,” is used primarily for confirming trends and providing insights into market momentum.

What is the Chikou Span?

The Chikou Span is derived from the current closing price, plotted 26 periods back on the chart. This backward plotting helps traders visualize how current prices compare to prices 26 periods ago, providing a historical perspective that is essential for trend confirmation.

Mathematically, it is represented as:

$$ \text{Chikou Span} = \text{Closing Price (t)} $$

where \( t \) is the number of periods ago.

Components and Calculation

Components of Ichimoku Kinko Hyo

The complete Ichimoku system includes five lines:

1. Tenkan-sen (Conversion Line)
2. Kijun-sen (Base Line)
3. Senkou Span A (Leading Span A)
4. Senkou Span B (Leading Span B)
5. Chikou Span (Lagging Span)

Calculation

The Chikou Span is relatively straightforward since it is simply the current closing price shifted 26 periods back.

• Identify the closing price of the current period.
• Plot this price 26 periods back in time.

Applicability and Examples

Applicability in Trading

In practical trading scenarios, the Chikou Span is used to:

• Confirm Trends: If the Chikou Span is above the price 26 periods ago, the trend is bullish. If below, the trend is bearish.
• Validate Momentum: It offers visual confirmation of the momentum, indicating if the prices are in sync with the historical trend.

Example

If the current closing price is $150 and 26 periods ago the price was $140, the Chikou Span plotted directly 26 periods back will show $150. This gives instant visual confirmation that the current price is higher, indicating bullish momentum.

Historical Context

Origin

Developed in the late 1930s by Japanese journalist Goichi Hosoda and published in the 1960s, the Ichimoku Kinko Hyo system aimed to provide a comprehensive perspective of market conditions in a single glance.

Evolution

Over the decades, the Ichimoku system, with its Chikou Span, has grown in popularity due to its versatility and effectiveness in various market conditions, including equities, forex, commodities, and more.

Comparison with Related Terms

Moving Averages

While moving averages smooth out price data to identify trends, the Chikou Span directly uses the closing price for a historical comparison, offering a different method for visual trend analysis.

Relative Strength Index (RSI)

RSI measures the speed and change of price movements but does not provide a historical comparative function like the Chikou Span.

FAQs

How does the Chikou Span help in trading decisions?

It helps traders confirm trends and understand market momentum by comparing current prices with past prices.

Can the Chikou Span be used alone?

While it provides useful insights, it is most effective when used in conjunction with the other Ichimoku components.

Is the Chikou Span effective in all market conditions?

Yes, it can be used across various market conditions, but its effectiveness is enhanced in trending markets.

References

• Ichimoku Charts: An Introduction to Ichimoku Kinko Clouds by Nicole Elliott.
• Technical Analysis of the Financial Markets by John Murphy.

Summary

The Chikou Span, or lagging span, is an integral part of the Ichimoku Kinko Hyo trading system. By plotting the current closing price 26 periods back, it offers a historical perspective that aids in trend confirmation and momentum validation. Its simplicity and effectiveness make it a valuable tool in technical analysis for traders seeking to make informed decisions.