The Ichimoku Cloud is a technical analysis method that combines multiple indicators into a single chart chart. This method is used on candle-type charts as a trading tool that provides insights into potential support and resistance price areas. It is also used as a forecasting tool as many traders use it in an attempt to determine future market trends and market momentum.
The Ichimoku cloud was designed in the late 1930s by a Japanese journalist named Goichi Hosada. But his innovative trading strategy was published in 1969 after decades of studies and technical improvements. Hosada named it Ichimoku Kinko Hyo (Ichimoku Kinko Hyo) which in Japanese means a glimpse into the balance chart.
How it works?
The Ichimoku Cloud System displays data based on both leading and lagging indicators and the chart consists of five lines:
Reversal Line (Tenkan-sen): 9-period moving average
Baseline (Kijun-sen): 26-period moving average
First Leading Line (Senkou Span A): Forecasting the moving average of the reversal line and the baseline for 26 periods in the future.
Second Leading Line (Senkou Span B): 52-period moving average, 26 of which are in the future
Chikou Span: The expected closing price for the current period over 26 periods in the past
The distance between the first leading line (3) and the second leading line (4) is what produces the cloud (Kumo) which is probably the most prominent element of the Ichimoku system. The two lines are expected to provide 26 periods in the future to provide predictive insights which is why they are considered leading indicators. The dependent line is a lagging/lagging indicator of an expectation 26 periods in the past.
Clouds are displayed in green or red by default for easier reading. A green cloud is created when the first leading line (green cloud line) is higher than the second leading line (red cloud line) and of course a red cloud is created when the opposite happens.
It should be noted that the moving averages used in the Ichimoku strategy do not depend on the closing prices of the candles unlike other methods. Averages are calculated based on the high and low points recorded during a given period (average high and low).
For example, the standard equation for a 9-day Conversion Line is:
Conversion Line = (9d high + 9d low)2
Ichimoku settings
After more than three decades of research and testing, Goichi Hosada said that the settings (9, 26, 52) achieved the best results at the time. The chart tables included Saturdays so the number 9 represented a week and a half (6 + 3 days) and the numbers 26 and 52 represented months and two months respectively.
While these settings are still preferred in most trading contexts, analysts are always able to adjust them to suit different strategies. For example in the cryptocurrency markets many traders adjust the Ichimoku settings to reflect the 24/7 markets and often change from (9, 26, 52) to (10, 30, 60). Some may use further options such as (20, 60, 120) to reduce false signals.
There is still an ongoing debate about how efficient it is to modify settings. While some argue that it makes sense to adjust them, others claim that abandoning the standard settings will disrupt the system's balance and produce too many false signals.
Chart analysis
Trading signals for Ichimoku
The Ichimoku Cloud produces different types of signals due to its multiple elements. We may divide them into momentum and trend-following signals.
Momentum Signals: They are generated according to the relationship between the market price, the base line, and the reversal line. Bullish momentum signals are produced when either or both the reversal line and the market price move above the baseline. While bearish momentum signals are generated when either or both the reversal line and the market price move below the baseline. The intersection between the reversal line (Tenkan-sen) and the base line (Kijun-sen) is referred to as a TK Cross.
Trend tracking signals: They are generated according to the color of the cloud and the position of the market price relative to the cloud. As we mentioned previously, the cloud color reflects the difference between the first and second leading distance.
Simply put, when prices are consistently above the clouds, there is a greater possibility that the asset is in an upward trend. On the other hand, prices moving below the clouds may be interpreted as a bearish signal, indicating a downward trend. A trend can be considered stable or neutral when prices make sideways movements within the cloud.
The Chikou Span is another element that can help traders identify and confirm potential trend reversals as it provides insight into the strength of the price movement, which may confirm an uptrend when moving above market prices or a downtrend when moving below. Usually the dependent line is used with other components of the Ichimoku cloud and not as a unit.
Summary of the above:
Momentum signals
The market price moves above (bullish) or below (bearish) the baseline.
TK cross: a reversal line moving above (bullish) or below (bearish) the base line.
Trend following signals
The market price moves above (bullish) or below (bearish) the cloud.
The cloud changes color from red to green (bullish) or from green to red (bearish).
The dependent line is above market prices (bullish) or below (bearish).
Support and resistance levels
The Ichimoku chart can also be used to identify support and resistance areas. The first dependent line (green cloud line) usually acts as a support line during an uptrend and as a resistance line during a downtrend. In both cases the candles tend to approach the indentation between the first leading line (A) but if the price moves in the cloud the indentation may act as a support/resistance line. What's more is the fact that the leading lines projecting 26 periods into the future allows traders to anticipate upcoming potential support and resistance areas.
Signal strength
The strength of the signals generated by the Ichimoku cloud depends heavily on whether it conforms to the overall trend as a signal that is part of a larger, well-defined trend will always be stronger than one that briefly appears opposite to the overall trend.
In other words, a bullish signal may be misleading if it is not accompanied by an uptrend. So when a signal is generated it is important to be aware of the color and location of the cloud. Trading volume is also something to keep in mind.
Keep in mind that using Ichimoku with shorter time frames (such as intraday charts) tends to generate a lot of noise and false signals. While longer time frames (daily, weekly and monthly charts) will produce more reliable momentum and trend following signals.
Concluding thoughts
Goichi Hosada devoted more than 30 years of his life to creating the Ichimoku system which is now used by millions of traders around the world. As a versatile planning method. Ichimoku Clouds are used to identify market trends and momentum. Indents make it easier for analysts to anticipate potential levels of support and resistance that have not yet been tested.
Although the charts may seem very busy and complex at first, they do not rely on subjective human input like other technical analysis methods (such as drawing trend lines) and despite the ongoing controversy over Ichimoku settings, the strategy is easy to use. relatively.
As with any indicator, the Ichimoku method should be used in combination with other techniques to confirm trends and reduce trading risks. The sheer amount of information this chart displays can be difficult for beginners and for this type of trader it is usually a good idea to get comfortable with more basic indicators before using the Ichimoku cloud.
