Ichimoku Cloud

Introduction

The Ichimoku Cloud has its development tied to the man named Goichi Hosoda who as you may have guessed happens to be a Japanese national and his occupation is that of a journalist.

He first introduced the indicator way back in the 1960s. and it can provide way more data points than your typical candlestick chart.

While it appears to be a bit complicated when you first come across  it those who are already familiar with  how to read  those charts will usually find it much  easier to get a hang of and see that it has some well-defined trading signals.

What is Ichimoku Cloud?

As for what it even is well the Ichimoku Cloud is  simply a collection of technical indicators that seek to display support and resistance levels and even trend and momentum direction.

It does this by taking several averages and then plotting them onto that chart  while also using those figures to calculate a “cloud” that  seeks to forecast where the price could find resistance or support in the future!

The Components of Ichimoku Cloud

There’s a lot that goes into making this indicator tick and here we’ll be looking at just that, namely the five main components that comprise it.

Starting off with the first component which is the Tenkan-Sen and this is typically represented as a red line on a chart. It’s a moving average that’s calculated by just taking that average of both the low and the high for the previous nine periods.

The second component is the Kijun Sen and it happens to be a support or resistance line acting as the indicator of future price movements and its usually showed as a blue line while being similar to that Tenken Sen in that it takes the average of the lows and highs.

But it does take a bigger time frame into consideration which typically involves 26 periods  as opposed to the nine that you see from the Tenkan Sen and when its plotted on the chart it usually lags behind that Tenkan which is natural seeing how it has longer periods.

The third component would be the Senkou Span A and it’s basically the average of the lows and high of the Kijun Sen and Tenkan Sen while being plotted to the right by 26 periods and on that chart you’ll see it as an orange line.

Then as for the fourth component that would be the Senkou Span B and that’s calculated by taking those averages.

And then finally you have the Chikou Span which is also regarded as the lagging span interestingly enough and is represented by this green line on the graph and it’s formed by taking that current price and then shifting that back 26 periods towards the left.

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The Cloud (Kumo)

But what about the cloud aspect of the indicator where does that fit in now? Well you should know that it’s that cloud that offers the trend direction while also being able to show the support and resistance levels.

Its formed by those two Senkou Span lines the A and the B and is dependent on where its located in relation to the price and a lot of the time it will be shaded in either green or red, hence the “cloud”.

How to Use Ichimoku Cloud in Trading

Knowing the indicator is one thing and actively using it is another and considering the very nature of it there are plenty of ways you can do so which we’ll look more into below.

Trend Identification

The first and probably the most obvious use of this is trend identification but there’s more than one way you can go about doing that as you can use both the cloud and the Tenkan Sen.

With the Tenkan Sen  the marker is considered to be trending if it’s moving down or up but if the line is horizontal in its movements then you may have a ranging market on your hands.

As for the cloud well if you see that price above that cloud then the trend is most definitely up but if that price is below that cloud then it’s down and if the price is inside that cloud then the trend could be either undetermined or flat.

Even the strength of trends may be influenced by the positions of the Senkou Span B and A lines so when the A moves over the B the trend could be stronger towards the bottom-up direction with the opposite being true if you see the B line moving over the A line.

Crossovers: Buy and Sell Signals

If the Tenkan Sen line crosses over the Kijun Sen line then you could interpret it as a buy signal but ideally those two lines and the price should be over the cloud.

But if that Tenkan line crosses below the Kijun line  then it could be a sell signal and those two lines and the price should naturally be located below that cloud.

Using the Cloud as Support and Resistance

You can even use the thickness of the cloud to determine how strong support or resistance really is and so the thicker the cloud the stronger the resistance or support while the thinner the cloud the weaker those levels are.

Chikou Span Confirmation

The Chikou Span by itself can be sufficient enough to confirm buy and sell signals like if you see that Chikou Span like crossing that price from the bottom up then it could be a buy signal.

But if that line crosses that price from the top down then its a sell signal.

Using Ichimoku Cloud with Other Indicators

Sometimes even the Ichimoku Cloud with its many lines may not be enough for you as far as accuracy is concerned.

If you want to improve its accuracy then the answer is simple in that you have to employ other indicators with it like the RSI or the MACD to better your technical analytical skills.

Ichimoku Cloud Strategies for Different Trading Styles

Yes you know how the Ichimoku Cloud works and some of the ways it can be used in  your trading goals but how does it relate to some of the trading styles out there like day, swing and long term trading?

If thats something you’re curious about then read on.

Day Trading with Ichimoku Cloud

The time frames for each of the lines can be adjusted to your liking so naturally if you’re a day trader then your focus will be on short term gains.

What you could do here is just change those time frames to something more short or something that suits your needs and you could follow trends or use scalping as your strategy.

Swing Trading with Ichimoku Cloud

Swing traders prefer medium to long term profits so they could just use the default time frames or lower or extend it accordingly.

For strategies with the extra time that they’ve given themselves to work with they would find crossovers more beneficial.

Long-Term Investing with Ichimoku Cloud

As for long term investors they could just increase the periods even more for every indicator and find signals given by those clouds to be more useful given the increased time, even more so than swing traders.

Advantages and Limitations of Ichimoku Cloud

Knowing both the pros and cons of any indicator and not just the Ichimoku Cloud goes a long way in making the most out of your trading endeavors.

The Ichimoku Cloud in this regard shouldnt be any different.

Benefits of Using Ichimoku Cloud

The Ichimoku Cloud is definitely more comprehensive in its approach as opposed to many indicators you may come across and if some lines may not be doing well for you you can always turn them off which gives you that sense of freedom to choose what works and what doesn’t.

Also it is flexible to a certain degree with various trading styles and can be alright for forecasting future price movements or providing buy and sell signals through various crossovers.

Limitations of Ichimoku Cloud

The indicator can certainly make the chart look more “busy” with all those lines which can make focusing on what you should be focusing on a bit difficult.

Another limitation has to do with how its dependent on historical information and although two of its lines tend to be plotted into the future there’s no guarantee that the results will be inherently predictive as averages are just being plotted ahead.

Conclusion

The Ichimoku Cloud can be a viable indicator for displaying support or resistance as well as trend momentum and direction with all of it appearing as a whole group of indicators.

While there are limitations to it no doubt it’s neither worse or better than current indicators like moving averages as it just shows data differently.