Chikou Span (Lagging Span)

What Is the Chikou Span (Lagging Span)?

The Chikou span is a component of the Ichimoku Kinko Hyo, or Ichimoku Cloud indicator. Also known as the "lagging span," it is created by plotting closing prices 26 periods behind the latest closing price of an asset. The Chikou span is designed to allow traders to visualize the relationship between current and prior trends, as well as spot potential trend reversals.

A trend is deemed to be upward when the Chikou span appears above the price, and downward when the indicator appears below the price. Many traders watch for the Chikou span to cross with prior prices to signal a potential trend change.

The Formula For the Chikou Span (Lagging Span)

CS= Last Close Price Plotted 26-Periods in Past where: CS = Chikou Span \begin{aligned} &\text{CS= Last Close Price Plotted 26-Periods in Past}\\ &\textbf{where:}\\ &\text{CS = Chikou Span}\\ \end{aligned} CS= Last Close Price Plotted 26-Periods in Pastwhere:CS = Chikou Span

How to Calculate the Chikou Span (Lagging Span)

1. Note the last closing price and then plot this value 26-periods back in time.
2. Repeat the process with each new closing price.
3. Connect all the values to create a single line.

Although the default setting is 26 periods, this number can be altered to increase or decrease the distance between the span and the price.

Understanding the Chikou Span (Lagging Span)

The Chikou Span is one of the five key lines of the Ichimoku Kinko Hyo, also known as the Ichimoku Cloud. The Ichimoku Cloud, developed by Japanese journalist Goichi Hosoda in 1969, is a technical indicator that traders use to gauge the trend and momentum of an asset. The other elements are the tenkan-sen, kijun-sen, senkou span A, and senkou span B.

"Chikou" means "rift valley" in Japanese.

One of the key ways to use the indicator is to view its relationship to the current price. When the price appears above the line, that is often an indication there is weakness in the price. When the price is below the Chikou span, that is usually an indication there is strength in the price and it is moving higher.

This is not useful when the price is crossing back and forth with the Chikou span. A trend may still be present, or the price action may be choppy, but other elements of the Ichimoku Cloud indicator may provide better insight into the trend direction.

Given the above, when the Chikou span crosses the price this may sometimes signal a trend reversal. Ideally, the price and Chikou span have had some distance between them for some time — as indicated above, when price and the Chikou are intertwined signals are not reliable.

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When the Chikou span crosses up through the price that could signal an uptrend has begun in price. The price will have already started to move higher, since that is the only way the Chikou can move above price. Similarly, if the Chikou falls below the price (after being separated for a time), that could indicate that the price has started to drop and could be heading lower.

Most Ichimoku Kinko Hyo strategies employ the Chikou span as a momentum indicator and as a secondary confirmation tool based on its relationship with the other four Ichimoku lines.

Another use of the Chikou span is to help confirm points of resistance or support. This is more visual confirmation than anything else, since the Chikou span will match the closing highs and lows in price, but will be offset from them.

The Chikou Span (Lagging Span) vs. a Simple Moving Average (SMA)

Both are lagging indicators but in different ways.

The Chikou span is not an average. It is closing prices plotted back in time. A simple moving average (SMA), on the other hand, is an average price over a number of periods. It lags because it is an average and therefore can't react immediately and fully to price changes.

The most recent SMA value will be aligned with the right side of the chart and the most recent price, whereas the Chikou span is 26-periods to the left of the most recent price.

Limitations of Using the Chikou Span (Lagging Span)

The lagging span is closing prices plotted in the past. There is nothing inherently predictive in this formula.

While crossovers can signal trend changes, there are many false signals. The price and Chikou span will often cross without any meaningful price move or trend change to follow. This is why the indicator must be used in conjunction with the other elements of the Ichimoku Cloud indicator.

When a crossover does result in a trend change, the price will have already significantly moved in that direction, as this is why the crossover occurred. If the price has already moved significantly by the time the signal arrives, it may not always be a worthwhile trading opportunity.

Traders may also wish to incorporate price action and trend analysis, as well as fundamental analysis and other technical indicators, into their trading.