What is the Ichimoku Cloud?
The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction. It does this by taking multiple averages and plotting them on the chart. It also uses these figures to compute a "cloud" which attempts to forecast where the price may find support or resistance in the future.
The Ichimoku cloud provides more data points than the standard candlestick chart. While it seems complicated at first glance, those familiar with how to read the charts often find it easy to understand with well-defined trading signals.
While the Ichimoku Cloud uses averages, they are different than a typical moving average. Simple moving averages (MA) take closing prices, adds them up, and divide that total by how many closing prices there are. In a 10-period moving average, the closing prices for the last 10 periods are added, then divided by 10 to get the average. But Ichimoku cloud are calculated differently. They are based on highs and lows over a period, and then divided by two. Therefore, Ichimoku averages will be different than traditional moving averages, even if the same number of periods are used.
What Does the Ichimoku Cloud Tell You?
There are two ways to identify the overall trend using the cloud.
First, The overall trend is up when price is above the cloud, down when price is below the cloud, and trendless or transitioning when price is in the cloud.
Second, the uptrend is strengthened when the Blue cloud line is rising and above the Red cloud line. This situation produces a green cloud. Conversely, a downtrend is reinforced when the Green cloud line is falling and below the Red cloud line. This situation produces a Red cloud. Because the cloud is shifted forward 26 days, it also provides a glimpse of future support or resistance.
Traders will often use the Cloud as an area of support and resistance depending on the relative location of the price. The Cloud provides support/resistance levels that can be projected into the future. This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.
Crossovers are another way the indicator can be used. Watch for the conversion line to move above the base line, especially when price is above the cloud. This can be a powerful buy signal. One option is to hold the trade until the conversion line drops back below the base line. Any of the other lines could be used as exit points as well.
How to trade with Ichimoku Cloud
1. Bullish Signals
- Price moves above cloud (trend)
- Cloud turns from red to green (ebb-flow within trend)
- Price Moves above the Base Line (momentum)
- Conversion Line moves above Base Line (momentum)
- Price is above the lowest line of the cloud (bullish bias)
2. Bearish Signals
- Price moves below cloud (trend)
- Cloud turns from green to red (ebb-flow within trend)
- Price Moves below Base Line (momentum)
- Conversion Line moves below Base Line (momentum)
- The Ichimoku Cloud is composed of five lines or calculations, two of which compose a cloud where the difference between the two lines is shaded in.
- The Ichimoku Cloud is a comprehensive indicator designed to produce clear signals. Chartists can first determine the trend by using the cloud. Once the trend is established, appropriate signals can be determined using the price plot, Conversion Line, and Base Line.
- The Cloud is a key part of the indicator. When price is below the cloud the trend is down. When price is above the cloud the trend is up.
- The above trend signals are strengthened if the Cloud is moving in the same direction as price. For example, during an uptrend, the top of the Cloud is moving up, or during a downtrend, the bottom of the cloud is moving down.